In recent weeks government efforts to scale-up low-carbon energy here in the UK have taken quite a battering in the press, with alarming reports of imminent enormous increases in electricity bills supposedly thanks to the country’s climate change policy. The latest blow comes courtesy of a report by the right-of-centre think tank Policy Exchange (PE), whose report today concludes that households will by 2020 be paying an extra £400 per year thanks to measures to reduce carbon emissions.
The Policy Exchange report (PDF) is important and worth reading, and some of it makes a lot of sense – in particular the conclusion that opportunity costs are real, and that the cheapest measures to reduce carbon emissions are therefore likely to be the ones most worth taking. I have argued myself that spending 600 euros or more per tonne of carbon abatement on solar PV in Germany makes little sense when carbon is trading on the EU ETS for as little as 6 euros per tonne. The Policy Exchange report also contains some useful observations about the need to consider the ETS impact more coherently when planning the UK’s low-carbon investments. PE also sensibly make clear that they are not opposing climate mitigation measures per se, and that making low-carbon energy investments is essential.
However, Policy Exchange’s conclusion that offshore wind is a waste of money, and its implication we should fall back on gas generation instead, does not I believe stand up to scrutiny – and nor does its £400 headline figure for increased cost of energy per household. As usual the devil is in the detail. PE has a note at the bottom of page 5 which gives a figure for the 2020 levelised cost of offshore wind as £190 per MW/h, sourcing this to Mott McDonald but without giving a specific reference. I assume they mean Mott McDonald’s 2011 report ‘Costs of low-carbon technologies’ – yet this gives a 2020 levelised cost estimate for offshore wind of £103-114 per MW/h, much lower than PE claims.
I can only assume that since PE’s figures for the projected costs of offshore wind appear to be flawed, so is its conclusion that the technology is “hugely expensive” and that subsidies to support it are “wasteful”. There may be a convincing explanation for the discrepancy in the figures – if so I would like to hear it. Either way there are other reasons to support offshore wind – most importantly, the issue of scale. Whilst onshore wind will slow considerably because of public acceptability issues, offshore has less obvious problems and can deliver tens, even hundreds, of gigawatts of low-carbon power. The UK is a world-leader in deployment, and this is a position which can be expected to deliver economic benefits in years to come in ways which are currently unquantifiable.
A large proportion of PE’s headline £400 energy costs per household figure also depends on some pretty questionable assumptions. One of them is that fully £185 of this additional cost comes not on actual bills but in the assumed higher cost of goods and services passed on from businesses, who will themselves be paying higher bills thanks to low-carbon premiums on energy prices. However, since PE’s estimates of energy costs seem to be flawed at the outset, presumably this figure is also wrong. The assumption that 80% of higher energy prices is passed directly on from businesses to the consumer is also probably unjustified – and in any case simply adding this to a headline-catching £400 figure that no energy consumer would ever actually see is somewhat misleading to say the least.
PE gives a cost of £300 per tonne of carbon dioxide saved by offshore wind, certainly very ‘expensive’ given the current European price of carbon. However, this is based on the assumption that the competition is gas. If one assumes instead that each additional few gigawatts of wind can allow a coal-fired power station to be taken offline, then the cost per tonne of CO2 might be halved (given that coal produces twice the carbon of gas). It can be reduced still further if indeed PE has got the levelised cost figure underpinning it wrong. In addition, the current low ETS carbon price is because of poor policy and oversupply – assuming prices will remain at rock-bottom out to 2020 and beyond is not credible either.
Calculating a net figure for additional energy costs by 2020 is no easy task, not least because of crucial underpinning assumptions such as that regarding the price of gas over the next decade. Whilst in recent years this has increased, putting up household energy bills by £290 between 2004 and 2010 (according to the Climate Change Committee) the assumption that the price of gas will continue to rise is less credible these days with the explosion of shale gas onto the US market, increasing supply and thereby driving down wholesale prices. This trend is likely to continue, and will presumably add to downward pressure on gas prices in years to come.
I am not qualified to offer my own figure here – but I would refer readers to the Committee on Climate Change’s December 2011 report (PDF), which undertook a similar exercise to Policy Exchange yet came to a rather different conclusion. The CCC concludes that an additional £110 may be added to household energy bills by 2020 thanks to additional costs of low-carbon generation. (In fairness one should point out that PE’s figure is not just bills but additional costs also in taxes and via purchases of goods and services, so there is a slight apples-and-oranges factor here.)
So the upshot is that adding low-carbon generation is not likely to save anyone money on their bills, at least by 2020 and particular if gas prices fall in comparison due to the shale gas revolution. This is admittedly different from the win-win scenario renewables advocates sometimes portray. However, it is clearly essential that the UK develops its domestic renewables resources, and that it delivers on its commitments to the EU and internationally in terms of meeting emissions targets. How to do this most cost-effectively is an entirely legitimate question – but unfortunately today’s Policy Exchange has likely helped muddy the waters rather than clarify this important area of energy policy.