British energy policy part 1: unilateral economic disarmament

Some recent events:

“The steel town of Port Talbot is braced for the shutdown of the final furnace at its plant on Monday which will result in heavy job losses and deal a devastating blow to communities in south Wales.” (The Guardian, 30 September 2024)

“Scotland's only oil refinery is to close by the summer of next year, with the loss of 400 jobs. Petroineos said the closure of Grangemouth was due to it being unable to compete with sites in Asia, Africa and the Middle East.” (BBC, 12 September 2024)

“Sir Keir Starmer risks inflicting job losses equivalent to closing the Grangemouth oil refinery every week with its approach towards North Sea drilling, industry and union leaders have warned. In a rare joint statement, representatives of offshore firms and the GMB trade union said Labour ministers have left the oil and gas sector “facing a cliff-edge for investment, production and jobs.” (The Times, 30 September 2024)

“Ineos owner Jim Ratcliffe warned last week that Europe will lose almost all of its remaining chemicals industry over the next 20 years,... One of the reasons, Ratcliffe said, was that in Britain his company is paying five times as much for its gas and four times as much for electricity as it does in the US. At the moment, Ineos in Europe is paying £130 million a year in carbon taxes, but by 2030 that will rise to £1.7 billion. The German industrials giant BASF has already announced that it is to shrink European operations while investing £8 billion in a new plant in China, as well as investments in the US.” (Spectator, 2 March 2024)

“British Steel has announced it will close down its blast furnaces in Scunthorpe, putting up to 2,000 jobs at risk. They will be replaced by two electric arc furnaces - one at Scunthorpe and one at Teesside. Bosses insist the move is needed to create "a clean, green and sustainable business", but unions claim it could put between 1,500 and 2,000 people out of work, predominantly in Scunthorpe.” (BBC, 6 November 2023)

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Unilateral economic disarmament

At the point where I got interested in politics, the biggest issue was deindustrialisation and the very high level of unemployment in poorer places. Politicians of the left slated the Conservative government as famous plants shut down one after another. The Proclaimers 1987 hit Letter From America listed some recent closures: “Bathgate no more, Linwood no more, Methil no more, Irvine no more.”

And yet here we are with a Labour government - a Labour government - presiding over a wave of spectacular industrial collapse. And the truth is: one of the government’s top priorities - their ambitions for a net zero grid by 2030 - is going to accelerate this process.

Almost every single thing about Britain’s current energy policy is wrong. The last Conservative government got it wrong. But the new Labour government is bent on making things even worse.

Energy policy is operating in a framework set up in the 1990s, which has five parts. Is all about:

1. Reducing domestic emissions,

2. By reducing energy use,

3. By making energy more expensive,

4. Focussing on growing renewables and biofuels,

5. Hoping that other countries will follow in time, but by ‘leading by example’ rather than requiring burden-sharing.

In this paradigm, the UK has cut energy and electricity use more than any other G20 country, and rolled out intermittent renewables at a faster rate than any other comparable country.

As a result, the UK cut emissions faster than any other major economy since 1990 and was the first to halve emissions.

Philosophically, our approach has not been about abundant clean power, but instead the deliberate reduction of energy use by making it more expensive, an approach enshrined in policy in numerous ways.

The focus has been on domestic emissions, not our contribution to the global picture through the development of new technology and cleaner processes.

While making our domestic energy more expensive we have also allowed other countries to compete with us using cheaper but more polluting energy. We did this in the naive hope that at some stage they will follow our example, but as we will see, they have not.

We are paying a high price for this.

• We’ve gone from having similar energy costs to other countries to having higher industrial electricity prices than any other country in Europe, with catastrophic consequences for industry and the poorer parts of the UK. Electricity in the UK was similar in price to the US twenty years ago, but is now four times more expensive than the US, while in China it is a third cheaper again than the US.

• Instead of aiming for abundant energy, China now uses 50% more electricity than the UK per head, and electricity production in the UK per head looks set to fall below the world average in the next couple of years.

• Other countries have not followed us. If you shut down all the remaining fossil-powered generation of electricity in the UK it would offset around 2% of China’s growth in fossil power use since 2000.

• We have simply outsourced our industry to more polluting countries and then imported the “embodied emissions” by buying their goods - in fact, imported emissions here are greater than any other major industrialised country.

As a result, energy costs have been a major contributor to the wave of disastrous deindustrialisation hitting poorer parts of the UK right now.

You ain’t seen nothing yet

Unilateral economic disarmament has already hurt us. But it is about to get a whole lot worse and more extreme.

Energy secretary Ed Miliband is determined to make our electricity completely fossil-fuel free by 2030. In just over 60 months’ time we will have completely removed from the grid the sources of power that have sustained our growth since the eighteenth century.

This is presented as a stretching-but-achievable goal: a continuation of the path we have been on.

It is not.

In reality it is an incredibly dangerous experiment, relying on magic thinking, and the imminent deployment of a bunch of technologies that don’t exist.

So far, we have been adding more and more intermittent renewables to the grid, but have had a lovely baseload of stable nuclear power and, most importantly of all, a massive chunk of gas that can rocket production up and down within minutes, so smoothing out the wild rollercoaster of intermittent wind and solar generation.

Ed wants to get rid of that and rely on… some kind of energy storage. Maybe it will be batteries, or pumped storage, or hydrogen power, or carbon capture or most recently giant flywheels. The problem is that these technologies either don’t exist or are excruciatingly expensive.

Attempting to ramp renewable use incredibly rapidly and rely on storage technologies which are currently very expensive is likely to make prices even higher and spell disaster for what remains of British industry.

I am sorry to deploy a very Generation X metaphor, but it is the equivalent of Evel Knievel’s doomed 1974 attempt to jump the Snake River Canyon on a rocket-powered motorbike.

The only difference is that Knievel was wiser than us: he at least packed a parachute and could bail out. Riding pillion behind Ed Miliband as he accelerates towards the cliff, we don’t even have that luxury. If we destroy what remains of Britain’s production industries with sky-high energy costs there will be no way back.

Britain’s history is the ultimate example of how energy can transform a whole society: the harnessing of coal power transformed Britain into the world’s first industrial economy, transforming life expectancy and Britain’s power.

Ironically, we are now once again the frontrunners and global outliers, but this time in our attempts to cut energy and emissions. The effects are a mirror image: a deindustrial revolution transforming Britain into a smaller, poorer and less relevant country.

Heading for the cliff

The above sounds very dramatic. Surely the experts and people in charge would be freaking out if we were on course for disaster?

Well, they kind of are freaking out.

Even back in 2017, a government-commissioned review of the cost of energy by Professor Dieter Helm concluded that we were not only paying a significant price to reduce emissions, but paying over the odds because of the dysfunctional nature of policy:

“The cost of energy is too high, and higher than necessary to meet the Climate Change Act (CCA) target”

At Labour Conference Gary Smith last week from the GMB union warned:

“we have been decarbonising through deindustrialisation… I fear that over the next decade we will lose up to a million jobs… we have an electricity crunch coming…. we talk about 2030 and the clean power mission. Starting two weeks ago we would have had to been pouring 2,000 tonnes of concrete a day and erecting a wind turbine a day basically the size of the Eiffel Tower.”

But I have been talking to people in industry and I’m struck that the private level of scepticism they have about Ed’s plan is not yet fully matched in the public discussion. I think there are several reasons for this.

As Britain’s industries shrink through deindustrialisation their voice becomes less powerful, creating a vicious cycle. Most firms don’t want to look “anti-green” by complaining. Meanwhile there are a large number of people are making a living out of green lobbying, green finance, emissions trading, carbon credits and the like, who will naturally always push for “more to be done.”

The Lansley Effect

But that’s the public - why isn’t the government itself more worried? Within the government I fear they may not wake up until too late, because of the “Lansley effect” - the twin dynamics which drove the coalition government into the 2012 crisis over NHS reform. There are two parts to this effect.

First, Andrew Lansley is ten years older than David Cameron. He was David Cameron’s boss in the Conservative Research Department. When you become the boss of someone who was previously your senior the dynamics are often interesting: think Bush and Rumsfeld or even Blair and Brown. As well as being a former Labour leader Ed Miliband is one of the guys who got Starmer into politics in the first place, so Starmer will naturally want to give him a long leash - and Miliband would certainly not want to be micromanaged by his former protege.

Second, Andrew Lansley’s reforms were complex. They dissolved about 200 NHS organisations and created about 300 new ones. The wiring map of how things were changed was quite something. And like a lighthouse, Number 10 can only really focus on one thing at a time. The reforms were complicated, but for exactly that reason the department was much closer to them than No.10, and the department could answer questions from the centre because they understood it better. Likewise, today DESNZ are way closer to the detail of their complicated plans than the centre is. They can answer any concerns from Number 10 with a pathway for this or a model of that… and a lot of authority and subject expertise.

Just as with the Lansley reforms, some people in the system are worrying. In private conversations people running the grid have warned about blackouts in the south east by 2028.

Twelve years on from the Health and Care act, it seems obvious that the positive intentions of the reforms could have been much more easily achieved by simple reforms to give GPs more power in the system. Why didn’t we see it?

Well, it seemed like a continuation of a path we had been on since the Ken Clarke era towards more operational independence for the NHS, a principle people in the sector were positive about. As with Miliband, we didn’t notice the gear change.

Miliband’s ambitions for a zero-carbon grid by 2030 are being promoted in a context where many organisations produce exciting roadmaps of how net zero could be achieved by 2050. The ESO’s Future Energy Scenarios are one. They assume the creation a suite of economically viable new energy storage technologies that don’t exist.

That’s fine. But there is a big difference in assuming a bunch of new technologies exist in 2050 and relying on them to deliver in 30 months’ time.

The first part of this piece is going to cover how and why we ended up as an outlier, with the fastest decarbonisation but also sky-high energy costs, including the most expensive electricity of any country in Europe.

The policy mix

The UK has had many policies to reduce carbon emissions. Feel free to scroll on past these bullets if you’re short of time, but some important moments include:

• 1989: The Non-Fossil Fuel Obligation (NFFO): A tax on fossil fuels paid by suppliers of electricity to promote nuclear and renewables.

• 1992 Pit closures and dash for gas. 31 of 50 deep coal mines shut with loss of 31,000 jobs. From 1992 to 2002 newly privatised electricity generators install enough gas generation to increase its share of electricity from 5% to 28%.

• 1993, Air Passenger Duty introduced, and Fuel Price Escalator (FPE) introduced, initially at 3% above the rate of inflation, then at 6% after the election of the Labour Government in 1997.

• 2000 Climate Change Programme sets goal of cutting CO2 emissions by 20% compared to the 1990 level by 2010.

• 2001 Climate Change Levy (CCL). New tax on non-domestic energy users with discounts for users who agree to a bespoke Climate Change Agreement to cut emissions. Renewable energy suppliers are exempt.

• 2001 Vehicle Excise Duty reform based on lowering CO2 emissions heavily promote diesel cars, despite the department knowing they are worse for air pollution.

• 2002 Renewables Obligation (RO) requires electricity suppliers to purchase a certain share of supply from producers using renewable technologies, and they receive tradable Renewables Obligation Certificates (ROCs) for doing so.

• 2002 Energy Efficiency Commitment (EEC) requires energy suppliers to reduce output savings through domestic energy efficiency. Many suppliers send customers fluorescent lightbulbs.

• 2005 EU Emissions Trading Scheme (EU ETS) replaces several UK policies.

• 2007 Energy White Paper commits to reduce emissions by 60% by 2050.

• 2007 Carbon Reduction Commitment Energy Efficiency Scheme (CRC EES) - a cap and trade scheme for non-intensive energy users like supermarkets, local authorities, hotels etc.

• 2007 Air Passenger Duty doubled.

• 2007 EU targets: the “20:20:20” targets for 20% reduction in emissions by 2020, backed up by having 20% all energy from renewables in 2020 and a 20% reduction in energy use. EU also agrees 10% of all transport energy from biofuels by 2020.

• 2008 Climate Change Act: legally binding target to reduce emissions by 80% on 1990 level by 2050, 34% by 2020. Creation of 5-year Carbon Budgets and Climate Change Committee (CCC).

• 2008 Renewable Transport Fuel Obligation written into UK law.

• 2008 Energy Performance Certificates required when properties sold or let.

• 2010 Carbon Reduction Commitment - levy on firms not covered by EU scheme.

• 2010 Feed-In Tariffs - subsidy for small renewable generation.

• 2010 Carbon Capture and Storage - government announced £1bn for CCS.

• 2012 Renewable Heat Incentive - subsidy for renewable heat generation. (Abuse of the scheme later led to the “burn to earn” political crisis in Northern Ireland).

• 2013 Carbon Price Support introduced as addition to EU ETS in UK. Coal power goes from being half the price of gas to being more expensive within two years. Coal use declines, and energy from interconnectors, which is exempt, increases.

• 2016-19 EU Clean Energy Package - eight new laws to reach goal of 32% of all energy coming from renewables by 2030.

• 2017 Contracts for Difference (CfD) replace RO for new projects.

• 2019 Theresa May commits to net zero UK carbon emissions by 2050.

• 2021 UK Emissions Trading scheme replaces EU ETS.

• 2022 Public Sector Decarbonisation Scheme subsidy scheme, building on previous Salix scheme.

• 2022 New target and scheme to reduce total UK energy demand by 15% from 2021 levels by 2030.

• 2023 Government agrees in principle to Carbon Border Adjustment Mechanism (CBAM) - a border tax on the difference between UK carbon prices and the carbon price in the country exporting to us.

These policies have given the UK a wide variety of tax and subsidy schemes - the net effect has been to try and drive down use of energy and drive up renewables. What effect did it have? I’m going to divide this in three:

• Falling use - driven by…

• Expensive energy - driven by…

• An unprecedented dash for renewables - while the world continues to add fossil power.

1) Falling use driven by expensive energy

Over the last 20 years the UK has reduced overall energy use per person by more than any other G20 country proportionally, and more than any other country other than Canada in absolute terms.

This reduction has been particularly concentrated in electricity production, where government policy has more impact, and the UK is even more of an outlier.

Over the same period we reduced electricity production per person by more than any other G20 country, whether measured in proportional or absolute terms. Only South Africa - which now suffers rolling blackouts - came close.

In 2003 the UK and EU produced similar amounts of electricity per head, but since then production in the UK has declined, while use in the EU has flatlined. The UK produces around a third what the US does per head. Even on a per-head basis production in China has overtaken the EU. In contrast, on recent trends production in the UK is likely to fall below the world average in the near future.

When it comes to total energy use the patterns are similar to electricity, though the gaps are smaller: in total China now uses more per energy per head than the UK, and is about to overtake the EU.

And of course, many other countries have faster population growth than the UK - and this multiplies the effect of per capita growth. China has gone from producing 37% percent more electricity than the UK in 1985 to 32 times more in 2023.

Where in our economy has this reduction in energy use come about? Overwhelmingly in manufacturing, particularly over the last 20 years since we started raising energy costs.

Between 1990 and 2022 energy use in manufacturing fell by nearly half, and manufacturing accounted for just under two thirds of the total energy use reduction. Household consumption accounted for just over a quarter and just 9% came from the rest of the economy.

2) The highest prices in the world

The reduction in electricity use in the UK is partly because we have the highest industrial electricity prices in Europe, giving energy intensive firms a strong incentive to move production elsewhere or locate elsewhere in the first place. It is of course not the only factor. But it is significant.

Though prices vary by firm size, firms in the UK pay more than four times as much for electricity as in the cheapest locations in Europe. Previously, the UK had lower prices than the EU average.

Look beyond Europe and it’s even worse. Both electricity and energy in Europe are expensive by world standards. At the turn of the century Europe and the US has similar electricity prices. Now they are radically different, with the UK four times more expensive than the US:

And that’s just the old, developed countries. Look globally and it is worse still.

The International Energy Agency estimates that in 2022 and 2023 the price in China was up to a third cheaper than the US, and less than one third of the price in Germany, which is still way cheaper than us.

No wonder it’s China, not Britain, which is the “workshop of the world” these days.

Nor is it just electricity. One factor (though only one) driving the growing gap is the shale revolution in North America, which, amongst other things, has seen the US overtake Saudi Arabia and become the world’s largest oil producer ever.

From 1979-2003 gas prices averaged around a third higher in France, Germany and the UK compared to the US. After the explosion in shale production in the US prices in Europe became 2-3 times higher even before the Russian invasion of Ukraine.

3) An unprecedented dash for renewables - while the world continues to add fossil power

The UK has been on an unprecedented dash for intermittent renewables, which are more expensive than fossil power (I will come back to that point in a moment).

Since 2010 the share of electricity produced in the UK from these sources has risen much faster than in other industrialised countries.

In the global scheme of things, in absolute terms, the world has added a lot of clean power since 2000, but has added more fossil fuel power. A bit over half of this net fossil fuel power addition is in China. The EU and US have reduced fossil generation, but the overall impact has been small in comparison to the increase in China and other industrialising countries.

For example, if you shut down all the remaining fossil-powered generation of electricity in the UK it would offset around 2% of China’s growth in fossil power use since 2000.

The UK now has around half of one percent of current global fossil powered generation, and the world has added fossil-powered generation equivalent to the total UK stock every six months over the last decade: a new UK every 26 weeks.

Looking in more detail at how the UK electricity mix compares to the G20 as a whole, the key differences are that:

• The UK has phased out the cheapest and most polluting source of power, coal, while it remains a major source of electricity for the G20 as a whole.

• Since 2017 nuclear is falling away fast in the UK. This trend is set to accelerate: There are currently 9 operational reactors in the UK, all but one of which is planned to shut before 2030.

• As a result, we have more gas compared to the G20, (which is cheapish) but also a lot more biomass and a lot more wind (which are expensive).

Renewables really are more expensive - and would become absurdly so in a zero carbon grid

Some people might dispute that renewables are more expensive than fossil power.

If this were really true, we would not even be having this conversation: market forces would see us smoothly transitioning onto renewables, and the government would not be having to spend large sums subsidising their rollout.

The previous post set out the array of taxes and subsidies designed to bring about a shift from fossil fuels to renewables. Despite this, people sometimes argue they are cheaper. This claim typically involves:

• Comparing the post-subsidy price of a renewable source to the original price of fossil fuels - even the Commons Library this made this error here.

• Failing to include the wider costs of providing firm power from intermittent renewables.

Steve Loftus has written a superb thread totting up the direct costs of renewable subsidies. As he points out:

• The vast majority of our renewables (73%) are under Renewable Obligation Certificates - meaning generators get the wholesale price of electricity plus a subsidy. So by definition, they can never be cheap.

• In 2023 onshore wind cost about £138 per MW, solar PV £186 and offshore wind around £191, while gas, including a 45% carbon tax, was around £95. Over the last year it’s dropped to around £72.

• Even back in 2020 subsidies for offshore wind were around £4.3 billion.

The Foundations team have totted up the expected costs of the main levies over the next few years:

But this is without factoring in any of the wider costs of adding these intermittent renewables to the grid.

And this last point is really critical for the UK now - which I will come on to in the second part of this post…

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Half-time recap

That’s the end of the first part of this post, which covered:

• Falling use - driven by…

• Expensive energy - driven by…

• An unprecedented dash for renewables - while the world continues to add fossil power…

• and why renewables really do increase the cost of energy.

In the second part I will look at:

• Why Ed Miliband’s plan for a zero-carbon grid by 2030 will make things much worse, rather than just a bit worse,

• The damage we have already done to the UK through unilateral economic disarmament, and why that damage is concentrated on the poorer places in the UK.

Part two »»»