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Cheap energy revives US manufacturing, skint Brits shiver

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The battle of crystal ball gazers over how much we'll be paying for energy in the future rages on. The government's advisory panel on global warming has weighed in, with a report on household energy bills. The Climate Change Committee uses slightly different assumptions to the Energy Department, and only looks at a slice of the market, but arrives at the same cheery conclusion: carbon policies will add a mere £110 a year to fuel bills by 2020.

If you read the small print, you'll find the CCC uses the same broad assumptions as DECC. The CCC assumes we'll be using much less energy - 19 per less than today - which means chucking out our energy-guzzling flat panel TVs and iPads. And we'll buck the trend to warmer homes by turning down our thermostats - by one degree. And the cold winter of 2010 won't be repeated. That's a lot of ifs.

There's an elephant in the room however, with 'cost' tattooed on its backside. The double whammy of replacing Britain's generation capacity and replacing them with expensive, renewables in remote locations comes at a price. £100bn for the windfarms, £40bn to connect them to the grid, and £100bn on backup: conventional gas stations that provide power when the wind doesn't blow. Since money can't be magicked out of thin air, and the debt-ridden state can't help either, that leaves consumers picking up the tab.

At an event this month the Renewables Energy Foundation estimated the cost of meeting the EU Renewables Directive at £15bn a year (£8bn subsidy, £5bn grid integration, £2bn VAT) - that's £170 per household, all things being equal. But, actually, costs aren't evenly distributed: electric-only households will see their bills rise by £320.

Climate change campaigner George Monbiot today suggested a rebate for the poorest 20pc by raising bills for wealthier households even further - "you would reverse the regressive element" - he suggested. But the middle will still have to find the bulk of it; "you can't distribute the problem away," says Matthew Sinclair of the Taxpayers' Alliance, and author of Let Them Eat Carbon.

You pays your money, and takes your pick. The cost-centric view looks hard-nosed and realistic, while the other, backed by DECC and CCC, looks quite utopian.

Yet all three make the assumption that gas prices will remain high. The era of cheap fossil fuels is over, we are told. But if new unconventional gas sources do to prices here what they have done in the US, that assumption is false. The natural gas price has halved in five years on the US market Nymex, to $3.14/mmBTU, down from a spike of $14 in 2007.

In a new report this week PwC predicts US manufacturing will undergo a renaissance thanks to cheap energy, with shale gas saving industry $11.6bn in lower, not higher bills. By remaining wary of climate change mitigation policies, the US economy seems to have dodged a bullet. ®

Related Links

CCC on Household Energy Bills
PwC on cheap energy for US manufacturing
REF on ROC[pdf]

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