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UK.gov energy policy: You can't please all the people much of the time

'Lights kept on' - but at a price

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Comment Try and please everyone, and you can end up pleasing no one. The government's new draft Energy Bill risks just this.

The Government says it needs £110bn of investment in new energy production plant to keep the lights on. That's slightly down from the £120bn figure the Department had cited earlier, but it needs to be qualified. That sum is "needed" to meet EU climate change target of a 20 per cent reduction in CO2 emission by 2020 using renewable energy production. Given the worldwide retreat from carbon dioxide mitigation policies, and the current financial situation within the EU, it's unlikely that a single European government will adopt a similar commitment, with a similar kind of energy mix.

So why the scare quotes around "need" - just how necessary is that £110bn? It's a good question. The cost of building new open-cycle gas-fired plant to meet the requirement is £13bn. What inflates the figure by a factor of eight is the commitment to do it using renewable energy and nuclear.

No private nuclear power stations have ever been built in the UK - as an inducement to investors, this takes the shape of a new tool, a variation of the Feed In Tariff (FiT) program called 'contracts for difference’ (CfD), which guarantee a price for energy bought from new nukes. The jargon is pinched from hedge funds, where the idea originated.

Like the Carbon Floor price, another part of the electricity market reform (EMR) proposed in the Energy Bill, it's all about removing risk from investors.

"Potential investors are more likely to welcome a CfD FIT and there is thus potential for a positive impact on the required cost of capital. This is because it is much easier for a base-load plant such as nuclear to achieve an average wholesale price and not to expose investors to basis risk. Furthermore, a far higher proportion of the nuclear generators revenue will depend on market risk without a floor price for carbon and a CfD," a research paper for DECC by Cambridge Economic Policy Associates noted last year.

Hang on, you're thinking - isn't investment all about risk? And isn't profit the reward you get for risking your capital? Well that would be the case, but the energy world is one of corporatism, rather than capitalism. The energy giants effectively have governments over a barrel, once they decide to make a strategic investment in a particular energy source. The UK no longer has indigenous nuclear know-how to make its own choices. With potential bidders E.On and RWE withdrawing, there's only the French power group EDF left willing to build new nuclear capacity. Nuclear electricity will cost more to make than gas, as long as gas prices stay down.

On BBC Radio 4 this morning both John Humphreys and Ed Davey agreed that gas prices would rise inexorably in the future. But this is far from given.

Countries able to exploit their own gas resources have seen prices fall - such as the United States. Officials, who are nominally obliged to be dispassionate and neutral, are desperately trying to talk down the UK's own shale gas resources - "not a game-changing amount" one civil servant told the Independent on Sunday newspaper.

Ministers believe them, with Ed Davey telling Parliament: "the shale gas reserves in this country are not quite as large as some people have been speculating." Cuadrilla, the one company that knows, last year suggested an estimate of 200 trillion cubic feet of gas under the Bowland Shale - in real terms 15 years of self-sufficiency at current exploitation rates- may have understated the reserves.

Last week we learned that No 10 recently held an energy summit attended by the Prime Minister. Representatives from companies keen on high gas prices, including Shell, were in attendance. But neither Cuadrilla or any other shale experts were invited.

Today Greens are anguished that renewable energy commitments are crumbling. The draft bill is given a hard time by the BBC's green mouthpiece Roger Harrabin - there's no clear 2030 goal. But when you consider that CO2 reduction by moving from coal to more gas can be achieved at the fraction of the price, the renewables so beloved by the greens have done remarkably well in terms of government support. Renewables already have the Renewables Obligation Certificate scheme, which yields so much cash that plant operators often give electricity away for nothing - or pay to get their power onto the grid - in order to collect lucrative ROCs. Now they are set to benefit still more from the extra payments designed to entice nuclear developers. They have to, or nuclear would be receiving a specific subsidy.

What will householders complaining about the £200 increase in bills today think when they realise it's completely unnecessary?

More on the sums tomorrow. You can read the Draft Bill at the Energy Department website, here, and backgrounders from last year's energy market reform white paper here. ®

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