Going green isn’t easy when we’re so far in the red

 
Corin Taylor
GOING green is important. But costs matter too, and never more so than at present. Household incomes are going through a decade of stagnation and businesses and jobs face a big hit this year if the euro crisis is not resolved.

The potential consequences, positive and negative, of British energy policy are huge, but right now it is far more of a hindrance than a help. There are three key failings.

Firstly, the more expensive renewable technologies are being prioritised. Analysis by the Institute of Directors of levelised cost estimates from a number of sources shows that biomass, waste-to-energy and onshore wind are up to half as expensive as offshore wind and three to four times cheaper than solar.

How the UK decarbonises is probably as important as how quickly it reduces emissions. British energy policy seems to have abandoned the free market, with targets and roadmaps for smart meters and electric cars only a few steps away from the tractor production targets consigned to history in 1989. A technology-neutral approach would be far better.

Secondly, the Department of Energy and Climate Change estimates that government policies will increase electricity prices in real terms by 27 per cent for households and 34 per cent for businesses by 2020. A number of heroic assumptions on the impact of energy efficiency measures reduce the forecast impact on bills, but a price increase of between a quarter and a third is serious money.

It’s not surprising that a package for the most intensive energy users was announced in the autumn statement, but mitigating the effects of the government’s own policies on a set of businesses is an admission of failure.

Thirdly, it’s unlikely that the green targets will be met in any case, as the big six energy companies don’t have strong enough balance sheets to finance the enormous investment that is needed. By 2020, the UK’s population is set to be 5m larger, which means at least an extra 5GW of peak power capacity, in addition to the huge amount of capacity needed to replace ageing coal and nuclear stations.

Energy secretary Chris Huhne has argued that it would be a big mistake to bet on shale gas coming to the rescue, but the key flaw in his argument is that the UK is currently making a big gamble on gas prices staying high.

We currently pay around three times more for gas than the US – a huge incentive for the Americans to export and for us to develop our own shale resources. If gas prices come down, it would not only blow a hole in the claim that renewables development can provide a shield from high fossil fuel prices, but would give a huge boost to British manufacturing.

As a recent PwC report found, shale gas development could help US manufacturers save $11.6bn (£7.45bn) annually and employ an extra 1m workers by 2025. It could happen over here too, if we choose to let it.

Ultimately, cheap energy drives economic growth. The UK needs a lot more of both.

Corin Taylor is a senior economic adviser at the Institute of Directors. Energy policy for a less affluent age, co-written with Dan Lewis, chief executive of Future Energy Strategies and the Economic Policy Centre, will be published this month.