The market for electricity, established 20 years ago after privatisation, has already been lethally undermined. Since there is no way it can deliver the expensive decarbonisation the coalition wants, investment is now driven by central planning and subsidies, set to meet the wishes of the developers, particularly the big six energy companies.
This oligopoly, in which four large continental companies are dominant, looks set to enjoy an arm-lock on this and future governments. Prices will rise and economic growth will be stifled.
The coalition’s policy of a £200bn energy investment and ambitious green energy targets risk raising the number of UK households in fuel poverty towards 8.5m (a third of the total) by 2030. As part of a rejection of a free energy market, a new carbon price floor will be introduced next year, as well as feed-in-tariffs guaranteeing the price of electricity for future new nuclear plants and green energy such as wind.
The price floor is a tax, which will increase energy prices for both consumers and industry without guaranteeing new nuclear plants or reducing EU emissions. The carbon price floor will tax the 75 per cent (and growing) of the UK electricity-generating grid dependent on coal and gas and will help push UK energy prices higher than those in the rest of the EU. The cost of this tax will be passed on to consumers and energy intensive industries. Also, it will provide a windfall of over £1bn to existing UK nuclear operators and risks alienating other potential atomic energy investors.
The price floor also risks another dash for gas to cover the shortfall as new nuclear plants are delayed (they are already over two years behind schedule) and older coal and oil plants close. This could result in yet more dependence on imported gas to generate electricity and over 1bn tonnes of economically recoverable UK coal reserves becoming stranded as the market for home coal production collapses before new clean coal plants are ready, possibly by the mid 2020s.
One of the main funding mechanisms being put in place to support new nuclear, the carbon price floor, could actively discourage plant construction. The carbon price floor is supposed to boost investment in low-carbon technology by making generators pay a pollution tax for every tonne of carbon dioxide they emit, starting at £16 per tonne in 2013 and then rising to £30 per tonne in 2020 and £70 per tonne in 2030.
In that sense it is similar to the European Union’s emissions trading scheme (ETS), but permits are currently trading at under 40 per cent of the cost of the carbon price floor proposed for next year. The ETS price is deemed to be too low, and the implication of this new unilateral UK policy is that the UK carbon market will no longer use ETS permits and its share of these will flood the European market, causing their price to drop even further (by up to about 20 per cent during low emissions periods) and making it cheaper to produce fossil fuel energy on the Continent. The price of carbon in the UK and in Europe will then differ hugely.
Perversely, this could stunt EU-wide investment in clean energy technologies, as it will not cost as much to run carbon-emitting plants. It will also massively increase the amount that UK households and energy intensive industry have to pay for power; electricity prices could more than double by 2030, putting a third of all British households into a state of fuel poverty, where 10 per cent or more of household income goes on energy bills.
This is liable to make the carbon price floor highly unpopular with voters, which in turn could affect the government’s commitment to clean energy support and the future of the floor price’s trajectory.
The coalition should be devoting their efforts to a viable and credible EU-wide carbon price floor, alongside a plan to deliver as diversified a generating base as possible, with new nuclear plants delivered quickly from a variety of atomic investors.
For the first time since the early 1970s energy policy is ready to take on a political edge, and governments who mishandle this vital area of responsibility will suffer at the ballot box. Higher bills and job losses as a direct result of new interventions to meet impossible green targets will dominate Westminster in the run up to the next election.
Tony Lodge is a research fellow at the Centre for Policy Studies (CPS) and is author of The Atomic Clock: How the coalition is gambling with Britain’s energy policy, published by the CPS.
The market for electricity is now driven by central plans and subsidies to the big six