Green energy subsidies are failing to deliver cheap low carbon power

December 19, 2012, 00:40am

TODAY Parliament will debate the Energy Bill. With homes braced for a hike in bills – and nearly 5m in fuel poverty – the government wants to strike an affordable balance between the UK’s environmental credentials and its raw energy needs. If policy is to follow facts not fads, we need a decisive break with Labour’s inheritance of expensive and inefficient green subsidies.

Between 2010 and 2014, the annual cost to businesses and homes of subsidising solar, wind and hydro-electric power – under the renewables obligation (RO) – is set to double, topping £2.5bn and costing each household the equivalent of £97 a year. Meanwhile, feed-in-tariffs (FITs), the subsidy paid by consumers to encourage small businesses and homes to generate renewable power, will quadruple between 2012 and 2015 – hitting £790m.

Is this a rational investment, or an arbitrary back-door tax? Measured by load factor, the extent to which a plant operates at maximum capacity, solar power’s energy efficiency fell between 2009 and 2011. Onshore wind and hydro have not got any better, while offshore wind crept up. This is good business for companies cashing in, but a lousy deal for consumers. The Energy Bill will phase out ROs. But the new contracts for difference (CfDs) will provide a consumer subsidy of £7.6bn per year – three times the current level.

The government wisely deferred the decision on a target for de-carbonisation by 2030. The green lobby is outraged, but carbon production targets have proved pointless. This year, official data lauded a 19 per cent reduction in CO2 emissions produced in Britain between 1990 and 2009. Yet, CO2 emissions associated with goods and services consumed in the UK rose by 20 per cent over the same period. We are just as addicted to carbon. We just import rather than produce it. The proportion of CO2 emissions embedded in UK imports has almost doubled. The Kyoto Protocol encouraged this displacement by benchmarking production emissions, but excluding developing countries from de-carbonisation targets.

What approach should the UK take? First, we must rely more on nuclear power and shale gas reserves. Unlike current renewable technologies, they can be produced at scale and help keep bills down over the long-term, while reducing UK reliance on carbon. Prospects for nuclear were boosted by Hitachi’s £700m investment in new plants at Anglesey and Oldbury. That is positive, but not enough. It is a measure of the last government’s negligence that, even with extra support from CfDs, nuclear generation is only expected to return to 1990s levels by 2030.

The discovery of shale gas reserves is also good news. A review by the British Geological survey is expected to conclude that Britain has reserves worth £1.5 trillion, making her a global leader. Gas is not squeaky clean, but it is far less dirty than coal or oil. Subject to proper safety regulation, it can help wean Britain off energy dependency from Russia and the Middle East. The government plans to develop a new tax and regulatory regime for shale gas. It should be adapted to encompass nuclear power, providing longer-term certainty and an attractive climate for investment in the two most sustainable UK sources of lower carbon energy.

Next, we need to protect households from rip-off green subsidies. That does not mean giving up on renewables. If we want to back the low carbon technologies of the future, government should spend less trying to pick commercial winners, and more promoting genuine scientific innovation. Yet in 2011, government investment in energy research and development was just 6 per cent of the RO and FIT subsidy – less than France, Germany, the US, Canada and Japan.

Finally, if we are serious about climate change, we need a stronger focus on the environmental here and now. This year, UK investment in resilience to flooding and coastal erosion will amount to a quarter of the RO subsidy – and is set to fall by 20 per cent between 2011 and 2015. The government has also yet to agree a deal to ensure insurance companies continue to provide protection for homes most at risk. Given the disjointed approach of the two environmental departments, a merger would encourage a more coherent strategy, and free up at least £1bn per year in bureaucracy that could be reinvested in flood defences.

By punishing the squeezed middle without driving the innovation to meet demand, the current green boondoggle is lose-lose. The Energy Bill provides a critical opportunity to face up to the stark reality of Britain’s energy needs at a time of austerity.

Dominic Raab is Conservative MP for Esher & Walton.

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