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UK energy policy – rearranging deckchairs on the Titanic?

Author : Alan Franck, Editor, Hazardex

25 September 2015

Over the last couple of decades, different UK Governments have cobbled together an energy policy that seems likely to lead to ever-higher electricity prices, while failing to meet environmental goals. At the heart of this dysfunction lies a string of decisions, some taken when market conditions were very different from now, others driven more by wishful thinking than any hard analysis of what would be best for UK consumers and industry.

The results are likely to be particularly damaging in two sectors in particular – renewables and nuclear.

In a report for the Centre for Policy Studies think-tank, the economist Rupert Darwall calls renewable energy "the most expensive domestic policy disaster in modern British history".

Darwall, a former government adviser, says in the report that the Government hides the full costs of intermittent renewables, particularly the massive amounts of extra generating capacity required to provide cover for intermittent generation when the wind doesn’t blow and the sun doesn’t shine.

Highly subsidised wind and solar capacity flood the market with near random amounts of zero marginal cost electricity, he says, wrecking the economics of conventional power stations.

Darwell’s report estimates that without renewables, the UK market would require 22GW of new capacity to replace old coal and nuclear. With renewables, 50GW is required, i.e. 28GW more to deal with the intermittency problem. Then there are extra grid costs to connect both remote onshore wind farms (£8 billion) and even more costly offshore capacity (£15 billion) – a near trebling of grid costs.

No British government has yet to produce an analysis demonstrating renewables are the most efficient way of cutting carbon dioxide emissions, he says. Neither has any government published any value-for-money analysis to justify the use of high cost private sector capital against cheaper public sector borrowing.

Some might find these opinions rather severe or even wrong-headed, but in a world where UK ministers can defend the environmental benefits of cutting down primary hardwood forest in North Carolina, transforming it into pellets, transporting it across the Atlantic and burning it at the Drax biomass plant in North Yorkshire as a substitute for coal (which would be 40% the price and produce significantly less CO2, according to one calculation), there is obviously something rotten in the state of UK energy policy.

As if that were not enough, it seems efforts to revive nuclear generation in the UK could be even more confused, costly and risky.

A final agreement to build Hinkley Point C, the planned £24.5bn nuclear power station in Somerset, is expected to be signed soon with developer and operator EDF Energy. After repeated delays, EDF said in September its most recent estimate for the plant’s completion and operational startup date was 2024.

But the Austrian and Luxembourg governments have mounted a legal challenge at the European Court of Justice against EU-approved subsidies from the UK government for Hinkley, arguing that this is in breach of EU law and risks distorting the market. EU lawyers say this could delay the project by a further five years.

On top of this, a detailed report by HSBC Energy Analysts describes eight other key problems with the project.

These include: declining demand for power in the UK, currently falling at 1% a year as energy-saving measures take effect; a three-fold jump in the UK’s interconnection capacity with continental Europe by 2022, massively increasing the country’s ability to import cheaper supplies; and "a litany of setbacks" in Finland and France for Areva’s European Pressurised Reactor (EPR) model, the same type as planned for Hinkley Point C.

HSBC’s analysts consider the EPR model to be too big, too costly and still unproven despite years of development effort. They also point out that wholesale power prices have fallen by 16% since November 2011 when the government agreed a 'strike price' for Hinkley’s output – effectively a guaranteed price of £92.50 per megawatt hour, inflation-linked for 35 years and funded through household bills.

This strike price is almost double current UK wholesale electricity costs. The HSBC report concludes: “We see ample reason for the UK government to delay or cancel the project.”

These objections were confirmed in a recent report for the OECD which found that the UK's projected nuclear costs are the highest in the world. OECD research showed that the cost of a nuclear plant in Britain is projected to be almost three times higher than in China or South Korea.

And the risk is increased by EDF Energy’s choice of two state-owned Chinese corporations as junior partners on the project, who would provide most of the finance.

Dieter Helm, professor of energy policy at Oxford University, considers the Chinese involvement in Hinkley to be very much against Britain’s interests. The professor, a leading expert in the field of energy policy and a member of the economic advisory committee at the Department of Energy and Climate Change, said that the Chinese contribution should be replaced with UK government debt or specific nuclear guaranteed bonds that could cut the cost of capital from 10% to 2%.

In a paper entitled British Energy Policy – What Happens Next?, he says: "Add in the military and security issues of letting Chinese state-owned companies into the heart of the British nuclear industry, and it seems positively perverse to prefer Chinese government money to British government money in so sensitive a national project."

After the explosions in Tianjin, which highlighted China’s lamentable industrial safety record, and the announcement in September that the US was considering financial sanctions against China over alleged cyber-attacks on Western state institutions and industry, it is increasingly apparent that the UK government’s China-friendly nuclear policy is risky in the extreme.

It seems the Government is not listening - in September, on a trade visit to China, Chancellor George Osborne also invited Chinese nuclear interests to design, build and operate a new nuclear plant at Bradwell in Essex.

It is not as if there are no other options. One already proven alternative would limit CO2 emissions, keep costs down, and act as a bridge until such time as energy storage technology makes renewables more cost effective.

Peter Atherton, an energy analyst at investment bank Jefferies, said that for the same price as Hinkley Point C, which will provide 3,200MW of capacity, almost 50,000MW of gas-fired power capacity could be built.

"This level of new gas build would effectively replace the entire thermal generation fleet in the UK – much of which is old and inefficient – with brand new, highly efficient, low carbon, gas generation," he said.

Sky-high construction costs and inflated subsidies for renewable and nuclear-generated electricity will have a malign effect on the UK economy for decades. The resulting increase in energy bills will push many more of society’s poorest and most vulnerable into energy poverty and accelerate the flight of energy-intensive industry from our shores, increasing unemployment.

There is still time to review past decisions in the light of present-day realities and take action accordingly, but this would necessitate a degree of political wisdom and courage not often in evidence. We can but hope.

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