The following talk was given at a meeting of the All Party Parliamentary Group on Rebalancing the Economy, at the House of Commons at 10.00 on the 13th of February 2013. The session topic was The Cost of Energy. Other speakers were Tamaryn Napp (Imperial College London), Professor Alan Riley (City University Law School), and Jeremy Nicholson (Director, Energy Intensive Users Group).
1. The cost of subsidies to renewable electricity generators are now well known, but bear repeating: the Renewables Obligation is now costing consumers about £2 billion per annum, and will have to rise to nearer £8 billion a year in 2020 if the EU Renewables Directive targets are to be met. The total program costs between 2002 and 2030, including system integration costs and VAT, are likely to be in the region of £175 billion.
2. Some will suggest that this enormous cost is worthwhile since it will facilitate the transition to a green economy. Mr Davey gave a speech yesterday to this effect; and the Prime Minister hinted at something similar last week.
3. Is such a green economy possible? The simple answer is yes. After all, we had a low carbon economy, if that is what is meant by a green economy, only a few hundred years ago. However, it had properties that are very different from those we observe in our economy today.
4. Specifically, a much smaller population lived in much less prosperous conditions, with peak levels of health and wellbeing that would probably regarded as only moderate in the contemporary world. In addition, there were higher levels of mortality, particularly amongst reproductive women and infants.
5. But no one, at least no one sane, wants a return to that state. What people mean when they ask “Is a green economy possible?” is “Can we have a low carbon economy that is as prosperous as today’s fossil-fuelled economy?”
6. We can only answer yes to that question if the green economy has the same fundamental property as the carbon-based economy. Namely, it must be as equally productive or even more so.
7. But that is a very tall order indeed. Carbon energy sources are very dense, and consequently cheap.
8. An example from a crucial period of our economic history, a time of rapid rebalancing in fact, will illustrate the point. In 1851 the 130,000 coal miners produced energy equivalent to 150% of the potential wood output of the entire land area of England and Wales, if managed sustainably.
9. That is a small workforce, and a very large quantity of energy. By comparison there were 1,140,000 agricultural works in that year, producing less than 1/100th as much energy per head as the coal miners.
10. That very high level of productivity powered the industrial revolution. The low carbon economy of the time was by comparison a high employment, low productivity economy, and was driven, quite literally, from the field.
11. Of course, modern renewables are not just wood, though we should not forget that modern fossil fuels are not just coal; there is oil for one thing, and gas continues to spring surprises.
12. But modern renewables, wind, solar, photovoltaic, are different from their predecessors, and perhaps it is plausible to offer them as ready or almost ready to offer a prosperous green economy. The question, then, is “Are modern renewables as productive as fossil fuels?”
13. The many industry and governmental references to the large numbers of jobs that are likely to result from the green transition should give us pause; high rates of employment are not characteristic of a highly productive energy sector, indeed quite the reverse.
14. Indeed, on investigation we find that modern renewables are still extremely capital intensive, with low load factor and very high system integration costs.
15. It is simply facile to say, as the industry often does, that “the wind is free”. Coal and gas are free in the ground; but we have to extract, convert, and deliver the usable energy to a consumer, all of which have costs.
16. Exactly the same is true of wind power, and for renewables the extraction, conversion, and delivery costs remain extremely high compared to fossil fuels.
17. The crude subsidy levels confirm this point. Even onshore wind, a relatively cheap renewable, needs a near 100% income top-up, and if systems costs, extra grid and balancing costs (a hidden subsidy since these costs are socialized over the entire system), are taken into account the cost to the consumer of onshore wind is three times that of fossil fuels, and offshore wind is still more expensive, perhaps four or five times as expensive as conventional energy.
18. Furthermore, these cost estimates may well be too low, since there is emerging evidence, published by REF before Christmas, to suggest that the economic life of current wind turbines is only half that claimed by the industry, roughly doubling the levelised costs of the energy generated.
19. One might quibble with all the estimates I have given above, but no plausible revision can change the order of magnitude involved. The fact is that renewable energy is still not close to being competitive with fossils, and nowhere near as economically productive.
20. Consequently, shifting to renewables for the bulk of our energy would result in a significant decline in standard of living.
21. Now, you might reply that there is a great deal of green growth at present, and that this seems to run counter to my observations. However, all this activity is funded by subsidies drawn from the wealth created by the high productivity of the fossil-fuelled economy.
22. Green energy, the current green economy overall, is a costly output of the fossil-fuelled economy. A luxury consumable, one might say. The green energy industries are not sufficiently productive to be self-sustaining; that is to say they are not economically sustainable without continued support from the fossil economy.
23. Moreover, there is no sign that the green industries are making sufficient progress to become as productive as fossil fuelled industries in any foreseeable future.
24. Part of the problem is intrinsic to the energy sources: renewables have the enormous disadvantage of low energy density to overcome, implying that the capital cost of their conversion devices must be very low indeed, as well as the conversion and delivery costs, if they are to be competitive and as economically productive as fossil fuels.
25. But it is also true that that the use of subsidies to drive the adoption of existing technologies in order to meet arbitrary targets is very unhelpful. Investors have no deep incentive to put capital at risk to drive the innovation required since they are already making money. Worse still, innovation is positively discouraged. Because of subsidies, capital that might have gone into research and development is actually better invested in existing technologies.
26. We shouldn’t mistake the frenzy of deployment for healthy growth. Subsidies, those transfers of wealth from the fossil-fuelled economy, are providing remarkable rates of return for short term investors, but when these transfers cease, as they will when consumers tell politicians that the prospective or actual reductions in standards of living are unacceptable, the current green growth will evaporate like dew before the rising sun.
27. A long term future for the green economy is only possible if the green energy sector is as economically productive as the fossil-fuelled economy, but the renewables of today simply are not. Yet it is those existing technologies that our subsidies and mandates are forcing into the market.
28. The renewables of tomorrow might, perhaps, be different, but we won’t discover these high productivity renewables, if they exist at all, by rewarding investors for building the current generation of inadequate technologies.
29. A green economy as prosperous as today’s fossil-fuelled economy is a theoretical possibility, but we can’t be more definite. However, we can be certain that our current policies are taking us further away from that possibility, not closer to it.