Renewable Energy: The Most Expensive Policy Disaster in Modern British History

In a departure from the normal format of Energy Matters, you will find below, the email summary accompanying a new report published today by “The Centre For Policy Studies”. The report is damning of UK Energy Policy and may be influential given that the author was formerly a Special Adviser to HM Treasury.

——————————————————————————

In a new report Central Planning with Market Features: how renewable subsidies destroyed the UK electricity marketpublished by the Centre for Policy Studies on Wednesday 18 March, Rupert Darwall shows that recent energy policy represents the biggest expansion of state power since the nationalisations of the 1940s and 1950s – and is on course to be the most expensive domestic policy disaster in modern British history.

Darwall shows that:

  • The electricity sector is being transformed into a vast, ramshackle Public Private Partnership, an outcome that promises the worst of both worlds – state control of investment funded  by high cost private sector capital, with energy companies being set up as the fall guys to take the rap for higher electricity bills.
  • Post-privatisation gains in productivity are now being reversed as a result of plunging labour productivity. By 2013, three quarters of the productivity gains recorded between 1994 and 2004 had been lost.
  • Competition between electricity suppliers is an expensive sideshow (which Ofgem estimated cost £730m in 2008) if it does not drive competition between generators and market investment in the most efficient generating technologies.
  • Government policies aim to hide the full costs of intermittent renewables, which as a result are systematically understated. In addition to their higher plant-level costs, renewables require massive amounts of extra generating capacity to provide cover for intermittent generation when the wind doesn’t blow and the sun doesn’t shine.
  • Highly subsidised wind and solar capacity flooding the market with near random amounts of zero marginal cost electricity wrecks the economics of conventional power stations. It is therefore impossible to integrate large amounts of intermittent renewables into a private sector system and still expect it to function as such.
  • As a result, the State has stepped in with a patchwork of interventions to support prices. Because revenues are dependent on continued government interventions, private investors end up having to price and manage political risk, imparting a further upwards twist to electricity bills.
  • 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. Neither has any government published any value-for-money analysis to justify the use of high cost private sector capital against a public sector comparator using the State’s balance sheet.

Including capacity to cover for intermittency and extra grid infrastructure, the annualised capital cost of renewables is approximately £9 billion. Against this needs to be set the saved fuel costs of generating electricity from conventional power stations. For gas, this would be around £3 billion a year at current wholesale prices, implying an annual net cost of renewables of around £6 billion a year.

Intermittent renewables destroy markets 

The above analysis leads to a straightforward conclusion. You can have renewables. Or you can have the market. You cannot have both.

There are therefore two options to align ownership and control:

  • if renewables are a must-have – although no government has made a reasoned policy case for them – then nationalisation is the answer; or
  • the state cedes control, ditches the renewables target and returns the sector to the market.

Nationalisation removes political risk thereby cutting the sector’s cost of capital. Together with the savings from abolishing retail competition, it would cut average bills by around £72 a year now, and £92 from 2020. By contrast, ditching the renewables target and returning the sector to the market would save households around £214 a year, assuming gas replaces renewable power. This option would depend on securing a permanent opt-out from the EU renewables directive and any successor policy imposing targets on individual member states.

Sir Ian Byatt: “Ministers have destroyed the emerging electricity market while talking of how it could improve competitive processes”

As Sir Ian Byatt comments in the Foreword to the paper:
“Ministers have destroyed the emerging electricity market while talking of how it could improve competitive processes. They and their advisers have not understood that effective competition proceeds from the right structure of suppliers and works in innovative, not predictable ways… Good intentions in the form of a desire to save the planet have led to our impoverishment. We need better analysis, greater transparency and more effective discussion of social and environmental issues, not Whitehall playing shops. Rupert Darwall provides us with the tools for such discussions in the area of energy and, in his policy lessons, points us towards better approaches.”

Click here to read the full report.

Notes:

  1. Central Planning with Market Features: How renewable subsidies destroyed the UK electricity market by Rupert Darwall is published by the Centre for Policy Studies on Wednesday 18 March 2015.
  2. Rupert Darwall is a former Treasury Special Adviser and is the author of the acclaimed The Age of Global Warming: A History (Quartet Books, 2013). For the Centre for Policy Studies, he wrote Paralysis or Power? (2003) on Conservative Party renewal and A Better Way to Help the Low Paid (2005) on reforming tax credits. Last year he wrote How to run a country: Energy policy and the return of the State (Reform) and has written extensively for newspapers and magazines on both sides of the Atlantic.

 

This entry was posted in Energy, Political commentary and tagged , , . Bookmark the permalink.

47 Responses to Renewable Energy: The Most Expensive Policy Disaster in Modern British History

  1. Hugh Sharman says:

    At 22h yesterday (St Patrick’s Day) 8403 MW of grid-connected wind power capacity was delivering 30 MW of actual power. Reference: http://www.bmreports.com/bsp/bsp_home.htm

  2. edhoskins says:

    This is an excellent and very well considered report.

    A very simplified layman’s article showing much the same effects is available at:

    https://edmhdotme.wordpress.com/2015/01/22/charting-the-effectiveness-of-renewable-energy-in-europe/

  3. Pingback: Charting the costs and effectiveness of Renewable Energy in Europe | edmhdotme

  4. Ed says:

    Basically a rehash of the “market economy” versus the “planned economy” debate and people trying to reframe the problem into having only the old “right” “left” binary solution. It is a smoke screen for people who don’t understand the problem and want to bury their heads in the sand.

    Problem: Net fossil energy is peaking out and will start to decline in the near future.

    Answer: We need to extend the fossil fuel age a little longer by building out renewable/Nuclear infrastructure and use this extra time to deduce Earth’s population.

    Outcome: A soft landing instead of a hard landing for when fossil energy declines to critical levels within a century.

    It is not about how much your bills are now ! Sometimes you need to endure short term pain for long term gain and the courage to make the correct decisions now to safeguard the future.

    • A C Osborn says:

      Sorry Ed, you have no idea what you are talking about.
      This is supposedly about CAGW and reducing CO2 output.
      It is in actual fact increasing CO2 output while at the same time doing untold harm to the UK.
      It is also supposedly about making the Energy more reliable and it is in actual fact doing exactly the opposite.

  5. jacobress says:

    “Problem: Net fossil energy is peaking out and will start to decline in the near future.”
    That is a declaration of faith or ideology, or prophecy
    “reduce Earth’s population” – another declaration of faith or ideology. (by the way: how do you reduce the population?).
    “Sometimes you need to endure short term pain for long term gain ”
    Yes, but let me decide. We don’t need “short term pain” imposed on us by force from above (by the government), based on a dubious claim of “long term gain” This “long term gain” is usually just an empty prophecy or pretext, with the pain being the only component to materialize.

    • Ed says:

      Fossil energy is finite. Therefore mathematically it will peak and decline at some time. This is not faith, ideology or prophecy but a statement of mathematical logic that follows directly from the fact that it is finite.

      Reducing Earth’s population is very difficult and takes a long time. The probability that we will do so voluntarily and in time is almost nil.

      Getting people to vote in a government committed to long term sustainability is also almost nil.

      On the positive side, awareness is growing. Alternative media and political parties dealing with these issues are growing in popularity. However they are getting very little traction.

      • LoboSolo says:

        –Fossil energy is finite. Therefore mathematically it will peak and decline at some time. This is not faith, ideology or prophecy but a statement of mathematical logic that follows directly from the fact that it is finite.–

        “The U.S. Energy Information Administration estimates that as of January 1, 2012 there were about 2,266 trillion cubic feet (Tcf) of technically recoverable resources of dry natural gas in the United States. At the rate of U.S. dry natural gas consumption in 2012 of about 26 Tcf per year, the United States has enough natural gas to last about 87 years.”

        “January 2012: Amount of methane frozen unknown. We don’t know the total amount of methane frozen deep beneath the ocean, but we suspect it could rival the rest of fossil fuels combined.”

        “March 2013: Japan successful at extracting natural gas from frozen methane. Japan says it has successfully extracted natural gas from frozen methane hydrate off its central coast, in a world first.”

        –Reducing Earth’s population is very difficult and takes a long time.–

        “If life expectancy worldwide stabilizes at 75 years, the world death rate would stabilize at 13.3 and a falling world birth rate would intersect a rising death rate around 2030. At about this time, world population growth would stop, which is consistent with the convex growth projection.”
        http://www.siue.edu/~rblain/worldpop.htm

  6. William says:

    Your second bullet point struck me:

    Post-privatisation gains in productivity are now being reversed as a result of plunging labour productivity. By 2013, three quarters of the productivity gains recorded between 1994 and 2004 had been lost.

    You imply that changes to the electricity market are behind that. Nobody who has looked at figures 2 and 3 critically would conclude that. But the impression is reinforced by the first page summary, which reads:

    Yet it wasn’t so long ago that Britain led the world with electricity privatisation and liberalisation – the last big policy achievement of the Thatcher years – cutting bills and driving huge gains in capital and labour productivity, gains which are now being reversed.

    Darwell’s figure 2 shows a red curve of something or other with a scale of £20bn and claims there is a 40% loss of productivity in the sector. UK GDP is around £2tn or 100 times bigger, so he is talking of productivity changes in around 1% of the economy. Do you think it is reasonable to attribute recent UK productivity drops to this? A case of the tail wagging the dog, no?

    His figure 3 shows sector productivity went negative in around 2004/5, 2 years before Blair’s 2007 renewables agreement, which he refers to. Were windmills from the future responsible for that drop?

    The CPS doesn’t like renewables, that much is clear. Darwell’s deliverable is all about justifying that. It is about politics and advocacy, not economics. I think you should have read it more carefully before giving it publicity.

    • A C Osborn says:

      William as requested I will respond directly to your criticism of only one tiny part of the Study.
      You questioned the graphs on Productivity and Efficiency.
      Although the renewables agreement may have come in during 2007, the writing was already on the wall in 2000 with the European Climate Change Programme and in 2003 with the EU Large Combustion Plant Directive.
      On top of that the UK had an ageing Oil, Coal & Nuclear fleet of power stations, which the Labour Government had done nothing to improve or replace.
      From the period 1989 to 2006 no less than 10 Nuclear Power Stations closed along with 1 Oil power station, there were also a few Coal Fired Power Stations that were taken out of commission to be converted to burn Biomass, (another very bad move).
      These closures obviously changed the output and overall productivity & efficiency of the total fleet even before Renewables were introduced.
      The introduction of the renewables, in particular Wind Turbines has further disadvantaged the rest of the fleet as it is no longer being run at Maximum efficiency and as the study points out it will only get worse with greater penetration of Wind power.
      The imbalance of Renewable Subsidies is leading to closures (mothballing) of Gas Turbine Generation as well with 1 already in the UK in 2013 and around 20 in Europe, see this article
      http://www.greentechmedia.com/articles/read/europe-mothballs-20gw-of-gas-plants-in-2013-with-more-to-come

      Even the latest most Effeicient Turbine of all is to be shut down, see
      http://notrickszone.com/#sthash.H6tzlHlP.dpbs

      This crazy dash for renewables is actually leading to higher & higher CO2 output as gas turbines close and in Germany Coal (which is cheaper) are not only continuing to run but are being built more & more for baseload & backup.

      • William says:

        AC, it might only be a “tiny part”, but it talks to the credibility of the author.

        I read Euan’s introduction and as soon as I read the 2nd bullet point, (“Post-privatisation gains in productivity are now being reversed …”) I smelled a rat. Anyone who reads anything about economics knows that the recent UK recovery has shown a worrying decline in productivity and nobody really knows why. Now here’s Euan saying that Darwall knows. So I went to the report and searched for “productivity” – and found his graphs. And he’s talking about a sector less than 1% of the economy and changes that started well before the push for renewables. I’m no economist and I shouldn’t be able within 5 minutes (really!) to find such obvious nonsense from a Cambridge economist and “former Treasury Special Adviser”.

        This alone tells me the report is not worth the paper it is printed on. It tells me to expect a hatchet job on renewables, not a balanced study. I have no doubt that the “deliverable” the CPS asked for was indeed a hatchet job, else why would they have commissioned Darwall and not a real economist who has studied the European and UK electricity markets?

        I’m not necessarily saying that current energy policy is sensible. But this report is not intended to inform honestly or to help design better policy. It is intended to mislead – it is base politics. I notice that even Euan is not defending it.

        By the way, the closures of plant that you talk about correlate well with the downward slope of the report’s figure 2. A naive interpretation would see these closures as the reason for the improved sector productivity Darwall proclaims.

        • Euan Mearns says:

          The only text in that post that is mine is this:

          In a departure from the normal format of Energy Matters, you will find below, the email summary accompanying a new report published today by “The Centre For Policy Studies”. The report is damning of UK Energy Policy and may be influential given that the author was formerly a Special Adviser to HM Treasury.

          This is a simple case of news reporting. If I’m not defending it its because I’m swamped.

        • A C Osborn says:

          There you go then, my first response was correct.
          You have no data to actually refute any of the findings, just snide remarks about the person & group doing the study.
          I won’t bother any further.

        • William says:

          Data is not required. If an “economist” mistakes or misrepresents the economics of productivity changes he is not credible. And so his deliverable in not credible.

  7. renewstudent says:

    The 50GW of new plant that is claimed as being needed to balance renewables already exists . The recent Capacity Market auction signed up most of it, and the likely cost to consumers is put by DECC at around £3 pa. on bills.

    • JerryC says:

      Interesting. Where, exactly are these 50 GW of new capacity coming from? That’s rather a lot of power.

    • A C Osborn says:

      You obviously missed the point here, the quote is “Without renewables, the UK market would require 22GW of new capacity to replace old coal and nuclear. With renewables, 50GW is required”
      I restate 22GW for replacement of old stock.
      If you go back and read the UK Capacity Market auction Report you will see that in Table 2 of the 50GW they are talking about 33.6Gw are of EXISTING CMU, only 15.7GW is NEW.

      With the Closure of old Coal fired power stations and even more penetration of Wind Power the BACKUP requirement is greatly increased as the back up is of “plated” turbine power (even though they only produce 20% of that on average), to actually achieve the Ed davey stated reduction of CO2 will require 5 times as many Wind Turbines as Coal or Gas Turbines to get the same output.
      So that study has estimated that the backup requirement + the replacement of closing power stations will require a FURTHER 30GW on top of that measly 15.7GW already auctioned plus another unidentified 7GW, which I can’t be bothered to find.

  8. A C Osborn says:

    Wow 3 Green Trolls at the same time, that has to be a record.
    What’s up guys getting a bit worried?
    You all have the wrong talking points.
    Wind Power is just too expensive and is making all other types of Generation too expensive, because all new plants are going to want the same “Strike Rates” as Offshore Wind £155/Gw or they won’t build it because they are being disadvantaged.

    • William says:

      Why not address what others actually say, trying as best you can to avoid ad-homs and to stay on topic, rather than just name-calling.

      • David A says:

        Not seeing the graphs you reference, but is this not referring to a loss of the productivity gains in the energy market only? Is this a loss as a percentage of the gains, or a loss as a percentage of the total energy sector productivity?

        Either way it is clear that these bullet points…

        “In addition to their higher plant-level costs, renewables require massive amounts of extra generating capacity to provide cover for intermittent generation when the wind doesn’t blow and the sun doesn’t shine.

        ◾Highly subsidised wind and solar capacity flooding the market with near random amounts of zero marginal cost electricity wrecks the economics of conventional power stations. It is therefore impossible to integrate large amounts of intermittent renewables into a private sector system and still expect it to function as such.”

        …clearly have a negative impact on productivity beyond their share of the amount of power actually generated. This as well…

        ◾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.”

        indeed, every bullet point has a negative impact on grid productivity.

        • William says:

          Figures 2 and 3 are in the report, pages 27 and 28. You need to click the link in the article at the top to download the report.

          • David A says:

            The graph for the energy sector from the “Office for National Statistics”, looks perfectly reasonable to me. Wind and solar has created very large inefficiencies due to the reasons in the bullet point.

          • William says:

            It is not the graphs but the spin put on those graphs by Darwall that is wrong. I explained that quite well above I think. Start at March 18, 2015 at 2:17 pm above.

        • A C Osborn says:

          But to a “Green” person the Wind Power is “free” and that is all they see.
          Increased Energy costs leading to unemployment, Social Hardship and even Death of the very poor & elderly does not come in to their equations.

  9. A C Osborn says:

    Euan, sorry for the off topic but I notice that you ran in to the Warmist Mafia” over at Climate etc.

    Re Nick Stokes response at

    Nick Stokes | March 17, 2015 at 6:33 pm |

    “This is what GHCN V3 did to V2 in Iceland:”

    This is endlessly frustrating. I tell you that GHCN V3 unadjusted preserves the Iceland record, and you come back with what looks like data from the adjusted file. The GHCN Reykjavik data is shown here. There is no unadjusted data missing from the 1960’s. The unadjusted data (table here) matches the IMO data perfectly (except that GHCN goes back further).

    Did you look at the first link?
    I wanted to make a response but due to Dr Curry’s new posting regime I am without an account, but I was going to reply about how that GHCN link shows Reykjavik has been warmed about 1.5 degrees C by their adjustments. I also wondered if the Raw data that Nick says matches the IMO perfectly is matching the IMO Adjusted or the IMO Raw.

    • Euan Mearns says:

      AC, got to pull you up again for comment standard. Just avoid the side swipes. Diversity of opinion is important and I learn from it. And Ed is not a GT, she simply has a legitimate view of the world that is vastly different to yours.

      Less said about Nick Stokes the better 😉 I’ve checked that source against IMO and the IMO records are accurate to the IMO source. But these are adjusted IMO records. They have applied legitimate adjustments and that should be that. I have invited IMO to submit a guest post 😉 Not heard back from them yet, but they have been genuinely helpful.

      But what is this source?

      http://www.moyhu.org.s3.amazonaws.com/GHCN/Reykjavik.txt

      Its masquerading as GHCN V3 unadjusted. How do you access it?

      You need to get yourself a WordPress account. I don’t know how you do it or what it does but I seem to have one that works 🙂

      Roger has new post on climate records tomorrow. Best to pick up this conversation then.

      • Ed says:

        Not on the same topic, but you may be interested in my comments on the following thread.

        http://www.peakprosperity.com/blog/92107/things-unraveling-accelerating-rate

      • A C Osborn says:

        Yes Euan I apologise, I reacted based on their responses.
        Ed may have a legitimate worldview, but her response bore no relationship to the actual Study or the reason for UK Reneable Energy, as I explained in my response to her this has nothing to do with “Peak” anything.
        In fact as you well know the UK has Coal reserves in abundance, especially offshore, but is not using it due to very poor Government decisions, unlike Germany.

        William (who has done good work on the Temp data) and RenewStudent (who is a proponent of renewable energy) both selected very minor sections of the Study to question which in no way rebutted or contradicted the overall study findings.
        This is only one of many studies to show the same thing.

        I will respond to them directly also, even though I do not believe they really have anything concrete that undermines the Study’s findings

        • Ed says:

          Ha ha. Just to clarify. I’m a him not a her. 🙂

          • A C Osborn says:

            Sorry, I was responding to this remark by Euan
            “And Ed is not a GT, she simply has a legitimate view of the world that is vastly different to yours.”

  10. alessandro says:

    not only in England… here in Italy a part of the energy bill is called ‘componente A3’ and it is intended to allow the state to get back the money invested in renewables promotion (e.g.: money given to who desides to instal PV panels)… so, on one side the policies make it mandatory to add always more ‘renewable’ energy in the national mix, and on the other side that A3 always grows in order to get money back. And, in the middle, we all italians have to pay a price for energy that is always rising. Obviously I, although being against renewables, have to pay for someone else’s PV panels…

    • Roberto says:

      Well, Alessandro, I understand perfectly your worry and pain, being Italian like you… luckily I got the possibility to live and enjoy the land of Voltaire, and the cheap kWh that go with 8 very reliable reactors.
      Sadly, I must say that Italy is quickly becoming a country worth of living in only as a temporary visitor or tourist…not long term.

      Ciao.

      Roberto

  11. Rud Istvan says:

    Very good report. Thanks for highlighting it here.
    Interesting that in Germany, E.ON recently announced it is splitting into renewables and conventional generation, because the conventional is now unprofitable owing to . Speculation (most of it in German) is that Merkel will have to step in and subsidize/acquire the spun off convenetional generation assets to keep the German grid stable. That is effectively the ‘nationalization’ option required if one insists on renewables. California is headed toward a similar crack up, but slowed and complicated by the amount of electricity it imports (4 Corners coal, Colorado River and PNW hydro)

  12. Leo Smith says:

    On the friggin’ button.

    But does anyone take notice?

  13. PhilH says:

    At the expense of being late to the commenting party, I thought I’d actually read the whole report. I have many criticisms of it, but the main one is that it repeatedly discusses the higher capital costs of renewables (eg Table 2, p12 & p14), but doesn’t give nearly the same prominence to the higher fuel costs of CCGT units (Box 2). It’s the running costs, ie fuel costs, that are usually the dominant part of a long-term system’s total costs.

    My take on the problem that he addresses is: we have about 16GW of baseload coal plant (estimated from last two graphs of http://www.bmreports.com/bsp/bsp_home.htm). That could be replaced either with 16GW of CCGT, or about 50GW of wind (say, as he does, 50:50 on- & off-shore), assuming a 32% average load factor. Granting for the minute that the figures in his Table 2 are correct, those 2 scenarios have 25-year (say) project lifetime costs:

    CCGT: capital 16,000,000 x £632 = £10G + fuel 16,000,000 x 25×365.25×24 x £0.023/0.6 = £134G == total £144G

    Wind: capital 50,000,000 x £2510 = £126G + fuel £0 == total £126G

    If you factor in that most people expect that over the coming decades, wind will get cheaper with economies of scale of rollout and larger turbines, and fossil fuels will get more expensive as they get harder to extract, the outlook is even more favourable for renewables.

    And this is before the need to add on CCS to the CCGT within a decade or two to meet the electricity system decarbonisation requirements of the Climate Change Act, which Darwall completely fails to take account of. No-one knows how much that will cost, but let’s say similar capital costs and similar running costs, for half the 25-yr lifetime…

    • A C Osborn says:

      As usual, you look on the bright side of Renewables.
      You seem to have forgotten to factor in the BACKUP required for every single one of those Wind Turbines for when the wind does not blow, which means building the Gas Turbines anyway.
      Or are you going to have the half of the UK without any Electricity when the wind does not blow?
      You also should add in the “Subsidy” in place of the zero “Fuel”, for that you need £50 for every GW of land based Turbines or £100 for every GW of Sea based Turbine

      • PhilH says:

        I used Darwall’s figures from Table 2, in which he has already included the CCGT backup costs for each of the 2 options.

        One of the things that I take from this back of an envelope calculation is that the renewable alternative makes sense without subsidy. What I haven’t taken account of is the cost of the up-front money, which is greater for renewables, and which might be where the current need for direct subsidy comes in. It’s this cost of money, which is greater for private finance than public finance, that drives Darwall to conclude that the electricity system should be renationalised. I can’t think of a reason to disagree with this logic.

        • A C Osborn says:

          The subsidies totally distort the market place.
          If wind power gets subsidies of £50-£100/Gw who in their right mind would invest in either coal, gas or nuclear power plants unless they got the same subsidy.
          Which is exactly what has happened with the proposed Nuclear power station.
          It makes Energy more expensive for everybody.

  14. Pingback: AWED Energy & Environmental Newsletter: March 30, 2015 - Master Resource

  15. Pingback: Recent Energy And Environmental News – March 30th 2015 | PA Pundits - International

Comments are closed.