26 September 2013 12:41

Ed Miliband’s speech to the Labour Party Conference promising to freeze energy prices may have been good politics, but does it represent a coherent energy policy?

During his tenure as Secretary of State for Energy and Climate Change from October 2008 to May 2010, Miliband was responsible for the Climate Change Act which set a target of an 80% reduction in CO2 emissions by 2050. However, although climate scientists had indicated that this was the scale of reductions needed, politicians had not grasped the magnitude of the engineering challenge to which they were committing their successors.

A study by the Royal Academy of Engineering¹ analysed energy flows in the UK economy when the 2008 Act was passed. There are two dominant flows – from fossil fuels to low grade heat (predominantly gas central heating) and from fossil fuels to petrol and diesel for road transport. If we are to have a chance of meeting the CO2 reduction targets, we must tackle these uses of energy.

If we rule out a wholesale switch to biofuels, because of the effects on food supply, any solution will involve renewable energy – almost certainly via electricity. That is why the Climate Change Committee envisages a doubling of the capacity of the UK’s electricity supply system over the next 30 years. Add to this the need to replace the life-expired infrastructure constructed during the 1960s and 1970s and we can see the need for a massive investment programme in low-carbon electricity.

With present fuel prices, the lowest cost electrical generation uses either combined-cycle gas-fired power stations, which emit around 400 g of CO2 for every kWh of electricity produced, or coal-fired power stations emitting more than 800 g. To effect an 80% reduction will require emissions of less than 100 g/kWh which can be achieved in two ways, either by using low-carbon generation – nuclear power, solar, wind, tidal or other renewables – or by burning fossil fuels and capturing the CO2 emitted.

At present, renewables and nuclear provide about 20% of our electricity. Were these to be expanded to be the mainstay of a greatly uprated electricity grid, we would need a couple of dozen new nuclear stations and many thousands of wind turbines, solar panels, marine energy devices (being researched by colleagues at Lancaster University) and other sources of low-carbon electricity.

The alternative is to burn fossil fuels, capture the CO2, convey it by pipes to exhausted offshore gas fields and bury it there for ever. Apart from the costs of the chemical plant to separate many thousands of tonnes of gas and the infrastructure of pipes, compressors and other plant, a power station fitted with CCS (carbon capture and storage) uses about 20% more gas or coal than one that just discharges CO2 into the atmosphere. Inevitably generating electricity by power stations fitted with CCS will result in increased prices of electricity.

Whether we use nuclear, renewables, CCS or a combination of all three, electricity costs will increase and we will be looking for well over £100 billion of new investment in the electricity generation infrastructure, in addition to the costs of renewing the grid. During the last major expansion of the electricity system in the 1960s and 1970s (when, as a graduate trainee, I worked on power station control systems), the planning and construction were undertaken by the Central Electricity Generating Board (CEGB) and the funds were provided by the state. Since privatisation, the Treasury requires this investment to be provided by the private sector.

In the hours following Ed Miliband’s speech, energy companies lined up to say how a price cap risked the lights going out as it would discourage the investment that will be essential if we are to have a modern, low-carbon electricity system. This may be true but it fails to recognise the fundamental problems of our privatised utilities. For almost two decades after electricity privatisation in 1990² the task of the energy companies, as seen by governments of either party, was to continue exploiting the assets that had been (over)provided during the stewardship of the CEGB and to drive down prices. This they did with enthusiasm, slashing research and other superfluous overheads and “making the assets sweat”. With the capital plant already paid for, the generators’ costs were largely fuel so a market based on regular auctions to provide the load in half-hour periods was a logical mechanism to allocate generating capacity.

What recent governments have failed to appreciate is that we are going through a paradigm shift in our relationship with electricity supply. In the 1960s expansion the philosophy was one of “predict and provide”: the consumer was king and, if 10 million families wanted to switch on their kettles during the interval of the Cup Final, it was the duty of the CEGB to ensure there was sufficient generation capacity. Renewable energy is different – it is available when the sun shines, the wind blows or the tides ebb or flow. The capital tied-up in plant dominates costs and the marginal costs of operation are almost zero. Consumers will have to match their use of electricity to the supply, rather than the industry matching its generation capacity to the demand.

Another constraint is the capacity of the distribution network. If we are to see the predicted expansion of electric vehicles and heat pumps, either we will have to manage an expensive and disruptive upgrade to the distribution cables buried in our streets or there will have to be a direct relationship between the local distribution network operator (DNO), consumers and the owners of small-scale renewables to manage loading of the local network.

Technology can come to the rescue! A “smart grid” can be used to match domestic and industrial loads to the available sources of generation and the capacity of the distribution network in real time. Rather than switching on the dishwasher after dinner, it would be put under the control of a home energy management computer and switched on when there is spare generating capacity and electricity is cheaper; similar arrangements could be made for freezers, heat pumps and water heating. Electric vehicle (EV) battery charging could be even more flexible with the charger “put into reverse” to support the grid from energy stored in the EV battery in times of maximum load.

A big problem with this utopian vision is the structure of the electricity supply industry with large national energy retailers and consumers kept by regulation at arms’ length from the DNOs. Householders would need a commercial relationship with their local DNO, rather than one of the “big six” energy retailers, as tariffs would need to be variable to reflect the loading on the local network as well as the availability of low-carbon generating capacity, which would require radical restructuring of the industry.

For more than 3 years Government has been working on Energy Market Reform, a complex set of measures which, after consultation documents, white papers and draft bills, is slowly working its way through Parliament. This suffers from a steadfast belief in competitive electricity markets but, in efforts to make them work, the bill is having to introduce even greater complexity in the form of capacity markets in parallel with energy auctions, carbon floor prices, feed-in tariffs and agreed “strike prices” for different technologies. Perhaps the time has come to recognise the limitations of “the market”, beloved of the European Commission and British governments. Markets work well for selling vegetables or consumer goods but struggle to operate in sectors with multiple and competing objectives (energy security, low prices and low emissions) and with timescales measured in decades.

When optimistic, I hope that Ed Miliband’s intervention in the energy debate shows he appreciates the dysfunctional structure of the privatised industry and that the price cap is an interim measure while Labour effects fundamental reforms. When pessimistic, I fear it is just a populist measure to win votes.

Footnotes

¹ Generating the Future: UK energy systems fit for 2050. Report by the Royal Academy of Engineering, ISBN 1-903496-54-1, March 2010

² Peter Pearson & Jim Watson, UK Energy Policy 1980 – 2010, published by the Parliamentary Group for Energy Studies and the IET, 2012.

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