Low cost, low carbon

20 June 2020

In the end, the only viable energy solutions for the post-Covid world which will work, are those that are simultaneously low cost and low carbon

Nick Butler

One of the most popular Labour policies of the last decade was Ed Miliband’s “energy price freeze” which forced the coalition government onto the defensive.   The details of the policy were always more complicated than the slogan but the message resonated and caught the public mood.  People believed that they were paying too much for their gas and electricity and that the retailers were ripping them off.

That episode should be taken to heart as new energy policies are developed for the 2020s.  The move to a low carbon economy is essential but low carbon cannot be allowed to mean high costs for consumers, nor should it be allowed to become a platform for corporate welfare. Energy costs are very important to ordinary families and to businesses both large and small. In the harsh post-COVID19 economy which will no doubt usher in high unemployment and serious financial insecurity, energy bills will be under even greater scrutiny.  Rising bills could undermine public support for the whole climate agenda, and an energy policy that treats costs as irrelevant will fail.

Clearly, current government policies do not treat costs as irrelevant. All the major political parties are now committed to reducing emissions to net zero by 2050.  Many campaigners want to advance that date to address the risk of the damage caused by climate change becoming irreversible if the current energy mix remains unchanged.  But the costs of making the transition have been neglected and the UK, in contrast to the most of the rest of Europe, remains dangerously committed to the high cost solution of relying on expensive  nuclear energy. The cost of a megawatt hour of power from Hinkley Point, the first of the country’s proposed new nuclear stations, will be index-linked from a baseline of £92.50 that was set in 2013 and which would escalate for 35 years from whenever the plant becomes operational.  Thus, the agreed price will rise in line with inflation each year and the inflated price will be applied to the power sold from the date the station starts to produce power – which is currently estimated to be 2027 – for a further 35 years. That means our grandchildren will still be paying the bills in the 2060s.

In 2013 the conventional wisdom was that energy prices would inexorably rise and that overtime power from Hinkley Point would end up looking cheap.  As is now very obvious, the reality has been a sustained fall in the costs of every other form of energy including solar and wind power. For example, the latest contracts for new wind power offer electricity at prices below £40 per MWhr (megawatt hour), while the price of power from Hinkley due to the indexation is now about £ 105 per Mwhr and given the indexation it will be higher still in 2027 or whenever the project actually starts.

Nuclear is the only source of energy supply whose costs have not fallen. To secure the next contract – to build a Hinkley Point-type reactor at Sizewell in Suffolk – the industry is now asking the government to put in place a system called ‘Regulated Asset Based pricing’ (RAB), under which the consumer pays from the moment construction begins.  RAB pricing is a legitimate device for funding very secure investments, such as water systems, where the initial capital requirements are high and the risks are low.  New nuclear construction projects by contrast, and in particular the  European Pressurised water reactors (EPR) –  the type being built at Hinkley Point – are riddled with construction risks.  At Flamanville in Northern France and in Finland, comparable projects are years behind schedule and are running billions of euros over budget.  Applying RAB pricing to new nuclear in the UK would reduce the headline figure (the £ 92.50) but, given the persistent delays and cost overruns, would leave customers paying at least as much over time.

Nuclear could be a viable technology and could make a great contribution to the energy transition.  But a new generation of reactors which can be built and operated at a much lower cost is essential if nuclear power is to be competitive.

In the short-term energy policy should focus on the available low-cost alternatives of wind and solar with the development of a grid that can cope with increased low supplies and an adequate network of charging infrastructure for electric vehicles.  The grid has to be adaptable to supplies which are intermittent, as the wind is not always blowing and the sun not always shining. Take-up of low carbon alternatives can be encouraged by imposing carbon taxes and by introducing scrappage schemes, and investment in energy efficiency can be made easier and more appealling.  These are the short-term measures for the next decade and could be summarised by government in a clear, deliverable set of objectives for 2030.

In tackling the overall long-term challenge of climate change, such steps are necessary but not sufficient.   Government support should also be focused on the research necessary to advance the next generation of alternatives to hydrocarbons, including battery storage technology to remove the problem of intermittent supplies and hydrogen-based technologies to provide viable alternatives for the provision of heat and industrial power.   Research into next generation nuclear power is underway and companies such as Rolls Royce are developing interesting options which do not involve the complexity and exorbitant costs of EPR.  If the research and development work is successful the new, simpler reactors could be competitive sources of clean power in the 2030s and beyond.

“Low cost, low carbon” is the right policy for the UK but it is also the right approach to the global climate agenda.  The greatest climate risks come not from Britain or the EU, which accounts for only 10 per cent of global emissions, but from emerging economies in areas such as South Asia and Africa where billions of people continue to rely on coal because it is the lowest cost source of energy. If the growth of emissions there is to be halted and reversed the alternative has to be low cost, as no other option will be affordable for countless millions in these regions.

If we in the Global North want to set an example, we must start by remembering that the energy transition is as much an economic process as it is anything.  In the end, the only solutions which will work are those which are simultaneously low cost and low carbon.