Opinion: Flaws in Policy Exchange’s report

Another day, another headline on the cost of green policies. This time thanks to a new report from Policy Exchange as part of their ‘Greener, Cheaper’ workstream. With customers feeling the pinch from high energy bills, Chris Huhne continues to have his work cut out to defend green policy spending. Problems with Policy Exchange’s analysis, including their uncritical support of gas and aversion to the promotion of growth by Government, must be brought to the fore.

The main argument of Policy Exchange’s report is that there are additional costs to consumers from renewable policies beyond those directly on the bill that the Government has not accounted for. These include the cost of policies funded through taxation and an increase in the cost of products and services resulting from higher energy costs for businesses. They add these estimates to consumer bills to arrive at a total figure for the annual cost of renewable policies per consumer of £400. Throughout the analysis they are strongly critical of the high subsidies awarded to off-shore wind.

The problem, as ever, with future projections like this is that they mean little unless compared with alternative scenarios. This better approach was the Department of Energy and Climate Change’s (DECC) rationale when they produced the ‘2050 pathways calculator’. The tool enables users to select between different combinations of fuels in the energy mix to find out how much they would cost. DECC have used the tool to claim that the cost of developing green energy will be very similar to the cost of replacing today’s ageing high-carbon power stations.

Policy Exchange base their estimates for the cost of off-shore wind against a projection for the future cost of gas, which they claim would be the cheapest and most likely alternative. Gas undeniably has an important role to play in the short term but the price of it is incredibly uncertain. Indeed, since 2004 the rising cost of gas has been the single biggest driver of increases in consumers’ energy bills, adding £455 by 2010 according to recent estimates by the Climate Change Committee (CCC). The future price of gas could be affected by a number of factors including levels of global demand, the feasibility of using shale gas safely and the scale of any reserves and instability in the Middle East – a trade embargo on Iran or political instability in Saudi Arabia this year could send prices soaring.

Estimates often fail to consider that once renewables infrastructure is in place it does not have an on going fuel requirement, whereas gas power stations do. This was factored into the Climate Change Committee’s estimates that the existing policy support for low carbon generation, including renewables, would add just £110 to bills by 2020 compared to £175 for gas.

Policy Exchange is right to focus on how we can relieve the squeeze from high energy bills on consumers. But we must find ways of doing this that preserve our ability to reduce carbon emissions in the long term. A forthcoming report from IPPR (Platt 2012) will argue that a lack of competitive pressure in energy supply means the market is failing to deliver for consumers. It will argue that enabling new entrants into the market by addressing anti-competitive practices will increase competitive pressure and deliver cheaper bills for all.

With their report Policy Exchange add more fuel to the debates on energy prices but the onus remains on the advocates of gas to show how it can play a role in the 2050 low carbon fuel mix. Supporters of renewables must meanwhile improve their defence. This means placing growth and industrial strategy alongside costs as a key concern for energy policy.

* Reg Platt is a Research Fellow at the Institute for Public Policy Research, specialising in energy and climate change policy.

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7 Comments

  • Simon McGrath 23rd Jan '12 - 9:24pm

    I don’t understand the figures here . The British Wind Energy Association estimate that offshore wind is 3 times the cost of gas
    http://www.bwea.com/pdf/briefings/Wind-Energy-Generation-Costs.pdf
    so surely there would have to be a huge increase in gas prices to make offshore wind cost effective. In recent years gas prices in the US have dropped substantially due to greater supplies of ‘fracked’ gas – why would that not happen elsewhere.

    The argument that we should pay much higher prices forever because prices ‘might ‘ go up is an odd one. No-one can predict future energy prices so we could be wasting untold billions.

  • Simon McGrath 24th Jan '12 - 5:49am

    @Reg thanks. I thought the reason the US didnt export was that it doesnt have the infrastruture and that they were busy refitting mothballed LPG import facilites for export.

    @ geoffrey “Actually it is not so hard to predict future energy prices.”
    An enormous fortune awaits you if you really have this ability.
    Actually energy prices go up and down. There are huge reserves of coal, shale oil, shale gas etc with ( as seen with fracking) new technology coming along to make it easier to extract.

  • There is a cost and techno fix free way to reduce energy demand which also solves most if not all environmental problems (road congestion,parking, land fill demands, pollution, housing needs, teacher/pupil ratios, water supply, sewerage demands etc., etc., etc.) and that is to reduce the UK population to a sane, say, 10 million.

    No one has any user friendly ideas on how to achieve this? Not overnight of course – oh yes, short termism is the order of the day and for years not t mention votes.

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