Opinion: How the market will decide our energy future

Recently articles from both the TUC and CBI have bemoaned the burden of increasing energy costs on energy intensive businesses. Both organisations make the rather obvious error in thinking that a carbon price will inevitably drive the cost of energy upwards. In fact, the opposite is true. The stronger the price signal, the faster the market works to balance supply with demand.

The supply of fossil fuels is finite. Conventional oil has already peaked its supply (as admitted by the chief economist of the IEA) and tar sands and fracking are far too damaging to the environment to continue as more and more countries consider bans. Fossil fuel extraction, meanwhile, is being attacked from every side, with the UK banning new coal power without CCS and a rising tide of civil disobedience in the US following Tim De Christopher‘s brilliant example.

What’s left is nuclear and renewables. Nuclear has been scheduled for phase out by Japan and Germany, while France, the UK, US, India and China all push towards expansion. Everyone, however, is investing heavily in renewable energy. The US now has more renewable generating capacity than it does nuclear.

GreenGuideSpain tells us that

According to Clean Edge research, the global market for solar photovoltaics has expanded from just 1.7 billion euros in 2000 to 49.5 billion euros in 2010. Biofuels and wind power are following a similar trend. They project these three technologies will grow to 243.2 billion euros in the next decade.

The consequence? The costs of renewable energy are tumbling. Expert analysts are predicting that renewable energy will be cheaper than coal by 2015.

Michael Liebreich quotes the International Energy Agency as saying

fossil fuels are subsidised to the tune of more than $300bn per annum, and that doesn’t even include the cost of security – which we pay through our taxes, not at the pump – or the health costs from particulates and other forms of pollution — which we pay through our health bills.

All this price signal is having results – individual investments are getting bigger and more ambitous. There is no longer any need to protect businesses from high energy prices, because it is rising fossil fuel prices, happening without any help from governments, combined with falling renewable energy prices, that is prompting people to make sound business decisions.

But the government does have a role to play. The stronger the price signal, the faster the market turns, and the faster it turns, the sooner businesses start to benefit from the long term stability and economic certainty of permanently low energy prices.

Technology is driven faster as well. Engines, turbines and batteries that don’t need rare earth metals, making them significantly cheaper to mass-produce, are on the horizon. Electric cars can be used to balance out supply and demand over smart grids and even store the power generated by your rooftop power station. Innovation is going so fast in these areas it’s hard to keep up, and every advance points to cheaper energy generation, and more convenient forms of storage.

The UN has predicted that it will be technically and economically feasible for the entire world to be run on renewables by 2030 as well as being extremely desirable to avoid the twin threats of climate change and peak oil.

So bring on the carbon pricing – Push the market as hard as you can, Mr Huhne. We need it.

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  • More market mechanism bibble babble. Yeah, I can see how the market has helped the poor, the homeless and the unemployed, how its moved in with dynamic expertise to actively reduce avoidable suffering … oh wait …

    The market does not exist to enhance quality of life or to advance the cause of civilisation – its merely a framework for trade and financial transactions, with the overriding rule of maximise profit/minimise loss. To imagine that market mechanisms are going to magically (cos thats what this thinking is) bring about the new energy sources and new technology that we need NOW is on the same level of believing in the tooth fairy.

  • Simon
    i agree with the general tone, but one problem that needs tackling is that after the initial competitive phase energy providers tend to, as with other seemingly competitive businesses, start price fixing. I don’t think that relatively small fines can tackle this and there needs to be some sort of mechanism to ensure that this doesn’t continue to happen. Maybe something to ensure companies don’t get complacent, perhaps some sot of limited timescale contract?.

  • If renewables will be cheaper than coal in 2015, why not wait until then before installing them?

  • I’ll remember to be thankful to “the markets” when I am unable to afford heating this winter. Thanks, markets!

  • Simon McGrath 12th Aug '11 - 7:11pm

    @Simon oliver “Thank you Simon, and as I said to you before in our previous discussion on the matter, if you want a professional thesis on the subject, you’ll need to come up with the money to pay for the time and expertise to produce it.”
    I don’t really need a professional thesis. Just for you to defend what you have written

  • Simon McGrath 12th Aug '11 - 8:41pm

    @Liberal Eye
    Interesting you talk about Germany. their solar power subsidies will be costing them €53bn over 10 years. I wonder if there is really nothing better to be done in the world with €53bn?


  • Peter Chivall 13th Aug '11 - 8:48am

    @Simon McGrath “is there really not something better you can do with Euros53bn?”. Well, Simon, we let the banks ruin our economy with their casino economics and then had to pay a bigger sum just to bail them out – with nothing to show for it. While the City of London was making a lot of money for a small number of people, and providing low-paid insecure jobs for cleaners, waiters and car valets, the Germans were making a lot of THINGS which people around the world wanted to buy and providing well-paid secure employment for a lot of people.
    It started as, so many bad things did, with Margaret Thatcher who squandered the legacy of North Sea Oil on unsustainable tax cuts financed by ‘giveaway’ privatisations and created a ‘rentier’ economy which substituted financial speculation and property booms for real economic growth based on manufacturing and infrastructure investment. New Labour simply continued the disaster, and now, sadly, some parts of the Coalition (mostly, but not exclusively, Tory ones) still believe in this tripe.
    Compare and contrast with Norway.

  • Simon McGrath 13th Aug '11 - 5:34pm

    @simon Oliver – I’m afraid you continue to confuse me. Fossil fuel prices have been going up and may continue to do so (or may not ). There are new technologies (such as fracking) which are greatly expanding the supply of fossil fuels so prices may stabilise.
    Renewable costs may drop – probably will. But noone knows by how much and on what time scale. Given that for example solar energy is many times as expensive as coal renewable costs will have to drop an awful lot to be competivive.
    Even if both of these assumptions were true why would it make sense to increase prices now rather than use the (cheaper) renewable sources when they are available. Why for example put up the energy prices now of our chemical industry when they will move production to other countries?
    I take your point about the cost of coal (actually I do say it source is the IEA) but here is a link to their annual statistical report ( Page 41) where you will see the graph of coal prices http://www.iea.org/textbase/nppdf/free/2010/key_stats_2010.pdf
    This is highly relevant because this report is your ONLY evidence for the key assertion that renewable energy will be cheaper than coal by 2015.

  • Simon McGrath 13th Aug '11 - 5:37pm

    @Peter Chivall ” New Labour simply continued the disaster, and now, sadly, some parts of the Coalition (mostly, but not exclusively, Tory ones) still believe in this tripe.
    Compare and contrast with Norway.”

    Norway has a population of 5 million people , less than a tenth of our with around the same size of oil and gas reserves. Not a great comparsion really.

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