Avoiding an energy civil war
This essay, by Michael Liebreich, CEO of Bloomberg New Energy Finance, also appears in Green conservatism: protecting the environment through open market, published last week by Green Alliance. There are similar collections under ‘Green social democracy’ and ‘Green liberalism’ projects as part of Green Alliance’s Green Roots programme, which aims to stimulate green thinking within the three dominant political traditions in the UK. This has also been published on BusinessGreen.
As things stand, energy risks becoming the most divisive issue within the Conservative Party, the place usually held by Europe. On one side are the Roundheads, determinedly modern, concerned about climate change and convinced renewable energy holds the key to future prosperity and environmental nirvana. On the other, the Cavaliers, dismissive of climate change and convinced that the right combination of tax relief and shale gas will enable the UK to reclaim its glory days as an energy exporter.
First, the Cavaliers need to accept that climate change is real. Here is what we know: the concentration of CO2 in the atmosphere has increased by a third since the industrial revolution; the increase matches the volume of fossil fuels that man has burned; CO2 is a greenhouse gas; the added CO2 is causing a very substantial imbalance between the amount of energy entering and leaving the planet’s envelope; the earth’s atmosphere and oceans are heating up; the past decade was the warmest on record; the ice caps are losing mass at record rates; and the world has been experiencing unusual patterns of storms, drought and flooding. Vanishingly few scientists and no learned scientific societies espouse an explanation for all this other than human-caused climate change.
Instead of accepting this, the Cavaliers have chosen to take refuge among the uncertainties of climate science, of which there are still plenty. They celebrate anomalous data points, select idiosyncratic start and end points of time series, ignore inconvenient facts and, when challenged, postulate a global scientific plot.
The old energy system is on the way out
Second home truth, the world’s energy sector is in the throes of a profound transformation. The old energy architecture – large scale fossil and nuclear power stations at the centre of a monolithic, analogue and over engineered grid – is no longer the most effective or efficient way of meeting our energy needs. The electricity system of the future will be based on a mix of super-efficient appliances, renewable energy, natural gas and nuclear power, held together with a digitally managed smart grid, with power storage integrated throughout. Our cars and trucks will either get vastly more miles per gallon, or be electric. The transition may take twenty years or seventy years, but it is inevitable.
This is no longer just the pipe dream of sandal wearing tree-huggers. Worldwide over a quarter of a trillion dollars has been invested in renewable energy, energy efficiency and associated technologies in each of the past three years. Germany derives over 25 per cent of its electricity from renewable energy. Texas, synonymous with the oil and gas industry, generated nearly ten per cent of its power from wind last year. China is the world’s largest investor in clean energy, with around half of its new power capacity over the next 20 years expected to be renewable, rather than coal, gas or nuclear.
At the heart of this transformation is the dramatic reduction in the cost of renewable energy. The best onshore wind farms produce power as cheaply as gas or coal-fired power stations. In Brazil, wind provides the lowest cost source of electricity. Roof top photovoltaic panels provide cheaper electricity than the local utility in almost all sunny countries. Geothermal, waste to energy, solar hot water, hydro power, sugar cane based ethanol: all can already be fully competitive under the right conditions without any subsidy at all.
Renewables’ intermittency can be overcome
Cavaliers will respond that the main forms of renewable energy: wind and solar power, are intermittent. However, engineers are smart, and there are plenty of ways of managing intermittency without resorting to expensive backup power. First, you improve your resource forecasting. Second, by interconnecting the grid over larger areas, much of the variability of renewable energy can be evened out. Third, just when an increased proportion of renewable energy means you start losing control over supply, the introduction of digitally controlled smart grids gives you better control of demand. Finally, there is power storage, currently mainly in the form of pumped hydroelectric power but, in future, most likely in the form of batteries for electric vehicles. The cost of each of these techniques is coming down just as rapidly as the cost of renewable energy.
The Roundheads are right to say that this sort of new energy architecture can reliably meet a modern economy’s energy needs, whilst simultaneously addressing climate change as well as air pollution, which is a silent killer in every country of the world, including the UK. The question Roundheads tend to ignore is whether this transition can be achieved at an affordable cost.
For the left, being pro-environment and anti-business are one and the same. Not surprisingly, the left’s approach is based almost exclusively on controlling or blocking enterprise. Feed-in tariffs are nothing less than state price controls. Renewable energy targets are indistinguishable from Soviet five year plans. Complex planning processes add costs, slow down projects and increase risk. The big mistake of the Roundheads has been to leave unchallenged the assumption that these are the only tools available to drive the transition, instead of coming up with good conservative solutions: ones which have wealth creation, personal responsibility and freedom at their heart.
It is hard to discern any conservative principles at all behind the current government’s energy policies: an Electricity Market Reform bill which enshrines high, state mandated prices for renewable energy, nuclear power and even back-up gas capacity; a Green Investment Bank that takes state allocation of capital to its most extreme form; a Green Deal which bribes people to implement energy efficiency with their own money; and most recently the award of monopolistic 15 year contracts to manage smart grid data and communications. The belated realisation that none of this speaks to concerns about rising energy bills resulted in a policy forcing utilities to reduce the choices offered to consumers.
Europe should be going for deep reforms not fixes
Then there is Europe. In the mid-2000s, it was an article of faith that Europe was leading the world towards a low carbon, clean energy future. Even as late as 2009, Europe accounted for nearly half of all investment in clean energy worldwide. But, if 2009 saw the high point for European leadership on clean energy, it also saw the low point: the descent into chaos of the much-heralded Copenhagen climate talks.
Today Europe’s energy policy is in disarray. The EU’s Emissions Trading System (EU ETS) is producing such low carbon prices that its coal usage has been growing faster than that of any other region in the world. Its utilities are decommissioning gas power stations and trying to build new coal plants, when they are not abandoning the continent altogether. Undaunted, the European Parliament is pushing to increase the renewable energy target from 20 per cent by 2020 to 30 per cent by 2030.
Instead of meddling in member country affairs, the EU should restrict its activities to areas in which its involvement is truly needed, such as technical standards, inter-operability, energy security and data protection.
The EU should also be working on deep reform of the EU ETS, not a cosmetic fix such as the current discussion about ‘back-loading’: withholding some credits from the markets for a few years. If you want a higher and more stable carbon price, one of interest to infrastructure investors rather than just commodity traders and hedge funds, you have to move to price targeting. That means creating an independent Carbon Central Bank, with powers to undertake open market operations and to create and cancel credits. The current UK solution, imposing a floor price for carbon credits, is a gross violation of market principles and should be anathema to any real conservative.
Most importantly, Europe needs to get serious about building a single energy market: the ability to sell the full range of energy related services from anywhere to anywhere within Europe. Wind power in Brazil is among the lowest cost sources of electricity in the world. Why is this? First, a reverse auction system ensures that providers compete to produce at the lowest cost. Second, Brazil has a grid which, if superimposed on Europe, would allow a Portuguese wind farm to sell its electricity to a client in Moscow. In Europe, a Portuguese power producer can’t even sell its electricity in France.
If Europe wants to lead the world on clean energy, it needs to get on with the tough work of deregulation and the introduction of competition. Where is the Easyjet of European energy, or the Virgin Atlantic? Where are the new services, the new providers? Only by releasing a maelstrom of entrepreneurial and competitive activity will Europe achieve its goal of a clean energy system without driving costs to uncompetitive levels. And the issue of competitiveness has become particularly urgent in the light of the US’s unconventional oil and gas revolution. A revolution which, despite the hopes of many, is not going to be replicated in the UK, let alone the rest of Europe.
The true impact of fracking
The Cavaliers are of course absolutely right that we should support shale exploration and extraction. The UK’s resources are enormous: extracting just ten per cent might provide enough gas supply for fifty years. This government deserves credit for clearing all of the obstacles so that the UK shale gas industry has a chance to prove itself, unlike in other European countries. But the third home truth is that not even shale gas extraction companies believe fracking will have much impact on gas prices.
Shale gas has been an astonishing success story in the US, shifting the country within a few years from being a long term gas importer to a potential exporter, and pushing prices down to as low as a fifth of current UK prices. But there are caveats. The US gas price has now rebounded by over 90 per cent from its lows to around $3.50/MMBtu. Shale gas operators in the US need a long term gas price of around $5/MMBtu to justify continuing to drill, frack and build pipelines. And that is in a country where conditions are ideal: great geology, low population densities, an existing pipeline network, a fragmented regulatory environment, landowners with sub-surface mineral rights, and a liquid market for rigs and drilling services. In the UK, it is hard to see shale gas coming to market much below $8/MMBtu: around the same as the wholesale prices which have been driving up utility bills so sharply over the past few years.
Then there is the question of public acceptance. To replace the decline of UK continental shelf gas production through 2030, before beginning to replace any coal or nuclear power, we would need to frack 2,400 wells, which means around 240 fracking pads. Each one is an industrial development, requiring many truck movements and together occupying an area the size of Lancashire. As we are seeing in Balcombe, the dislike held by the British public for wind turbines near their homes may pale into insignificance compared to their dislike of fracking.
Those pointing out that current UK oil wells chug away inoffensively once drilled are missing the point: the output of a fracked gas well declines 85 per cent in its first two years. If the UK ever becomes dependent on shale gas, it will never be able to kick the fracking habit.
So whilst the Cavaliers are right that we should support fracking, it behoves us to do so with a sense of humility: acknowledging the environmental uncertainties, respecting the local impacts and being realistic about the potential speed and scale of development. The watchword should be ‘trust, but verify’. Issues of surface water disposal, methane in drinking water, fugitive emissions and, yes, even earthquakes need to be taken seriously. Data on fracking fluids must be made publicly available. Above all, robust, publicly-accessible baseline data for air and water quality must be established at each prospective fracking site before operations begin. Conservative principles of respect for property and privacy demand no less, and without this sort of openness the shale gas industry will never be trusted.
Cavaliers with a sense of history would do well to remind themselves of Roads for prosperity, the 1989 white paper launching “the largest road building program for the UK since the Romans”. After seven years of almost continuous, village by village protests, the policy was sent to the junkyard, when it was finally accepted that it was a vast vote losing gift to Labour and the Liberal Democrats in the south east.
The time is now
As we approach the final year of the coalition government, the time is right for a robust, fact driven debate about energy. We have an opportunity to explain what we would do differently if no longer trammelled by our Liberal Democrat partners in the next government. We have a window of opportunity to ditch aspects of policy which go against our principles and to come up with a truly conservative set of proposals to manage the transition to a new energy infrastructure.
We also need to decide what David Cameron should focus on in his renegotiation of the terms of the UK’s membership in the EU. This is our opportunity to demand three things: that Europe stops meddling in our domestic energy decisions; that it focuses on its core mandate of creating a single market in energy services; and that it reforms the EU ETS carbon trading scheme so it does the job expected of it.
Neither the Cavaliers nor the Roundheads have all the answers. We need the technological savvy and creativity of the Roundheads, but we also need the deep respect for conservative principles of the Cavaliers. It is time to decide what a future conservative energy policy will be, and to head off the risk of civil war.