This post is by Chris Huhne, former UK energy and climate change secretary from 2010 to 2012 and current co-chair of ET Index which analyses the carbon risk of worldwide quoted companies. He advises Zilkha Biomass Energy and the Anaerobic Digestion and Bioresources Association.
One criticism of British energy and climate change policy over the past few years is that it has involved a ‘dash for renewables’ predicated on high oil and gas prices. That is not true. During my time as secretary of state for energy and climate change, and subsequently, we were careful to balance all three families of low carbon electricity generation: renewables, nuclear and fossil fuels, with carbon capture and storage. The reason? We could not predict the future, and did not know which would turn out the cheapest (or, indeed, what the oil and gas price would be). In a time of great uncertainty, energy policy should be akin to investing in a portfolio of shares for retirement: however good one share looks now, do not put all your eggs in one basket.
True, renewables had particular support from the EU target that other technologies did not have. No British government that wants to respect legislation it has jointly agreed has any option: our UK target was lower than the European average because we started from further back, but we are (still) legally bound to provide 15 per cent of our total primary energy consumption from renewables by 2020.
I was sceptical about this commitment for classically economic reasons: if you want to curb carbon emissions, set a target for carbon emissions (as we did in the Climate Change Act) and use the cheapest possible means to achieve that target. Any other targets are likely to impose costs, because they will involve backing one technology over another, rather than tackling the emissions problem most effectively.
Our attempts to tackle emissions have been too weak
I have, though, changed my view. This is partly because direct attempts to tackle carbon emissions have been so weak, particularly through the collapse in the carbon price set by the EU emissions trading scheme (ETS). The ETS was flawed because there was no way of adjusting its quotas for carbon emissions during a recession, which drives down output and, therefore, emissions. So a system that assumed a regular rise in output and carbon emissions would show a very weak carbon price in downturns, and a high one in booms. We had volatility when we needed consistency.
Nor have nationally set climate change targets been a great encouragement. Among the cheapest ways to cut carbon, under the government’s potential control, is to save energy. Yet the government has been feeble in persuading people to do so. The Green Deal should have been a framework for substantial energy savings, which would have allowed government, through either incentives or regulation, to insulate our houses. The idea that the Green Deal would happen of its own accord, through the operation of the market, was always nonsense, although many Conservatives (including George Osborne in opposition) seemed to believe it. The scheme was too complicated and costly. But its fatal flaw was the lack of carrots and sticks: clear regulation of landlords, plus a stamp duty incentive to buyers.
The Holy Grail is in sight, but we need more ambition
Our global inability to slow down the flow of carbon emissions sufficiently is leading to a steady rise in atmospheric carbon. Having just exceeded 400 parts per million, the chances of halting global warming at two degrees are small. The Paris COP 21 – if every country delivers its pledges – would probably curb global temperature to a little less than business as usual: say 3.5 degrees.
In retrospect, one of the few policies that has delivered real change has been the European Union’s renewables target. Without the triggering of enormous solar and wind deployment, costs would not have tumbled so far. The graph below shows how the costs of solar have fallen since 1990. In sunny Texas, power companies have installed field-scale solar without subsidy, despite electricity from cheap shale gas being trapped in the US by a lack of export terminals.
Nor is this cost decline confined to solar. In windy regions – Brazil for example – wind power has beaten gas. These trends are more to do with steady improvements, as engineers learn by doing rather than having Eureka moments at the lab bench. The falling cost of solar and wind is related to the increase in installed capacity. The trend decline for solar for each global doubling is 19 per cent and for wind it is 6.7 per cent. In windy and sunny places, these technologies are now viable without subsidy.
In short, the Holy Grail is in sight: developing such cheap low carbon energy that it naturally retires fossil fuels from use. To those who argue that these renewables are intermittent and are, therefore, of limited use in replacing continuously available electricity generation, optimists can also point to the falling price of battery storage. A combination of solar roof panels and attic batteries will soon make a lot of homes – and some businesses – independent of the electricity grid except in emergencies.
This is particularly true where peak electricity demand comes about on hot days due to air conditioning, because those are the times when solar panels yield most. But what happens in the north – Europe, North America and Japan – when peak demand occurs when it is cold and dark in January and February? What will keep the lights on? Cheap batteries can certainly shift electricity from one part of the day to another, or even from one very sunny day to a few grey ones soon after, but the northern problem is of a different scale, as shown below.
It is inconceivable that batteries will become so cheap that we could to shift solar generated electricity from July to January. So there has to be back-up generation. Contrary to popular myth, nuclear is not the most helpful because it is also inflexible. Solar and wind are intermittent, but nuclear is also difficult to match to the ups and downs of demand because nuclear power is constant. We need back-up that can be turned off and on.
What are the options?
We could continue with gas, which emits only half as much CO2 as coal, so long as we have carbon capture and storage to soak up its adverse impact. For exactly this reason, I brought a gas project into the CCS programme (which was previously exclusively coal). The Conservatives’ ditching of CCS is short-sighted, and makes gas a harder low carbon option.
Other alternatives are renewable biofuels. Providing that biomass is sustainably sourced from areas with net forest growth, it can be burned in old coal facilities or new ones. An alternative is anaerobic digestion (AD), which captures biogas from food waste, sewage or animal slurry. Such gas can either be burned directly via the gas grid – for example in home gas boilers – or used to generate electricity from a turbine. UK policy should support these technologies as back-up, not just baseload.
Policy makers also need to be wary of the price paradox. As we get more and more cheap solar and wind, the reduced demand for coal and gas will cut their price. That should not be taken as a market signal that we should move back to fossil fuels, but instead as a sign of the success of the new low carbon energy revolution.
So we should certainly get tougher in setting the carbon price. The ETS should be revamped to protect it against the European business cycle. Finance ministries are used to calculating their budget deficits in a normal year, without the impact of boom or bust. We should be doing the same with the ETS. But the carbon price is not likely to be enough to spur new investment. Not many bankers would lend money on a project relying on the ETS carbon price.
That is why the UK government’s contracts for difference make sense: by signing an individual contract with an electricity provider – whether nuclear or renewable – the government can provide certainty and get costs down. Since most low carbon electricity sources are capital intensive (with relatively low running and fuel costs), that certainty should feed through into lower prices for consumers. The Dutch auction process – contracts to the lowest bidder – is reducing subsidies.
In retrospect, the European Union’s renewables target has sharply cut the cost of low carbon electricity. That is an unsung achievement where there have been too few successes. We shouldn’t throw out the policies that work.