New Energy Bill Is A Disaster
Press Release from The Global Warming Policy Foundation
London, 23 May: With the publication of its draft Energy Bill, the government has announced its intention to reverse the course of energy deregulation.
The Global Warming Policy Foundation warns that any attempt to turn back the clock to the dark period of centralised energy planning will not only damage Britain’s economy, but will almost certainly end in failure, just like other attempts to impose a centralised system of energy controls have failed in the past.
Nigel Lawson, the GWPF’s Chairman, who as Energy Secretary was the architect of Britain’s energy market deregulation in the 1980s, warned:
“The Energy Bill constitutes a disastrous move towards a centrally planed energy economy with a high level of control over which forms of energy generation will be favoured and which will be stifled. The government even seeks to regulate the prices and profits of energy generation.”
The government bases the case for green – and more expensive – energy in large part on the assumption that gas prices will significantly rise in the future. This argument is no longer credible in the light of the growing international abundance of shale gas, not to mention the likely shale gas potential in Britain itself.
North American gas prices have dropped from $15 per million British thermal units to below $2 in just 7 years. This price collapse is an indication of things to come in Europe, once its own vast shale deposits are allowed to be extracted.
“At a time when most major economies are gradually returning to cheap and abundant fossil fuels, mainly in form of coal and natural gas, Britain alone seems prepared to sacrifice its economic competitiveness and recovery by opting for the most expensive forms of energy,” said Dr Benny Peiser, the GWPF’s director.
In any case, the complex and inconsistent measures of the draft Energy Bill are unlikely to provide investors with the certainty they require to make substantial investments.
The proposed contracts for difference (CfDs) are extremely complex and convoluted. Neither the profit guarantees offered for different technologies nor the duration of CfDs is known. The government has not provided any numbers and price guarantees for its favoured green technologies. Investors are therefore thrown into limbo since they cannot calculate whether expensive renewables or nuclear reactors are viable and can compete with less expensive conventional power plants.
This lack of clarity will inevitably lead to constant government amendments and continual intervention, which will act as additional barriers to new entrants in the UK electricity market.
In light of government indecision and investors’ uncertainty, the Energy Bill proposes to give the Secretary of State the exclusive authority to offer green energy companies ‘letters of comfort,’ promising them that they will be guaranteed profits once the specifics of CfDs are finalised and introduced. This is both arbitrary and unconstitutional.
Moreover, it is doubtful that what is proposed is actually workable, let alone economically viable. After all, similar interventions in the past have proved inept and uneconomic. They will almost certainly prove to be highly unpopular when the costs of these measures are reflected in energy bills.
Many commenters here are clearly American and so don’t know the two facts that are ingrained in UK energy costs. Therefore you mistake “skewing the market” for “freeing the market”. The market is not free in the UK
The two facts that dominate the energy price paradigm are:
1 There ain’t much option where you go. You can switch provider daily and the costs don’t change as no-one can follow what each of the six providers is doing like the other five can. Most people give up and just concentrate on turning the lights off. This is a win for the stated aim of the Government and the freeloading energy barons who have everyone over a barrel. (Unless you do have a wood burning oven or maybe fur and a taste for raw food but most voters aren’t bunny rabbits).
2 We have a petrol (gas) fuel escalator in the UK for years that has gradually pushed the cost of energy in cars up to a significant percent of people’s wages. £1:40 a litre (about $8:33 a gallon, I think). This has made everyone feel that energy is precious and rare. No-one complains about home energy rip-offs when it’s cheap compared with filling the car.
And they are both twin aspects of the same Government aim: to reduce energy usage.
If that happens to be by starving industry, so what?
Indeed, the switch to services from manufacturing could even be considered a success.
Vince Causey:
Your post at May 24, 2012 at 7:06 am goes to the heart of the issue under discussion when it suggests;
That does not work for electricity supply.
And it is why UK electricity costs and prices rose with privatisation of the UK electricity supply industry and have soared since.
There are several reasons for this, but the following few should indicate the issues.
A business exists to obtain profits. It will only – and should only – maximise energy efficiency if that maximises profits.
Most efficient (i.e. most energy efficient AND most economically efficient) generating technology differs for base load, most load following, and peak load supply. Hence, a balance of supply technologies is needed for most efficient supply that matches varying demand. However, the economic return on equipment differs if it is used for base load, load following or peak matching.
The balance of technologies for maximum energy efficiency differs from the balance of technologies for maximum economic efficiency.
And security of supply requires that there is great financial risk in overdependence on a single technology. A nuclear power plant has high capital and decommissioning costs but negligible fuel cost. A CCGT gas-fired power plant has negligible capital and decommissioning costs but high fuel costs. A coal-fired PF power plant has moderate capital, decommissioning and fuel costs. Gas price has high volatility and coal has good price stability.
A power station has a scheduled life of at least 30 years. Hence, choice of technology has future supply risk. Building nuclear is an expensive build but there is negligible risk that the costs of its output electricity will escalate with time. Building CCGT is cheap but there is high risk that the costs of its output electricity will escalate with time. Building coal-fired is a ‘safe’ option but risks imposition of ‘environmental’ impositions that could escalate the costs of its output electricity.
There are two extreme options for addressing these issues. They are
• nationalisation (which the UK’s Central Electricity Board, CEGB, proved works)
and
• a completely free market (which economic theory says should work).
Unfortunately, any compromise between these extremes would provide the ‘worst of both worlds’ while failing to provide the benefits of either.
Richard
Blackouts are definitely not a vote winner.This government is producing yet another inept policy on top of all the recent disasters including its failure to reduce government expenditure (It’s significantly higher than when the previous bunch of incompetents was in power).
I find it deeply worrying that Cameron is ensuring that he will be kicked out at the next election. What does he know that we don’t?.
In the US the due to tax rebates and the like, the bottom 50% of wage earners pay almost not taxes at all. As in zero dollars per year. The top 10% of earners pay 70% of the total tax load. (http://www.ntu.org/tax-basics/who-pays-income-taxes.html) People with enourmous sums of cash, lets use MItt Romney as an example, even if it is overseas, must pay the going capital gains tax (15%)on their profits. The days when the US govt let that type of thing go are gone. They have just inked a deal with the Swiss banks to ferret out what US citizens have in their banks so they cannot dodge the taxes on it.
That being said, GE should never have been able to get away with paying nothing. The CEO is in Obama’s cabinet, so I can’t see that changing for now.
Caveat: The National Taxpayers Union states that it it “non partisan”, whenever I see that the BS pings a bit. Take it with a grain of salt.
That is to say …..”MY BS meter pings a bit”. Sorry.
Perhaps it would be best for all if the politicians who are going to run this scheme were guided at each step by scientists. Not just any rogue scientists, but a clear consensus of scientists who have a noble cause, several well-recognized models of the ideal, and who are members of a trusted global organization and funded by a consortium of interested nations from all corners of the world.
What could go wrong?
Everybody in the US pays a base tax rate…the corporate tax. It is always passed on so its priced into everything.
Vince (May 24, 2012 at 6:55 am) – You ask “which is it?” of warty “free markets and capitalism” and equally warty “socialist command economy”. OK.
Point 1: I have never seen a working free market, anywhere. As I said above, the system which goes by that name these days gives freedom only to the already rich and powerful, a freedom which is routinely abused to screw everybody else. It may have existed, even worked well, once, but it has been so compromised that it no longer does – hence my comment above that “it may work, who knows?”.
Point 2: I have also never seen a socialist command economy. The command economy, like the modern free market, just hands more wealth and power to the already wealthy and powerful, etc., etc. as per point 1. Socialism involves devising a society in which everyone can benefit from it (as I’ve mentioned in comments elsewhere) and, like capitalism and the free market, has been monstrously compromised in its modern instances.
I suspect that the reason so many foul things come from systems with “socialism” in their name – the “socialist” command economy you mention, National “Socialism” etc., is that every one of us accepts that we are social animals, and that too many believe that the wielder of the word is proposing something which will lead to more-or-less what I have already mentioned – a system which is good to all.
For the record, I see nothing good in the command economy, nor in what passes for a “free market” now. Both now are merely different faces of authoritarian centralism which, although very popular with the authoritarians at the centre (UN, EU, IMF, and a shower of other unelected, unaccountable acronyms) is not, and never can, work to the benefit of those not at the centre, and who only get to suffer under the authoritarianism.
You sound as though you approve of the asset stripping which I have seen destroy my country over recent decades. I do not. Those were our assets and, though the system wasn’t perfect before, it used to work a darn sight better than it does now0 – and cheaper.
So yes, I’m a socialist and proud of it. I want to live in a society which works well for everyone, not just for those who are sharp financial operators or clever power mongers. And I have never yet seen such a society either. Being now in my 60s, I doubt I ever shall, unless the human race finds – very quickly – a way of dealing with the greed-fuelled cunning *******s at the top of the current heap. If you support either “side”, you’re just helping them screw us all.
Which is it? Neither. That’s the point.
IIRC, it was Victor Yakovenko (U Md) who found a link between the laws of physics and the laws of economics by treating ‘money’ as an analog to ‘energy.’ In this model, taxation is dissippative of resources, much as friction is, and government regulation diverts resources away from productive applications. In an unforced economy, the distribution of resources rapidly and naturally achieves a Boltzmann distribution equivalent to thermal equilibrium.
All arbitrary efforts to alter the distribution are doomed to fail because the microeconomics (statistical mechanics) remain unchanged, save for the dissipation of resources through misdirected efforts to alter the equilibrium. The primary effect is to reduce productivity in direct proportion to the amount of resources expended in the wasted effort.
We are now seeing rapid growth in careers related to ‘compliance’: specialists in every industry are spending their entire productivity in maintaining current knowledge of government regulations and insuring that their employers are not in violation of some minor rule imposed, with the best of
intentions, by unelected bureaucrats “for the public good.”
We all know that Good Intentions make excellent pavement – for certain roads.
Steve C, why not just aim for the possible? Like a good law-based, mixed market economy with effective checks and ballances, a truly free press, transparency and open information, restored liberties and a protected free enterprise? Brief periods of such conditions, even partial ones, is what brought all this wealth and development. Hoping for a never-will-happen “good” socialist system run by “philosopher kings” or a Chicago-style populist rabble is a dead end.
Also, in your group of “greed-fuelled cunning *******s at the top of the current heap”, do you nclude the tousands of saintly-looking, but very greedy and corrupt NGOs and busy-body groups that have been siphoning more that the corporations and not producing a single item of use to boot?
Well,
as I said,
http://www.letterdash.com/HenryP/fracking-for-gas-is-okok
Steve C,
You say “You sound as though you approve of the asset stripping which I have seen destroy my country over recent decades. I do not.”
Actually I was just quoting what you said in your earlier post, which was part of a general invective against capitalism, in order to draw you out into saying whether you supported the capitalist or state run model. And you answered “neither” quite convincingly.
Asset stripping should be a force for good, in that industries are only “stripped” if they are unprofitable. The process of stripping is like a bacteria that breaks down waste or unusable material and returns it in a form that is good for the ecosystem. It should be the case, that the process of stripping, frees up valuable resources of land, labour and capital, that can be recycled into producing something that is more highly valued by society. That is the basis of capitalism, and my point would be that it has got us to a level of prosperity that would have been unimaginable to our nineteenth century ancestors.
Let us therefore not be in too much haste to cast out the baby with the bath water. Because capitalism harnesses the baser human instincts of greed and power, does not render it unfit for society. I have yet to see a model of socialism of which you speak, to have delivered a like for like increase in prosperity.
To borrow a description that was originally intended for democracy – capitalism is the worse economic model – except for all the others. But to believe that there must be a better way, is also a laudable aim, and I salute you for that.
Steve C:
Thankyou, and well done.
WUWT is US based and several who post here have no understanding of socialism. Some of them think socialism and communism are the same (yes, I know it is hard to understand how anybody could think that, but they really do and they will admit they do).
Old fashioned British socialists like us love our country and adhere to the socialist principles that owe much more to Methodism than to Marxism. But the American hard right can give us a hard time here.on WUWT.
You have stated our views bluntly, clearly and forcefully. Thankyou.
Richard
Vince Causey:
I read and liked your post addressed to Steve C at May 24, 2012 at 11:46 am.
Your post induces me to suspect your views may have much more in common with those of Steve C and me than you seem to think they do. And, as I said, I appreciated your post.
Richard
@ur momisugly Steve C says:
May 24, 2012 at 10:01 am
Steve, re your comparison of free-market vs. socialism. The fundamental difference is the former adheres to ‘equal opportunity’, the later to ‘equal outcomes’. Focusing on outcomes in the forlorn hope that equality of outcomes will reign supreme is a Utopian fantasy that has been thoroughly dismantled. It has never existed, and never will. Life (human or otherwise) is a competition, often violent and fatal. I think what you and many others wish for is life without competition. It won’t happen, because competition is the essential ingredient that drives both cultural and biological evolution.
In a forest, every tree has an equal opportunity to grow and flourish. But not every tree will. Get used to it.
Looking through the comments, there are some serious misunderstandings of the reforms, the current operating environment, and the history of the UK industry.
First thing – the reforms DON’T immediately replace the existing subsidy regime for renewables (primarily the Renewables Obligation). The RO will continue to apply for eligible schemes that start operation before 2017-2019 depending on technology. So, for example, and elegible offshore windfarm that starts operation will get 1.9 Renewable Obligation Certificates for every MWh generated – each ROC is currently worth about £55 in total, as opposed for about £50 for an MWh on the wholesale market. The operator will have the option to opt out of the RO scheme onto the CfD scheme (see below) , but it’s unlikely that anyone will for reasons I’ll explain.
The actual components of the reforms are (assumimg the eventual model is as per the white paper):
1 – there will be an absolute limit on the amount of CO2 per MWh from any power station. At the limits proposed, this will effectively close down any non Carbon-Capture equipped coal-fired capacity by 2025, even new supercritical plant.
2 – there will be a floor to the carbon price (as traded through the EUETS). The EUETS has so far mostly delivered prices below €15/tonne – this measure will set a minimum price of €30/tonne by 2025. Given measure (1) it will mainly penalise CCGT gasfired generation.
3 – National Grid will be empowered to make payments to operators of generating plant to keep the plant available as reserve capacity. Most of the benefit of this will go to operators of gas-fired plant (for reasons of plant economics). There are two reasons why more system reserve is needed – first because plant unit sizes have increased (each unit at Hinkley Point will be 1600MW – the largest single unit on the system at the moment is 1200MW), hence more capacity is required to satisfy the need to have enough reserve to compensate for two large units going off-line simultaneously. Secondly, large amounts of wind on the system needs rapid response (spinning) reserve equivalent to average production, which means around 25% of nominal capacity, and 100% reserve dispatchable in 3-6 hours.
4 – the big item – the “Contract for Difference”. CfDs will be auctioned periodically, equivalent to (probably) about 20-25% of average load. They’re basically a hedge – if wholesale prices fall below the CfD price, the government pays the difference to the generator; if prices are above the CfD price the differential is paid by the generator to the government. CfDs will theoretically be open to any low-carbon generation. In practice, it looks likely that the majority of the allocation will be taken up by nuclear operators. There are a couple of reasons for that. First, it’s likely that nuclear will be the cheapest low carbon output, and will hence be best placed to win the auctions. Second, the probable nature of the contracts will mean that anyone operating intermittent generation will be at very high risk of not being able to supply in any given settlement period, and hence face penalties. It might be that at some future point CCS generation is cheap enough to take up part of the CfD allocation, but that looks unlikely at the moment.
To be honest, items three and four are arguably justified in terms of security of supply, as much as on carbon grounds (without something like this, the market would probably end up being 80% gas-fired). It’s also worth noting tht although there are remaining coal supplies in the UK, little of it is in economically exploitable seams – Selby was the last eaasily workable, decent sized reserve identified, and that was back in the late 1960s. It’s exhausted now – most of what we still have is deep, wet or in small faulted seams.
DECC is aiming at having about 16,000MW of nuclear in the UK mix. Allowing for the fact that that would almost certainly be operated as baseload (plus a small amount of loadfollowing), given average demand of about 40,000MW that would leave us with about 40% of production being nuclear, 40-50% gas, and the remainder renewables (including non-intermittent hydro and landfill methane).
Contrary to the GWPFs view, as a former nuclear engineer who’s worked around the sector for the last three decades, that sounds actually like a well balanced policy to me.
Curiousgeorge:
At May 24, 2012 at 1:46 pm you stay to Steve C:
Sorry, but that is very, very wrong.
Socialism equates to
From each according to ability, and to each according to need.
It is an extreme form of individualism that attempts to provide ‘equal opportunity’ in so far as that is possible; e.g. if possible, those with reason to compete are assisted to obtain their needs for entry into the competition.
Free markets do nothing to provide equal opportunity: e.g. those with inherited riches can operate in any competition they desire, but others cannot.
In either case, their abilities and diligence will determine the ‘winner’ of the competition. But the larger pool of abilities provided by socialism enables more people with ability to compete.
Using your analogy, socialism attempts to provide every tree in the forest with access to sunlight. Get used to it.
Richard
@ur momisugly richardscourtney says:
May 24, 2012 at 2:36 pm
Your use of the word “provide” tells me you just don’t get it.
Jarryd Beck says:
May 23, 2012 at 4:15 pm
I don’t quite understand. I was under the impression that in Australia these things have always been centralised, and now we are fighting against the government who wants to deregulate everything because the prices will inevitably go up. Why is government control of fundamental societal resources like electricity, gas, phone, water a bad thing?
***********************************************************************
Economics 101. Competition. Tends to drive prices down, quality up, gives consumers freedom of choice. If two people are offering the same product and competing for the same market share, they have to do things to make their brand attractive to consumers – more features, lower price, better coverage, a free toy in every box, whatever. I agree that LOCAL governments should have a (small) hand in regulating basic utilities for their citizens – mainly in the areas of quality assurance, safety, and reliability of supply. Most municipalities still control necessities for life; at least water, sewage, and trash, for example. Electricity deregulation is interesting. Extras like internet service, cell phone service, etc., leave it alone. Companies are doing an okay job. If anything, MORE competition is warranted, not less.
Price will dictate everything if people leave markets alone. Economics is not some hard-to-understand enigma. Honestly. Supply versus demand equals price. As someone so eloquently put it on this website some time ago:
1. Government is force.
2. Good ideas don’t have to be forced on people.
3. Bad ideas shouldn’t be forced on people.
4. Freedom is essential to determine good ideas from bad.
If people wanted something like wind power, for example, some enterprising fellow(s) would research and develop it into a product for market. If it was ready for market and the S/D ratio was good, it would live. If not, death.
Instead we have government and government-run “science” creating (forcing) artificial demand for wind power (CO2 is bad etc.), artificial price (subsidies, guaranteed profits, renewable mandates, etc.), and of course people are signing up in droves to produce supply for their share of cash.
So we have a very expensive and not very good product that is forced on people.
Contrast this with the fracking boom.
Control is such a strong word, and should never be paired with government on principle. Governments legislate, regulate, enforce, tax, but shouldn’t control. And none of these, or other, measures should overreach and become a controlling factor, as they unfortunately tend to do (or purposefully become – carbon tax being an underhanded method of energy, and economic control).
In short, why is government control of ___________ bad?
Because it is government control.
It doesn’t matter if you would trust your life even to the current people in power – one day they will be replaced (this is why things like line item veto should never be passed).
Remember that government is not some benevolent or malevolent entity. It’s just a bunch of dudes whose words carry more weight than ours, and we should be very mindful of how much power we give them over our lives.
Freshman reading: http://www.amazon.com/Should-Consent-Governed-Introduction-Philosophy/dp/0534574165
You can probably find a used copy locally for super cheap.
Curiousgeorge:
At May 24, 2012 at 2:56 pm you reply (in total) to my post at May 24, 2012 at 2:36 pm by saying;
Oh, but I do “get it”, and your reply tells me that you also “get it” but you don’t like it and you have no answer to it.
Richard
Curiousgeorge says:
May 24, 2012 at 1:46 pm
“In a forest, every tree has an equal opportunity to grow and flourish. But not every tree will. Get used to it.”
Except in Yamal, where it only takes one tree to make a hockey stick.
@William Howard Abbott May 23, 2012 at 8:40 pm
Sorry so long to respond.
Once the producer has a market for all of their available product then they can and will raise the price until finally the market clearing price justifies additional capital investment. Where a capital intensive industry like electricity production is concerned this will result in significant economic profits. This is doubly true since potential investors know that building additional capacity will lower the market clearing price and electricity is fungible. This will act to further delay capital investment until prices are very high. IMO this market clearing price will produce profits higher than the 8-10% ROE allowed now under state regulation.
Also, producing 1Mw is not the same as producing 1000Mw. Power plants do have variable operating costs, primarily fuel costs. They are very different based on fuel source though. Hydro is very low, then nuclear, then coal and nat gas. Right now nat gas has lower fuel costs in many cases than coal. That is not typical though, and I personally expect that to change in the next year or so back to the more normal advantage to coal.
I agree completely that deregulation will make sense when, and if, competition for energy types advances enough to eliminate these natural monopolies. We are becoming a society that is more reliant on electricity though NOT less. Remember, other forms of energy are less regulated than electricity. If it made sense to power TVs directly with gas, nat or otherwise, then there is no reason we wouldn’t be doing it now. In fact, electric cars are a good example of this now………right now they don’t make economic sense.
“Private capital tends to become concentrated in few hands, partly because of competition among the capitalists, and partly because technological development and the increasing division of labor encourage the formation of larger units of production at the expense of smaller ones. The result of these developments is an oligarchy of private capital the enormous power of which cannot be effectively checked even by a democratically organized political society. This is true since the members of legislative bodies are selected by political parties, largely financed or otherwise influenced by private capitalists who, for all practical purposes, separate the electorate from the legislature. The consequence is that the representatives of the people do not in fact sufficiently protect the interests of the underprivileged sections of the population. Moreover, under existing conditions, private capitalists inevitably control, directly or indirectly, the main sources of information (press, radio, education). It is thus extremely difficult, and indeed in most cases quite impossible, for the individual citizen to come to objective conclusions and to make intelligent use of his political rights.”
—Albert Einstein – Our of My Later Years, pp.123-131
Also, most of these subsidies will go to nuclear power, which evidently can’t compete on the “free” market.
Doug – WE are agreed; it does not make sense to power the TV with natural gas. We are not agreed that the term natural monopoly refers to something very hard and real. I understand the natural efficiency of a singular, real, distribution network for electricity and gas, at the moment. (we would have included cable and telephone a few years ago but wireless technologies imploded the value of those networks) But there are all sorts of uses for electricity that compete with other energy sources. A free market in energy does limit the “whatever the market will bear” price in grid electricity. I realize that all grids have to answer to some level of government oversight (usually overbearing & politicized oversight) so totally free markets in energy don’t exist. But the more free the market – the more efficiently it will serve consumers. If you sight Enron and California as examples of freee market gone bad, I’ll think you are truly unobservant. California deregulation was anything but deregulation. Enrons can only thrive in the crony capitalist fever swamps. They disintegrate in free markets. You say “deregulation will make sense when, and if, competition for energy types advances enough to eliminate these natural monopolies.” I say, we will not be harmed if we deregulated before the “natural” monopoly is eliminated because, one, these natural monopolies are inherently weak and vulnerable to competition, and two, the regulators add so many layers of insulation and inefficiencies trying to protect consumersthey end up costing us more than if they had done nothing at all. It isn’t because the regulators aren’t well-intentioned. But they can’t know the future and they are always making wrong assumptions about it. When capitalists make that mistake – they lose their money. When regulators make that mistake they lose our money.
Andy Dawson – thank you for the timely post – it was very informative and we have a much better idea of what CfDs are and how they will work – (still think free markets are best)
Louise says:
May 24, 2012 at 12:19 am
The increase in wealth of the wealthiest 1000 people in the UK over the last 10 years is more than enough to pay off the UK national debt. That’s just the ‘increase’ in their wealth over the last decade not the actual total wealth.
You, of course, have a reliable source for this claim! Care to share?