The climate change minister argues that the free market can deliver green energy—is he guilty of wishful thinking?by Jay Elwes / December 11, 2014 / Leave a comment
“Solar power—the costs have dramatically fallen, far faster than anyone has speculated,” says Ed Davey. “It’s probably one of the greatest steps forward in human history.” Davey claims that solar could still make a significant contribution to Britain’s energy needs, despite the meagre sunlight of the winter months.
Speaking to Prospect, the Secretary of State for Energy & Climate Change says that “in the UK, people are talking about getting towards ‘grid parity’ either by the end of this decade or next decade”—the point when a unit of solar energy would cost the same or less than a unit of energy bought from the national grid.
Davey’s enthusiasm for solar suggests that the Energy Secretary hopes the plummeting prices of the technology will lead to that grail of energy policy—clean electricity that still does not cost more than that from conventional power stations burning gas or coal. But those hopes have confounded others before him—and lured governments into subsidising technologies that have failed to deliver their promise. Critics suggest that the new passion for solar is a distraction.
Energy policy is one of the most politically tricky portfolios to hold. On one hand, it appears irresistible for politicians; if not in the top rank of government policy, it is still steeped in high seriousness, demanding big “once in a generation” spending decisions with consequences affecting the costs of every household and business in the country and the United Kingdom’s ability to meet its environmental targets. On the other hand, trying to satisfy the competing targets of price, greenness and security of supply torments any minister, while the one constant of public opinion is that people don’t want much power generation—whether gas, nuclear or wind—built near them.
But Davey and the coalition government have been dealt a rare series of valuable cards. The United States’s discovery of fracking and China’s slowdown have caused the price of fossil fuels to drop despite the turmoil in Iraq. However, forestalling yet another “dash for gas,” the costs of solar and wind have also declined, in solar’s case driven partly by the output of mass cheap solar technology from Chinese factories. The UK government estimates that between 2010 and 2012, the costs of installing solar equipment fell by around 50 per cent and that total solar capacity grew by 60 per cent in 2013 alone. A government report on energy investment in July said that, “the government is taking steps to support” the solar sector “by removing non-financial barriers and tackling grid issues.” That appears to stop short of extra subsidy, but is clearly intended to be a helping hand.
Under agreements with the European Union, by 2020 Britain is obliged to produce 15 per cent of its energy from renewable sources; the question of how to do this has been a source of strain within the coalition. George Osborne, the Chancellor, has pushed for drilling for natural gas by fracking. But Davey, like his predecessor and fellow Liberal Democrat Chris Huhne, prefers government investment in renewable energy. Prime Minister David Cameron eventually brokered an agreement between Davey and the Chancellor, with Osborne agreeing to a limited increase in renewable energy investment.
“It’s got to be a low carbon mix and ultimately I don’t want the government—the Secretary of State—to decide what that low carbon mix is,” says Davey. “I want the markets and technology development and innovation to decide what that mix is. And our reforms to Britain’s electricity market move from the post-privatisation liberalised market, which actually favoured fossil fuels—that’s why you saw no nuclear power stations built, why you didn’t see any investment in renewables—to a free market, but to a free, low-carbon, market.”
“At the moment we’re trying to create the potential for competition between low carbon technologies,” says Davey. “And that means we are engaged in a market transition and a technology policy, because we have to help bring on the less mature low carbon technologies to make sure there’s a proper competitive market in low carbon.”
There is a suggestion of wishful thinking in these remarks. The government wants to encourage cleaner energy but without distorting the energy market. It is hoping, it seems from Davey, that the market will deliver the solution it wants, if it gives the solar energy industry a quiet nudge. Sceptics say, however, that Davey is greatly overestimating the contribution that solar power can make in Britain’s energy mix, and that this new enthusiasm for solar—following on from years of promoting wind power—is distracting attention from the more difficult decisions that need to be made on gas and nuclear.
Davey is also optimistic about the potential of tidal energy, “particularly tidal lagoons,” he says, for generating power. He also stresses the potential of carbon capture and storage systems, which would allow Britain to make full use of its coal and gas reserves, while minimising the effects of the resulting emissions. Those systems are the subject of intense research but costs remain high.
“We are not trying to pick a winner,” says Davey. “We are trying to help all these technologies. We aren’t going after ones which are not yet at the commercial stage.” That depends how you define “commercial” however; some would argue that technologies receiving significant subsidies do not merit that term.
In any of these plans, Britain will require substantial investment in energy infrastructure, some of it likely to be from overseas investors. Should it accept this, as it has done already by allowing Chinese investment in Hinckley Point C, the nuclear power station in Somerset? Does Chinese money pass the “smell test”?
“Well, we do smell tests,” says Davey. “There are quite a lot of Russians who want to invest in the UK at the moment and we are making it clear [through] sanctions [that] the behaviour of Putin is unacceptable and he is using energy as a weapon and we won’t stand for it.
“We will draw a hard line if we need to,” says Davey. Regarding Chinese investment, “they will have to pass all the security tests,” he says. “When it comes to nuclear they have to pass all the regulatory frameworks just like anybody else. There’s no free pass for anybody,” says Davey. “We have a very strict regulatory regime and all aspects of our energy and nuclear in particular.”
Davey describes himself as a “strong free-trader” and he stresses his belief that Britain’s economy draws strong benefits from remaining open to international investment—so long as it is not tainted with the “smells that you have from Putin.” He points out that “the company that owns the electricity networks in London is Chinese. Does anybody care?”
Can Britain adopt a liberal trade policy when it is doing business with countries that do not share it? “That’s the classic protectionist argument, which the French call reciprocité. I had the privilege of listening to President [Nicolas] Sarkozy at the Elysée Palace going on about ‘do you know the Chinese aren’t reciprocal, the Japanese aren’t reciprocal?’ Well, more fool them,” says Davey of the French. “I don’t accept the protectionist reciprocity argument at all.”
Davey asserts that energy investment has been “the big success story of infrastructure investment of this government.” “Is there political risk? Well, there’s always risk in long-term investment,” says Davey, “but the political risk in the UK is diminished,” he says, pointing to the broad political support in Westminster for both the Climate Change Act and the 2013 Energy Act. He also cites the Competition and Markets Authority Review into the UK’s energy companies, which he says “any government, even a Miliband-led government, will have problems ignoring.”
Political risk to the energy market has also been diminished by the introduction of “contracts for difference,” derivatives that allow an energy buyer to obtain protection against price rises, an energy seller protection against falls. These are contracts that effectively fix the price of energy in the market. Davey says that these derivatives are “private law contracts, and that means when someone has a CfD, a future government minister cannot undo it. They can go to the courts, the high courts, just up the road and demand their contractual rights and that [has] given them more protection than they have got in any other or very few other countries.”
Davey concedes that a general election inevitably brings some increase in political risk. “It’s augmented a little bit because Ed Miliband made one of the most irresponsible speeches of any leader of the opposition when he talked about the energy price freeze,” says Davey. “And given that he did my job, it makes it even more irresponsible because clearly if global investors, UK investors, see a government that’s willing to intervene and fix prices, that makes them a bit nervous.” Ed Miliband was Secretary of State for Energy and Climate Change from 2008-10 in Gordon Brown’s government.
“We all know it was a headline—his leadership was under strain then as it is now. But there’s not a lot of content to it, so I think even the markets have discounted that to some extent.” Does that mean that, in Davey’s view, the markets are assuming that even if Labour wins the general election or leads a coalition that Ed Miliband would not push through his price fixing policy?
“Yes,” says Davey. “We’d been reforming [the energy market] long before he made his speech. Frankly, Miliband was Johnny-Come-Lately to the issue of energy bills. I know people don’t think that, but just look at the history.”
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