Andrew Raingold argues that we need a grown-up debate about the long term implications of our energy policy decisions
Recent Npower and British Gas announcements of yet another energy price hike this winter have sparked anger and concern among consumers. The cost to households (a nearly 20 per cent increase for some) has rapidly become a hot topic for the nation.
Our political elite are worried. That much was clear when David Cameron spontaneously proclaimed to Parliament that his Government would compel energy companies to charge customers their lowest tariff.
Politicians are right to be concerned about the impact on households. But they should also pay close attention to the effect that our energy choices have on businesses and – as a consequence – our national economic growth.
A few numbers provide a powerful illustration. The price of energy paid by UK businesses has increased 58 per cent since January 2010. Our joint survey of 153 major corporates published in July showed that if energy prices continue to rise at this rate for just another two years, eight per cent would go bankrupt and 31 per cent would have to significantly restructure. 91 per cent of corporate energy users believed that energy prices would rise over the next two years. And what do they attribute it to? Mostly (77 per cent) to anticipated increases in fossil fuel prices – on which we currently rely to meet 60 per cent of our national energy needs. An Oxford Economics study has calculated that a 50 per cent shock price increase would cost the UK one per cent of GDP.
Piece these numbers together, and it is not difficult to see the business case for rapidly building a national energy system that is far less reliant on fossil fuels and imported energy. Businesses understand that the MW cost of generating energy from renewable sources may be higher right now. But this cost constitutes a prudent investment; allowing the nation to hedge against future fossil fuel price volatility and allowing us to benefit from much more certainty about the expense longer term. Too much exposure to fluctuating prices, affected by unpredictable events like the Arab Spring, creates a very risky environment for business.
Major corporates have already made this calculation and are publically showing their hand – most recently in an open letter coordinated by the Aldersgate Group to the Chancellor, calling on Government to make a legal commitment to power sector decarbonisation by 2030. They are seeking to make a straightforward deal with Government: build us an energy system that is secure, reliable and protects us from sudden price volatility in global markets that are beyond national control – and we will do our best to operate profitable businesses that create jobs and help to fund public services.
The Government’s response? The new Energy Minister says “enough is enough”. The Chancellor: “only if our estimate of the levelised cost isn’t too high compared with fossil fuels”. (There has not yet been a formal response to the business letter – but messages being sent through policy decisions is clear).
A case in point is the “Levy Control Framework” – a policy that has enjoyed far less public attention than the 2030 power sector target – but goes right to the heart of the way in which we currently cost our energy choices. Due to be announced in the Autumn statement, the stated intention is to limit energy bill increases by setting a cap on how much energy companies spend on investment in renewables. It will effectively set a cap on the £29 slice of bill increases attributed to environmental regulation from 2004 to 2010; but there is no cap at all on the £290 bill increase attributed to gas price hikes during that period. This cannot be right.
Now, on the eve of the biggest reform of our energy market since the 1970s, it is time to seriously test the assumptions underpinning our economic models, start valuing the risk of those assumptions being wrong, and have a proper national conversation about the true cost of our energy choices.
The energy debate has become the site of a major national contest this Autumn. The resulting decisions will have a critical impact on how we fuel our economy – but are also a test of our ability to think afresh about other national challenges
The financial crisis demonstrated the severe economic consequences of undervaluing systemic risk and where it can leads us. Our imminent energy sector choices will show whether we’re capable of building an economy according to the logic of sustainable growth or whether we’re trapped in a web of short-run calculations based on narrow economic modeling.
The Aldersgate Group is an alliance of leaders from business, politics and society that drives action for sustainable growth
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