Central Planning with Market Features: how renewable subsidies destroyed the UK electricity market

Renewable Energy: the most expensive domestic policy disaster in modern British history  

In a new report Central Planning with Market Features: how renewable subsidies destroyed the UK electricity marketpublished Wednesday 18 March, Rupert Darwall shows that recent energy policy represents the biggest expansion of state power since the nationalisations of the 1940s and 1950s – and is on course to be the most expensive domestic policy disaster in modern British history.

Darwall shows that:

  • The electricity sector is being transformed into a vast, ramshackle Public Private Partnership, an outcome that promises the worst of both worlds – state control of investment funded  by high cost private sector capital, with energy companies being set up as the fall guys to take the rap for higher electricity bills.
  • Post-privatisation gains in productivity are now being reversed as a result of plunging labour productivity. By 2013, three quarters of the productivity gains recorded between 1994 and 2004 had been lost.
  • Competition between electricity suppliers is an expensive sideshow (which Ofgem estimated cost £730m in 2008) if it does not drive competition between generators and market investment in the most efficient generating technologies.
  • Government policies aim to hide the full costs of intermittent renewables, which as a result are systematically understated. In addition to their higher plant-level costs, renewables require massive amounts of extra generating capacity to provide cover for intermittent generation when the wind doesn’t blow and the sun doesn’t shine.
  • Highly subsidised wind and solar capacity flooding the market with near random amounts of zero marginal cost electricity wrecks the economics of conventional power stations. It is therefore impossible to integrate large amounts of intermittent renewables into a private sector system and still expect it to function as such.
  • As a result, the State has stepped in with a patchwork of interventions to support prices. Because revenues are dependent on continued government interventions, private investors end up having to price and manage political risk, imparting a further upwards twist to electricity bills.
  • Without renewables, the UK market would require 22GW of new capacity to replace old coal and nuclear. With renewables, 50GW is required, i.e. 28GW more to deal with the intermittency problem. Then there are extra grid costs to connect both remote onshore wind farms (£8 billion) and even more costly offshore capacity (£15 billion) – a near trebling of grid costs.
  • No British government has yet to produce an analysis demonstrating renewables are the most efficient way of cutting carbon dioxide emissions. Neither has any government published any value-for-money analysis to justify the use of high cost private sector capital against a public sector comparator using the State’s balance sheet.

Including capacity to cover for intermittency and extra grid infrastructure, the annualised capital cost of renewables is approximately £9 billion. Against this needs to be set the saved fuel costs of generating electricity from conventional power stations. For gas, this would be around £3 billion a year at current wholesale prices, implying an annual net cost of renewables of around £6 billion a year.

Intermittent renewables destroy markets 

The above analysis leads to a straightforward conclusion. You can have renewables. Or you can have the market. You cannot have both.

There are therefore two options to align ownership and control:

  • if renewables are a must-have – although no government has made a reasoned policy case for them – then nationalisation is the answer; or
  • the state cedes control, ditches the renewables target and returns the sector to the market.

Nationalisation removes political risk thereby cutting the sector’s cost of capital. Together with the savings from abolishing retail competition, it would cut average bills by around £72 a year now, and £92 from 2020. By contrast, ditching the renewables target and returning the sector to the market would save households around £214 a year, assuming gas replaces renewable power. This option would depend on securing a permanent opt-out from the EU renewables directive and any successor policy imposing targets on individual member states.

Sir Ian Byatt: “Ministers have destroyed the emerging electricity market while talking of how it could improve competitive processes”

As Sir Ian Byatt comments in the Foreword to the paper: “Ministers have destroyed the emerging electricity market while talking of how it could improve competitive processes. They and their advisers have not understood that effective competition proceeds from the right structure of suppliers and works in innovative, not predictable ways… Good intentions in the form of a desire to save the planet have led to our impoverishment. We need better analysis, greater transparency and more effective discussion of social and environmental issues, not Whitehall playing shops. Rupert Darwall provides us with the tools for such discussions in the area of energy and, in his policy lessons, points us towards better approaches.”

Click here to read the full report.

Media Impact: 

Rupert Darwall - Wednesday, 18th March, 2015