This is the first in a series of three articles examining climate change and the opportunities created from decarbonisation written by the Conservative Environment Network (CEN). The aim of CEN is to advocate solutions to environmental problems that are consistent with conservative principals. The theme of this article is the benefits of a low carbon energy mix. By Adam Buckley with Ben Caldecott and Gavin Dick.
The next twenty years requires the rebuilding of over 30% of our electricity infrastructure. As Thatcher pursued a ‘dash for gas’ strategy we need to decide between rebuilding a high carbon economy or creating a new low carbon one based on efficiency and low carbon energy. Despite numerous energy reviews Labour has failed to make a decision.
Should the Conservatives win the election David Cameron will have the opportunity, as Margaret Thatcher did, to redefine our energy policy. The Conservative Low Carbon Economy paper sets out what they might do in government and it would have wide-ranging environmental, as well as economic, benefits.
CEN believes that we should consider climate change a significant risk and decarbonise accordingly. But even without the very real and obvious risks associated with climate change, decarbonisation has other profound benefits. In a world without climate change it would still make sense, if done in a cost-effective way, for Britain to save energy, use less foreign fossil fuels, and develop indigenous sources of low carbon energy.
The least contentious and economically rational decarbonisation measure is energy efficiency, clearly demonstrated in the McKinsey cost curve. Even without the threat of climate change we should use less energy – simply because it can save us money quickly. But to do so we need to tackle the market failures that prevent people and organisations from improving their energy efficiency, principally: access to capital, knowing what to do and reducing the “hassle” factor.
Many think that to use hydrocarbon fuels to generate electricity is the cheapest and easiest option available for powering our economy. Even if you strip out the environmental considerations, for Britain this is probably no longer the case – coal, gas and oil are becoming more expensive. Since 2004, their prices have risen significantly (Chart 2.1.2) and this trend looks set to continue, especially with increasing demand from developing countries. Even optimistic scenarios for gas and oil prices put them well above 2004 levels. More pessimistic scenarios put long term oil prices at 150 $/bbl and gas at double its 2008 peak. Coal prices are predicted to be lower than their 2008 peak but higher than the 2004 level.
If relying on fossil fuels was so economically advantageous then our liberalised energy market (which relies mainly on fossil fuels) should have one of the lowest electricity prices in Europe. In fact from 2003 to 2008 we have had the highest compound annual growth rate and third highest wholesale price in Europe. The era of cheap energy is over.
But are renewables like wind or tidal really viable cost competitive alternatives? This depends on two points: the cost of raising capital and commodity prices. Renewables have high, upfront capital costs but low running costs. If we can reduce the upfront capital costs and raise finance cheaply enough, they will provide us with cost competitive electricity given some of BERR’s quite realistic estimates for the future of fossil fuel prices.
This argument is true for nuclear energy, hence the recent enthusiasm of the CBI for moving the UK to nuclear centric mix. However, entering into complex debate on nuclear energy is not the focus of this piece.
The last two years have demonstrated the price volatility in global fossil fuel markets and the inflationary pressures and interest rate instability this causes. As a result, reducing our exposure to the price volatility of fossil fuels is desirable.
Additionally, we can send less money abroad. The issue of balance of trade has become unfashionable, but is another important reason why decarbonisation should be desirable regardless of the risks associated with climate change. Britain continues to run huge deficits, energy being a major contributor, with potential adverse effects on interest rates and Sterling. Delta recently estimated that by 2020 switching from a high carbon economy could reduce our balance of trade deficit by between £2.23 and £12.61 billion per year. Given that our 2008 deficit was £38 billion this is a significant figure.
If we retain a high carbon economy we must spend tens of billions of pounds annually importing foreign energy – in 2007 total UK energy imports were almost £45 billion. In contrast, low carbon energy and energy efficiency investments can create business opportunities and jobs for the British economy. In the depths of a recession, we should not forget that for every £1 million invested in energy efficiency, 8-14 person years of direct employment are created and indirect employment effects contribute a further 9-40 person years because savings from lower fuel bills are spent on other goods and services that are more labour intensive.
The economic costs of a clean energy seem large, but is it worth it? On environmental grounds alone we’re inclined to say “yes”, but even if you discount arguments about climate change, decarbonising our energy infrastructure can save us money and make us less energy insecure at the same time. These are the goals we must seek to realise.