Tony Lodge is a Research Fellow at the Centre for Policy Studies and co-author of The Hidden Wiring – How electricity imports threaten Britain’s energy security.
Britain’s electricity market is increasingly slanted in favour of importing electricity and against securing investment in new power plants at home. Billions of pounds of energy plant investment are consequently at risk, which will undermine future security of supply and risk price rises. Policy needs to change.
Firstly, it is important to appreciate our growing reliance on imported electricity, the plans to quadruple this dependency and the consequences for prices, competition and security of supply. Our recent Centre for Policy Studies paper, The Hidden Wiring (co-authored with Daniel Mahoney) follows months of research and analysis into proposals for more undersea cables to import electricity, called interconnectors, and their negative impact on Britain’s electricity market. We are calling for our findings to be urgently considered and examined by the competition authorities and Parliament.
Britain’s interconnector imports from Europe increased by 52 per cent in the three years to 2016, and they are set to surge as new interconnectors are planned. Back in 2012, imports were expected to account for just six terawatt hours (TWh) of supply per year in 2030. But four years later, the projection had radically changed. The 2016 forecast sees Britain’s electricity imports rising from 21 TWh today, to a peak of 77 TWh in 2025. That’s close to a fifth of supply.
In principle, importing electricity can have advantages – ranging from price to abundant availability – but this depends on a series of important factors. However, our research shows it is increasingly unlikely there will be much spare electricity in Europe to send to the UK going forward. We argue that these serious risks of future volatility must be reviewed in the national economic interest, and we have asked the BEIS Select Committee to examine the policy.
The truth is that Britain’s rising electricity imports are, in the short term, an easy way out for failed energy policies stretching back over a generation. Back in 2012, the Coalition had the right plans for a new generation of gas-fired plants that would be easy to switch on and off to accommodate the sporadic nature of weather dependent renewable supplies. It estimated that Britain would need 26 gigawatts (GW) of additional gas generation capacity by 2030 to plug any potential gap left by cloudy, windless days and to replace the electricity output from closing older coal, oil and nuclear plants. On current trends, however, the UK is on track to build just 12 GW by 2030. This goes some way to explain the panicked dash to build interconnectors.
Declining electricity capacity and supplies on the Continent are key to our conclusions. Both France and Germany are reducing their reliance on nuclear power (in Germany’s case, to zero by 2022) without any clear policy for replacements.
Coupled with this is EU policy to combat climate change and air pollution; it will accelerate the shutdown of firm generating capacity across the Continent. Europe still generates considerable electricity from coal, and these plants are increasingly vulnerable to new legislation and political factors. Angela Merkel will need the Greens in her new coalition and they have already said they will want to see the closure of Germany’s dirtier coal plants. Holland is similarly keen to close coal plants over time, with plans for a new carbon tax.
All of this means that importing power is likely to get more expensive, not less. And yet the way in which Britain allocates access for imports to the electricity grid continues to discourage building new gas plants as they enjoy clear market exemptions. This unfair and preferential market access is undermining the investment case for new power plants in the UK through the Capacity Market. We need an urgent Competition and Market Authority probe in order to deliver a level playing field for all power generators.
Interconnectors enjoy a competitiveness boost from the fact that generators on the Continent don’t have to contend with Britain’s high carbon price floor tax – unlike UK generators. This means they can undercut British generators even if their power comes from dirty, coal-fired capacity in Holland or Germany. So instead of cutting carbon emissions, the UK is in some cases offshoring it. They also don’t pay the transmission charges faced by UK generators.
Connected to this is the sham claim by National Grid that the UK is increasingly enjoying ‘coal-free’ days – a PR wheeze based on the point that no UK coal plants are generating any electricity at a certain time. The claim is flawed because the UK is increasingly importing electricity, and the Grid cannot guarantee this electricity has not been generated from the many coal plants in Europe. The Minister for Energy recently confirmed in a Written Parliamentary Answer that it was impossible to trace the generation source of imported electricity.
Nearly 30 years after the Conservatives led the world in delivering a liberalised electricity market, new market distortions and the corrosive old habit of picking winners is back with a vengeance. In his recent review of policy, Dieter Helm has reached a similarly depressing conclusion. But if picking winners is to be the policy of the future (which in itself should be vigorously opposed), then can we at least make sure they are in the national economic interest. Anything less is very bad policy indeed.