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The £200 Billion Price Tag For Britain’s Green Folly

  • Every home will pay £600 a year towards green energy projects by 2020
  • Shift to unprofitable renewables will reverse long-term rise in living standards
  • Subsidies are discouraging innovation, so wind and biomass will remain unviable

Green energy subsidies will cost every British household £600 a year by 2020, a leading industry analyst warns in a new Civitas publication.

The cost to consumers of pursuing EU renewables targets is set to rise above £16 billion per annum, when VAT is taken into account, Dr John Constable writes.

What is more, these huge costs are making it more, not less, likely that green energy production remains inefficient and a burden on the taxpayer in the years to come.

Dr Constable, director of the Renewable Energy Foundation which publishes data on the energy sector, says subsidies are discouraging the innovation that will be necessary if green energy is ever to become a sustainable alternative to fossil fuels.

And he warns that the shift to renewables is likely to herald the first long-term decline in living standards since the start of the industrial revolution.

“The fact is that renewable energy is still far from competitive with fossil fuels, and nowhere near as economically productive,” he writes in his paper, Are Green Times Just Around the Corner?

“Consequently, shifting to current renewables for the bulk of our energy would result in a reversal of the long-run economic trend since the industrial revolution.

“More people would be working for lower wages in the energy sector, energy costs would rise, the economy would stagnate, and there would be a significant decline in the standard of living.”

The growth in green energy that can be observed at the moment is linked to subsidies from the wealth generated by the fossil-fuelled economy.

“The green energy industries are not sufficiently productive to be self-sustaining; that is to say they are not economically sustainable without continued support from the fossil-fuelled economy,” he says.

Under the EU’s 2009 Renewables Directive, Britain’s energy consumption from renewables needs to reach 15% by 2020. Dr Constable says this is one of the largest proportional increases in the EU and will mean the UK carries 25% of the total bloc-wide cost of the directive.

On the costs to British consumers, he says:

• The Renewables Obligation (RO) is costing consumers about £2 billion a year and will have to rise to nearer £8 billion to meet the directive targets.

• The recently introduced Carbon Price Floor adds to these subsidies by increasing the wholesale price in the electricity markets thus benefiting renewables that do not pay the carbon tax. Assuming all wind farms currently consented are built, and a quarter of the generators currently in planning are built before 2017, the Carbon Price Floor will add about £1 billion a year to renewables subsidies in 2017.

• Additional system expenses, such as additional power lines, grid management measures, the cost of maintaining conventional generation equivalent to peak load to guarantee security of supply, are likely to be about £5 billion a year in 2020.

Dr Constable concludes: “Together with VAT this would bring the annual additional cost to consumers to upwards of £16 billion a year in 2020, over 1 per cent of current GDP.

“One third of this cost would hit households directly through their electricity bills, regardless of income, making it an intensely regressive measure.

“The remainder of the cost would be passed through from industrial and commercial customers and eventually be met by households from increases in the cost of living.

“The total impact would be in the order of £600 per household per year, assuming 26 million households.”

The on-going cost from renewable generators means that the figure for 2020 is likely to last for a decade, giving the entire programme a price tag in the region of £200 billion between 2002 and 2030, including system integration and VAT.

“Such an estimate can be indicative only, but establishes the order of magnitude; this is an extremely expensive policy, and fossil fuel prices have to rise to super-high levels to make this look competitive,” he says.

Whether this is worthwhile depends on whether a low carbon economy can be as productive or more so than today’s fossil-fuelled economy. Dr Constable describes this as a “very tall order”: energy sources are dense stocks of energy that are cheap to the consumer, whereas renewables draw on low density flows from natural energy cycles.

“It is simply facile to say, as the industry often does, that ‘the wind is free’. Coal and gas are free in the ground; but we have to extract, convert, and deliver the usable energy to a consumer, all of which activities have costs. Exactly the same is true of wind power, and for renewables the extraction, conversion, and delivery costs remain extremely high compared to fossil fuels.”

Dr Constable says that subsidies are holding back innovation in the green energy industry by removing the incentive to design the conversion devices that would be necessary to make renewables sustainable in the long-term.

“Subsidies, those transfers of wealth from the fossil-fuelled economy, are providing remarkable rates of return for short-term investors, but when these transfers cease, as they will when consumers tell politicians that the prospective or actual reductions in standards of living are unacceptable, the current green growth will evaporate like dew before the rising sun,” he says.

“A long term future for the green economy is only possible if the green energy sector is as economically productive as the fossil-fuelled one, but the renewables of today simply are not so.

“A green economy as prosperous as today’s fossil-fuelled economy is a theoretical possibility, but we can’t be more definite. However, we can be certain that our current policies are taking us further away from that possibility, not closer to it.”

In a further warning about the hazards of the hectic pursuit of decarbonisation, the director of the Energy Intensive Users Group – representing important sectors like steel and chemicals – warns that manufacturing is being damaged.

Jeremy Nicholson, in a separate paper also published today, says that British industries are being disadvantaged by the relative price of energy in the UK compared with that in Europe and elsewhere.

He says the issue is not with the long-term goal of decarbonisation itself but with “the loss of competitiveness that arises from going faster than our neighbours”.

“The problem we face at the moment is that for a variety of reasons – some to do with the necessity of reinvesting to maintain our power infrastructure and others with the long-term goal of decarbonising our energy supplies – energy prices are rising faster in the UK compared even with Europe, let alone emerging economies,” he writes in Why British Energy Policy Imperils Manufacturing Industries.

“By the government’s own estimates, UK electricity prices are going to increase by over £30 per megawatt hour by 2020. This is a larger increase in industrial prices than anywhere else in Europe, let alone countries like Russia, China, and India, and principally of course America – which not only doesn’t have direct climate costs but also has the benefit of cheap shale gas, which good for both gas and electricity consumers there.

“The independent Committee on Climate Change estimates climate policies already in place – renewables policies, taxation, EU emissions trading scheme and the carbon price floor – have already added 21% to industrial electricity prices. Furthermore, by 2020 carbon policies will drive up electricity prices by the order of 58%

“These are increases that won’t be experienced by our competitors elsewhere this strategy is not feasible when international competitors don’t have comparable costs that they need to pass on.”

Notes

Are Green Times Just Around the Corner? and Why British Energy Policy Imperils Manufacturing Industries are featured together in the sixth of series of research papers, entitled Ideas for Economic Growth, which Civitas is publishing as part of its Wealth of Nations project.

The purpose of Wealth of Nations is to explore how, amid the present economic difficulties, a free people can create prosperity that is widely shared and sustainable. This means exploring the optimum role for government and examining how public policy can best support the development of productive assets.

Previous publications in the Ideas for Economic Growth series can be accessed in the Economy section.

For further information contact:

Daniel Bentley
Communications Manager
Civitas

55 Tufton Street, London SW1P 3QL
T: 0207 799 6677
E: daniel.bentley@civitas.org.uk

Civitas: Institute for the Study of Civil Society is an independent social policy think tank that facilitates informed public debate on important issues of the day. It has no links to any political party and its research programme receives no state funding


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