The cost of sustainability

Successive governments have pursued ambitious renewables targets, but now the costs are starting to bite, says Nick Linklater.

The consensus is that the UK will need to invest £110 billion between 2013 and 2020 in the plant and infrastructure required to realise its green targets. To finance this, electricity customers are paying a premium embedded in their utility bills. Meeting the government’s ambitious targets for reducing carbon emissions has been, and will continue to be, a costly burden.
For Britain’s power sector, “going green” and the impact of the Large Combustion Plant Directive has forced the closure of coal and oil power plants before the end of their planned operating lives. The consequence, as Ofgem concedes, is that Britain will have seen the phasing out of 15.5GW of coal and oil generation between 2011 and 2016 without any compensating construction.
 It is not until 2016 that a new 1GW gas plant is due to come online. The delay in building new plant is primarily the result of market uncertainty and a lack of government leadership. As a result, the UK’s generating capacity has shrunk from 93GW in 2010 to around 80GW today. However, what is really concerning is the size of reserve capacity, which is around 14 per cent currently and is forecast by Ofgem to drop to just 4 per cent over the next three years.
Cutting fossil fuel generation in order to cut greenhouse emissions was perhaps an obvious approach. The other main approach to creating a sustainable future rests on boosting renewables such as wind and solar. Both the previous and the current government introduced generous subsidies and feed-in tariffs for wind and solar farms in order to boost the contribution of renewables, all to be paid for by green taxes.
As a result, over 20 per cent of businesses’ electricity bills are made of green taxes and levies, according to Benny Peiser, director of the Global Warming Policy Foundation. Generous subsidies and government support for renewables, whether on an industrial or domestic scale, has seen a doubling of Britain’s renewable capacity in just five years, to 12 per cent today. It is anticipated that without a major reduction in the level of subsidies, this upward trend will continue until renewable generation grows to around 30 per cent of total capacity by 2020.
However, growing public and business concern over steep rises in energy bills may slow this growth. Already, the government has promised a reduction in the green taxes embedded in energy bills, and at the same time has reduced the Eco obligations on suppliers. Then there is the very public cancellation of the Bristol Channel windfarm and a promised review of carbon targets in 2014.
In addition to the cost of building plant, a lot of new network infrastructure is needed, all of which adds to the bill. In order to cope with the new demands on the national and regional grids the system has had to be effectively redesigned and rewired. For example, a new 400km high-voltage undersea power cable has been laid to link Aryshire in Scotland with the Wirral in Merseyside to enable Scotland to export power to England and Wales. This £750 million project has added £10 a year for each of the past four years to the typical household’s bill.
Despite the government creating a seemingly most generous environment for renewables, it would appear that many of our utilities have not played ball either in terms of investment or meeting their Eco obligations. According to Ofgem’s analysis, profit margins of four of the big six power companies have doubled in the past few years.
Indeed, British Gas, Npower, Scottish Power and SSE appear to enjoy a profit margin of around 5 per cent which, as media headlines have pointed out, is well above the supermarkets’ average profit margin of around 2 per cent.
Government policy currently envisages a sustainable future based on an increasing contribution of renewables, supported by a new string of gas and nuclear power stations, to ensure energy security, diversity of supply and affordability. But it is also becoming apparent that the current government is keen to support the rapid exploration of shale gas, which will give a big boost to any efforts to slash carbon emissions.