More Expensive Than What?

We keep hearing that low-carbon energy is more expensive. It's a pretty consistent meme pedalled by the right-wing media on both sides of the Atlantic. The further right the media, the more ruinous the expense. The left wing media tells a very different story, insisting that low-carbon energy is an investment with a long term payback.

But there is a little point here that's often overlooked by both sides. Fossil fuel burning is all about building cheap power stations and then buying in the fuel at whatever the market price may be, whereas the low-carbon alternatives are all about upfront capital costs, followed by almost-free running costs. (I'm excluding biomass here - it's much more like a fossil fuel in this respect).

So immediately you have a problem in that you are comparing apples and oranges. There's no easy way to tell which energy source is more expensive because you don't know what the future holds. To do that, you would need to know the price of fossil fuels many years ahead - like 25 or 50 years ahead. Only then would you be able to calculate which method had been more expensive. In effect, would the cost of fossil fuel burning be greater or less than the cost of financing the building of the low-carbon plant.

Now problems like this are not unusual. Businesses face them all the time. Consider a timber frame company thinking about investing £1 million in a fancy cutting machine which could automate the production line and reduce manpower costs by £250k a year. Even after factoring in a finance charge for the machine, it seems to make financial sense to spend the money. The business will reduce its costs and thus be more competitive, which should bring in more work and the production people who would lose their jobs in the joinery shop may be found new roles in the expanded business.

But the decision is not without risks. For instance, the amount of business being done might collapse and the projected savings of £250k per annum might not materialise. On the other hand, without the cutting machine, the prices charged by the business might become uncompetitive and the business could go into decline. Only with hindsight can you tell whether the decision to invest in a cutting machine is a good one. The question facing the directors is "Is it worth spending the extra money on this machine?" not "Which option is the most expensive?"

It's not so very different with our energy choices. We are not in a position to answer the more expensive question - there is simply no way of knowing until the capital investments we make now have run their course. As it stands, the capital markets are too timid to take the plunge and invest without some guarantee that they will see a return. Their fear is that the future price of energy will still be set by the availability of fossil fuels (and not mitigated by a carbon tax) and that if the price of fossil fuels falls below their financing costs, then they will have to bear a loss on every unit of energy they sell. Whereas the price of fossil fuels can rise and fall in response to supply and demand, the cost of finance is fixed at the outset, and fixed for a very long time.

Hence all the subsidies which governments are using to kickstart low-carbon energy production. The subsidies are not there because low-carbon energy "is more expensive", but because investors don't want to take a punt on fossil fuel costs many years ahead. Hence the need to socialise the decision, or for governments to shoulder the risk.

The trap which the government has fallen into is taking the green subsidy money from utility providers. If low-carbon energy is seen as a social good — which it is — then the money to get it off the ground should come from general taxation, where it would be lost in the mire, along with spending on healthcare, education and my bete noir HS2. Instead we have it pegged to our utility bills and there it's bound to become more and more unpopular as the Mail and the Telegraph continue to highlight just how much of our bills is going on subsidies.