15 Aug 2013

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.


  1. But what do you do to outlast this unfashionable era for Eco-upgraders? Will it turn around? Will people believe in a lo-carbon future after fracking? Or should the few just dig in and anticipate saying 'told you so' as the UK burns. Sigh!

  2. Just keep on talking the truth, and where possible doing it (but not necessarily in a rigorous 'walking my talk' way, which is an invitation to exposure as a fraud!). Simply creating and reinforcing the lively field of knowledge, and exemplars on the ground, is all most of us need to do.

    Don't get co-opted into accepting or practising 'least worst' solutions, except to expose their inadequacy. e.g. don't say that fracking and/or nuclear is OK or inevitable to 'bridge the gap' just because no one's going to get their head around serious demand reduction.

  3. Mark

    This of course raises the rather obvious question of how to get energy companies to invest in low carbon energy in the long run. The only option really seems to be to put a higher price on carbon.

    Even if renewables reach "grid partity" (whatever grid parity means) there is still, as you say, a very real risk that the costs of fossil fuels will come down and the investment will not work out. So, the levelised costs of renewables or nuclear will presumably need to be significantly lower than those of gas to drive massive investment in them. A carbon tax would put a floor on the price of fossil fuel electricity, so should provide reasonable long term certainty to investors in low carbon energy. The ETS of course is such a bad joke (and people just want to "reform" it), so this option may not come on the table for many years to come.

    The alternative is nationalisation of electricity production. This would make more sense than the current policy the government likes to pretend is market based, which it blatantly is not. The weakness with that is that government's could easily decide to invest in things that are seen as politically correct but not very effective, such as solar panels, over more effective but politically incorrect options.

    Either way it is clear that current policies are not working.

  4. ***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.***

    The other side of the coin is that this is the most democratic way of doing it.

    And as to investment vs capital costs.

    I really doesn't help that wind and solar power is being pushed as a big solution, wind farms have a design life of 20 years, with the markets being what they are, and that time-frame, I don't think they make a sensible choice money-wise, they will increase cost, they don't provide reliable supply, what problem do they fix?

    We could instead spend that 20 years building massive tidal power facilities that will have proper long term lives and returns with stable supply, and we could do it with the taxes from shale.

    And solar, that's a dead duck in the UK.

    *don't say that fracking and/or nuclear is OK or inevitable to 'bridge the gap' just because no one's going to get their head around serious demand reduction.*

    What is there to get your head around, we are using more computers, electric cars will only become more, not less common, more houses are building built.

    Demand reduction is a fantasy, I don't understand what there is to "get our heads around"?

  5. Just a small point but the Renewable Heat Incentive is indeed paid for out of Government spending (taxpayers money) not the Levy on bills used for PV and wind. That of course brings its own complications!

  6. Demand reduction is a fantasy, I don't understand what there is to "get our heads around"?

    Try http://www.greenbuildingforum.co.uk

  7. And what am I supposed to be looking at on that link?

    Green *Building*, oh, so more buildings then, yes, I'm sure that will reduce demand.

    You can stick solar panels,and roof insulation into houses, and all you do is stand still, more computers, more houses, electric cars coming in the future.

    Sorry, don't see demand reduction as anything but fantasy.

  8. It's everything...

    Silver bullet decriers present the climate change problem as unfixable..by one major decision or initiative.

    But it's possible that we escape the borders of hell, pulling a 180 in our handcart, by just enough people doing just enough different modest things, to prevent just enough carbon clogging up our skies.

    Moaning about lack of coordination, conflicting strategies, other countries, weaknesses of this or that option, is the sound people make when they wash their hands of the problem...and duck their responsibility.

    Do what you can.