7 Aug 2011

How the market will decide our energy future

Recently articles from both the TUC and CBI have bemoaned the burden of increasing energy costs on energy intensive businesses. Both organisations make the rather obvious error in thinking that a carbon price will inevitably drive the cost of energy upwards. In fact, the opposite is true. The stronger the price signal, the faster the market works to balance supply with demand.

The supply of fossil fuels is finite. Conventional oil has already peaked its supply (as admitted by the chief economist of the IEA) and tar sands and fracking are far too damaging to the environment to continue as more and more countries consider bans. Fossil fuel extraction, meanwhile, is being attacked from every side, with the UK banning new coal power without CCS and a rising tide of civil disobedience in the US following Tim De Christopher's brilliant example.

What's left is Nuclear and renewables. Nuclear has been scheduled for phase out by Japan and Germany, while France, the UK, US, India and China all push towards expansion. Everyone, however, is investing heavily in renewable energy. The US now has more renewable generating capacity than it does nuclear.

"According to Clean Edge research, the global market for solar photovoltaics has expanded from just 1.7 billion euros in 2000 to 49.5 billion euros in 2010. Biofuels and wind power are following a similar trend. They project these three technologies will grow to 243.2 billion euros in the next decade."

The consequence? The costs of renewable energy are tumbling. Expert analysts are predicting that renewable energy will be cheaper than coal by 2015

"fossil fuels are subsidised to the tune of more than $300bn per annum (according to the International Energy Agency), and that doesn't even include the cost of security - which we pay through our taxes, not at the pump - or the health costs from particulates and other forms of pollution -- which we pay through our health bills."

All this price signal is having results - individual investments are getting bigger and more ambitous. There is no longer any need to protect businesses from high energy prices, because it is rising fossil fuel prices, happening without any help from governments, combined with falling renewable energy prices, that is prompting people to make sound business decisions.

But the government does have a role to play. The stronger the price signal, the faster the market turns, and the faster it turns, the sooner businesses start to benefit from the long term stability and economic certainty of permanently low energy prices.

Technology is driven faster as well. Engines, turbines and batteries that don't need rare earth metals, making them significantly cheaper to mass-produce, are on the horizon. Electric cars can be used to balance out supply and demand over smart grids and even store the power generated by your rooftop power station. Innovation is going so fast in these areas it's hard to keep up, and every advance points to cheaper energy generation, and more convenient forms of storage.

The UN has predicted that it will be technically and economically feasible for the entire world to be run on renewables by 2030 as well as being extremely desirable to avoid the twin threats of climate change and peak oil.

So bring on the carbon pricing - Push the market as hard as you can, Mr Huhne. We need it.

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