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."
source

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."
source

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.

Progress on Climate Manifesto

Five years ago I laid out a series of measures that I felt it was necessary to implement to achieve a rapid energy descent. It's time to review current proposals by the UK Government against those measures.

Target One

New fossil-fuel power stations to be banned by 2010 unless they have negligible CO2 emissions. Existing stations to be retro-fitted with sequestration systems by 2015, unless they are due to close by 2025 (said closure to be mandatory at that date).

The coalition agreement contains the following:

"The establishment of an emissions performance standard that will prevent coal-fired power stations being built unless they are equipped with sufficient CCS to meet the emissions performance standard."

"Continuation of the present Government’s proposals for public sector investment in CCS technology for four coal-fired power stations; and a specific commitment to reduce central government carbon emissions by 10 per cent within 12 months."

Target Two

No new road vehicles to be licensed after 2012 (private) and 2015 (commercial) unless they have negligible CO2 emissions. No old road vehicles to be licensed after 2020 (private) and 2025 (commercial) unless they have negligible CO2 emissions.

The coalition agreement contains the following:

"Mandating a national recharging network for electric and plug-in hybrid vehicles."

This comes on top of the existing framework of tax incentives for low-emission cars and a general move towards stimulating innovation and manufacturing in the area. It does appear to be all about the carrot and very little stick, at the moment, thanks to a militant motoring lobby.

Target Three

A policy to move towards smaller, localised schools, hospitals and industries, exchanging economies of scale for the reduction in energy costs of the journeys that large central organisations require.

While it has stumbled, and is far too heavily concentrated on new development instead of fixing existing developments, the Eco-towns initiative adopts these principles, and the rhetoric generally has shifted away from centralised service provision.

The coalition agreement contains the following:

"The parties will promote the radical devolution of power and greater financial autonomy to local government and community groups. This will include a full review of local government finance."

Target Four

Home Improvement grants to be provided (funded by the carbon tax below) for the installation of all forms of renewable energy capture/generation in domestic properties and commercial or civic buildings. Building regulations to be changed so that all new buildings must be significantly more energy efficient and derive at least 50% of their energy needs from on-site energy capture/generation.

Several improvements have been made over the past few years to building regulations to improve new house emissions in Scotland and the UK as a whole

The coalition agreement contains the following:

"The establishment of a smart grid and the roll-out of smart meters."

"The full establishment of feed-in tariff systems in electricity – as well as the maintenance of banded ROCs."

"The provision of home energy improvement paid for by the savings from lower energy bills."

"Retention of energy performance certificates while scrapping HIPs."

Target Five

Carbon tax to be introduced at a very low level - £1 per tonne carbon in 2010 - with a built in geometric escalation. The level should increase by 25% per year for 20 years so that by 2030 it will be £86.70/tonne. The predictability of this escalation will give planners time and reason to adapt to the economic regime.

The coalition agreement contains the following:

"The provision of a floor price for carbon, as well as efforts to persuade the EU to move towards full auctioning of ETS permits."

Progress

Overall I would say we are about half-way there in terms of the rhetoric, and 25% of the way in terms of the actual concrete initiatives.

Of course, I am not claiming any credit - as far as I can tell the manifesto has been read by about fifty people and circulated to no-one!