The UK Green Energy Policy Shambles

By: Andrew_McKillop

GREEN TAPE AND BUSINESS DONT MIX
BusinessEurope president Jürgen Thumann speaking to EurActiv at the European Business Summit, May 15, squarely blamed the European Commission for "the negative effects of green tape”, also saying EU regulations create ‘unnecessary burdensome legislative instruments in climate, energy and environment policies’.  The UK Energy Intensive Users Group, an umbrella group that represents a dozen or more energy intensive sectors such as steel, cement, paper and chemicals which have no option but to compete on international markets, often have 70% or more of their operating costs swallowed by energy purchases.  These industries are therefore very sensitive to the relative price of energy in the national economy. The EIUG's Director Jeremy Nicholson is outspoken on the negative impacts of Europe's "green tape", like its European continental opposite numbers which include Eurogas, the industry group representing the heavily penalized European gas industry.

In a series of articles and comments published this month by Civitas UK, under the heading "Ideas For Economic Growth", we find articles by Jeremy Nicholson and by Dr John Constable, the Director of the UK Renewable Energy Foundation, and author of The Green Mirage: Why a low carbon economy may be further off than we think (London, 2011).

Both start by a quick look at the basic facts, the first of which is that UK energy prices are among the highest in Europe and the world. Forecourt filling station prices for oil in the form of gasoline and gasoil fuel run at around $400 a barrel. Electricity prices are already high by European and world standards, but even worse, are surely and certainly set to rise by large amounts. Gas prices are also set to rise, due to the combined impact of the Renewable Heat Incentive, which was given all-party support in parliament, whatever the shading of apparent political opinion of Opposition and Government, and the utilization of oil-indexing for the pricing of Britain's increasing gas imports from international suppliers, notably Gazprom and Qatar.

In the case of the Renewable Heat Incentive, unlike coming levies on electricity bills to fund the UK's massively ambitious offshore windfarm programme, much of its costs will be borne through general taxation rather than a levy on gas bills, a relief for energy intensive industries.

CARBON LEAKAGE
The Civitas articles show the chart from a report commissioned by the UK Department for Business Innovation and Skills in 2012, concerning the so-called "carbon leakage threat", which is Green Correct terminology for energy intensive industries relocating from countries with high-priced energy and strict carbon controls, to less carbon constrained countries with cheaper energy, thereby increasing world total carbon emissions. This is not a "threat" but a major, known and increasing trend.

The chart also helps explain why Italy and the UK are the two European countries which have suffered the most intense de-industrialization since 2000, due to their extreme-high energy costs, as well as the application of Europe's green energy policies and anti-global warming policies. Interestingly enough, France comes much lower on the scale of electricity prices in Europe, due to its heavily subsidized national nuclear power programme, but this has barely improved France's competitiveness relative to the UK and Italy.

Both articles (by Nicholson and Constable) show that the UK faces particularly difficult energy challenges, as well as those of its own policy making. Firstly the UK already needed to reinvest in its power infrastructure, without which power prices would have risen even in the absence of the policy goal of decarbonising national energy supplies. With the combined impact of persistent long-term underinvestment in the power sector, and the "green policy goals", by 2010 it was necessary for the UK Department of Energy and Climate Change to suggest industrial energy users would see a 60-70% increase in electricity prices by 2020, and a 40% increase in industrial gas prices. Only in the second case and only due to the US shale gas revolution and fast-growing global LNG capacity, is it likely this will be a too-pessimistic forecast.

As both authors point out, Germany’s industrial electricity costs are lower than the UK despite it having some of the most ambitious renewable energy targets in the whole of Europe, and the world. The Energiewende sets what are certainly Europe's most expensive renewable energy goals but Germany has achieved them using a very different approach to decarbonisation. Despite being bound by the same EU legislation (the climate-energy package and REAPs) as the UK and other EU States on this subject, they have combined a hugely expensive renewable programme with huge discounts for trade-exposed energy intensive industries in order to preserve competitiveness. Instead of German industrial consumers paying over €40 (about $51) a Megawatthour for their renewable energy and €20 for their Eco-tax, as in the UK, industrial users of electricity enjoy a 90% discount on their Eco-tax.

CARBON LEVIES
How each Member State interprets and applies the Dec 2008 EU climate-energy package is decided by its national government. In the UK all that can be said is that successive Labour then Conservative-Lib Dem governments have applied the stick rather than carrot. The tax elements that are inflating the bill for UK industrial consumers start with the Climate Change Levy, which is a flat tax on energy consumption, and the Carbon Price Floor, set to start in April 2013, which is a unilateral UK charge on carbon emissions. Added to these, there are both Feed-In Tariffs for small scale renewables and the Renewables Obligation, the cost of which is set by law to rise every year.

Increases in electricity prices in the UK, by 2020, the authors say, could well exceed $50 or 40 euros - an increase in power prices equal to the current total average price of electricity in countries as widely different in ideology and economic status as the USA, Russia, China and India. Troubling detials of the UK governmental attitude and policy to this subject include its chosen way of intepreting the interaction of its Carbon Price Floor and the troubled, near-collapsed EU Emissions Trading System (EU ETS), in the UK. The ETS is often treated as able to recover to price levels three times current levels (May 2013), and if not ETS-related charges will be applied "as if" recovery had taken place. The current UK governmental negotiating stance on this subject, with UK industrial users of electricity, is the offer of a £250 million annual rebate, which as the authors say, sounds like a lot of money on a personal level but is only a drop in the ocean compared with the actual combined costs of UK decarbonization measures across industry. It is tiny compared with equivalent package in Germany, which is roughly providing €8-9 billion per year as compensation to power users.

Basically, Germany has been careful not to push its own industry out of business while pursuing
decarbonisation, but the UK has chosen a reckless path.

In the UK, non-private users of all kinds are especially targeted for high-priced electricty. The Independent Committee on Climate Change’s estimates, shown in the Civitas special issue, May 2013, add the likely or planned costs of the individual components of specific UK climate policies and renewable energy policies. For industry it estimates an average rise of power prices of 58% by 2020. Outside of the UK but in Europe, in many cases, other EU states will have no increases whatsoever, attributable to these specific UK intepretations of EU climate-energy policy goals.

This underlines the basic and massive dangers of a "green energy policy shambles" across Europe, because as the two authors of the cited articles say, if the UK's chosen policies were part of a global agreement on climate change, industry would be quite relaxed about it, and inflated energy costs could be passed on to the end consumer. The price rises may have had an economic impact but it would not have destroyed the competitiveness of industry - the UK strategy is therefore not feasible when international competitors do not have comparable costs they have to pass on.

GREEN INIQUITY
The June 2009 European Union Renewable Energy Directive which transposed the 2008 climate-energy package into national member state law requires that a minimum of 15% of the United Kingdom’s total final energy consumption comes from renewable sources by 2020. The increase of nearly 33% in the role of renewables, to attain 15% by 2020 in the UK, is one of the highest growth requirements in Europe.

Constable says that not only is the UK’s burden or share disproportionate, but the distribution of costs is also iniquitous, with the government’s own estimate showing that the UK will carry 25% of all spending costs, across Europe, for the total EU-wide application of the directive. The UK's population is very close to 12% of total EU population.

UK government interpretation of how to attain the target by the Labour, then Lib Dem-Conservative governments, was to target more than 30% of UK electricity from renewables by 2020. This can be called a "very ambitious target", but its costs and even feasibility can be heavily criticized, because the costs were blatantly underestimated, and the programme's feasibility was probably overestimated.
 
Multiple examples of runaway growth in subsidy cost and needed energy taxes are given by both authors. The Renewables Obligation, combined with the Carbon Price Floor will in some cases such as onshore windfarms result in a 40% increase in net payments made to already heavily subsidized onshore windfarm operators. Also, all currently built renewables and anything built before 2017 will see an increase in subsidy.

Bothe authors, we can note, are higly optimistic regarding UK development of shale gas, because as they say "If we can capitalise on the opportunity that shale gas offers in a similar way to US development, then the benefits for the UK will be numerous". In particular the now-rampant de-industrialization of the UK economy could be halted or at least massively slowed down, while limiting or eradicating fuel poverty and increasing tax revenues. At present however, due to the UK's chosen policy set, both electricity and gas consumers in the UK will be paying a minimum extra of £16
billion a year by 2020 for their energy supplies

This makes the present UK "soft energy path" iniquitous and an intensely regressive measure, the authors say. As the authors show in their charts and tables, even if no further renewable energy targets are brought forward, the need to support investments to the end of their lives creates a legally committed on-cost of 20 years for each generator. In other words a renewable generator built in 2020 will remain as a burden to consumers until 2039. Overall and due to this, even if the UK stopped its "clean energy programme" tomorrow, the authors calculate that costs only to 2030, including
system costs and spending-related taxation (VAT), would be in the region of £200 billion.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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