The premises of tomorrow’s Energy Bill are fundamentally wrong

The Energy Bill whose second reading is tomorrow has been presented by the Government and the press as a bitterly fought compromise between the Tories and LibDems in which the latter have secured an extra £7.6bn at today’s prices to support nuclear and renewables up to 2020, while the former have secured the dropping of the target to decarbonise the electricity supply by 2030.

That is the picture presented to the public. It is however a profound misrepresentation both of the bill’s contents and of the nature of Britain’s current energy problems. There are two key mechanisms in the bill which are not even mentioned, but which contain the essence of what this bill is in reality all about.

The first is the awkwardly titled Contracts for Difference. Under this the government would agree a ‘strike price’ with an electricity generator (EDF) , offering a guaranteed payment for each MWh of electricity. If the market price is below this, the government commits to make up the difference. This gives nuclear generators a built-in guarantee that they will get the necessary return on their investment – and nuclear plants don’t come cheap at £8bn a time – courtesy of the taxpayer. Government answers (Hansard 8 March 2011) have stated that the cost of generating new electricity will be up to £98/MWh.

Even EDF Energy’s chief executive has estimated the strike price will be £140/MWh, which implies public subsidy costs of over £4bn. What DECC is keeping very quiet about is that nuclear costs are on an ever-rising spiral, while renewable costs are set to fall dramatically – offshore wind to under £100/MWh by 2020, domestic solar tariffs to £77/MWh by 2015, while large-scale solar will reach grid parity prices within the coming year. The whole bill therefore is designed to subsidise at public expense (contrary to constant government promises) an uncompetitive nuclear.

Then there is the ‘capacity mechanism’. Whilst Contracts for Difference bail out nuclear, this mechanism bails out the old fossil fuels. As more renewables come on to the system, they drive down the profitabiolity of fossil fuel generation since wind, waves and sun are free, unlike gas. The obvious policy therefore is to give renewables priority in meeting grid requirements, leaving the more expensive and polluting fossil fuels to fill in the gaps.

That is exactly what is done in Germany which has reduced the price of electricity at peak demand by 25-40%. If that were done in the UK, it is estimated it would generate 7,700 jobs and remove 9 out of 10 families from fuel poverty. But the ’capacity markets’ proposed in the bill will perversely reward the bulk of market incentives to fossil fuels.

There is a further absurdity in this bill. DECC’s own Demand Reduction Project destroys the case for any new nuclear power stations at all. It says ”We have identified approx. 155 TWh of demand reduction potential, which is actually substantially more than the electricity which the 8 new nuclear power stations are expected to generate (about 102 TWh per year). So is it not far, far better to save 155 TWh of electricity rather than generate much less at colossally greater expense and hugely more damage to the environment?