Britain's Energy Disaster

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0:54Thanks for listening to A Long Time in Finance with Jonathan Ford and Neil Collins.

1:03The news from British industry, or as they say, what remains of it, is extremely bleak. Barely a week goes by without news of another major plant closing or the shelving of investment plans, which is essentially tantamount to a deferred closure notice. Just this week, Exxon announced it was closing its chemicals plant at Mossmorran in Scotland. And this year alone, We've seen the closure of the Stellantis or Vauxhall as it used to be car plant in Luton, the pausing of investment at the Mini plant in Oxford, the closure of two big oil refineries and another ethylene plant in Teesside. We've seen the UK shut its ammonia industry used for explosives and fertilisers and one of its largest glass fibre plants.

1:51For a long time we used to associate this with a natural process that Britain had moved beyond manufacturing would make all its money from hedge funds, banking, tourism and amusing apps on your phone. But maybe there's another process at work, namely that it's hard to justify making stuff in Britain when the cost of energy, a key input, is a multiple of that in many other countries. Britain has the highest industrial energy prices in the developed world and its domestic prices are in the top five. Industrial bills are 90 % higher than the average in Europe, and the gap between Britain and America is even more stark.

2:29So how did Britain end up with such high prices? Bad luck? A lack of resources? Or is it a question of policy? One where high prices might not be an intentional outcome in themselves, but are seen as a price worth paying to achieve a collateral objective. So we thought we'd present a brief history of energy policy since the 1980s, showing how a bad idea can take root. And in the end, I'd suggest, threaten an entire kingdom. So we're going back, Neil, to a point in time when you were in your prime. City editor of the Daily Telegraph and the era of Mrs Thatcher, because we're going to start with Mrs Thatcher.

3:09This is what she said in the autumn of 1988. And I think it was very significant in the context of what came afterwards. Recently, she told the Royal Society, three changes in atmospheric chemistry have become familiar subjects of concern. The first is the increase in the greenhouse gases, carbon dioxide, methane and chlorofluorocarbons, which has led some to fear that we are creating a global heat trap, which could lead to climatic instability. We're told that a warming effect of one degree centigrade per decade would greatly exceed the capacity of our natural habitat to cope. Such warming could would cause accelerated melting of glacial ice and a consequent increase in the sea level of several feet over the next century.

3:55So that was Mrs Thatcher. And basically, this speech kind of took this whole subject out of the realm of a minority of environmentalists into the mainstream. And this is what Jonathan Porritt, the head of the Friends of the Earth, had to say. He said it changed everything. Before Mrs Thatcher started to talk about the ozone layer and climate change, Lots of people said, these green issues are just for weirdos, tree-hugging. But if Mrs Thatcher's saying something like that, there may be something in it. Do you remember the speech? I'm afraid it didn't make a great impact on me at the time. Although, you know, it gets better as time's gone by, it must say it looks very prescient today.

4:37But of course, as well as being prescient about the science, she was very careful to emphasise that the world didn't have the science to tackle the problem effectively at that point. And she was very worried about intervening in something as fundamental as energy, which, after all, touches pretty much everything we do. It's all very well, for example, to talk about the principle that the polluter pays, but Mrs Thatcher, who's a very staunch defender of the motorist, was worried where that might lead you. And she said, if you apply that principle, otherwise everyone who drives a car would be liable.

5:12Mrs Thatcher's intervention changes the weather. From that date, you can see the international impetus moving towards paving the way to the Rio Conference in 1992 and then Kyoto in 1997. And while her successor, John Major, isn't very interested, he's happy to keep the legacy alive because Britain's sort of leading the world in climate change. And he appoints a very green environmental secretary in a man called John Gummer, who introduces Britain's first environmental taxes, the landfill tax. Yes, I remember that. Yeah. And Britain also set sort of soft greenhouse gas targets that are easily met.

5:51And they're met basically by the fact that in the 1990s, a lot of power utilities switch from coal to gas, which produces a lot less CO2. And that entrenches the idea that you can solve all these problems by changing the power system. Well, yes. And as a first approximation, that's true. the gain in terms of the amount of energy per tonne of CO2 you get from gas is hugely better than coal. And the dash for gas was one of the more sensible things that we did in those days. But then the problems started when gas and indeed oil were demonized and considered to be part of the problem rather than part of the solution.

6:40Sure. But the main point about the dash for gas is that it was done without any public subsidy at all. It was an entirely private sector endeavour. It was driven by the market. It was driven by the market. And gas was cheap and plentiful then and now. It was a logical move. And it certainly, at the very least, bought us a decade or three before any serious problem was going to arise with CO2. So we come to the end of the 90s and Britain has embarked, has been very successful in hitting its first environmental target, CO2 targets. Then we come to the years of Tony Blair where things change quite significantly and no doubt in ways that you won't entirely approve of.

7:25But basically he wasn't very green to begin with, Tony, and his first environment secretary was the splendid figure of John Prescott. A natural environmentalist, I'm sure. Despite having the nickname Two Jags, he turned out to be quite at home in the green sort of world. He basically didn't approve of roads, which is an odd thing for a Jag driver, because he liked public transport and home installation. And of course, he was sent by Tony Blair to Kyoto in 1997, where he did something very significant, which was he negotiated the first binding emissions target. It didn't bind America in the end, but it did bind Europe.

8:07Basically, Blair, who's initially rather indifferent to all this stuff, later becomes much more interested. I was told by somebody who used to work for him that the reason Blair became interested in energy policy and all that was that he basically thought green stuff would be a way of rehabilitating his image after the unfortunate experiment in Iraq, which had gone so well. And it's at this point, basically, that Britain, I think, takes a series of key decisions which set it on the route to where we are now, which is following a policy of really prioritising, almost to the exclusion of everything else, the construction of a renewables energy system.

8:50I agree with that. At the time, it didn't look like a bad idea. This sort of green and pleasant land run on the back of the rapidly falling price of solar panels and the attraction of putting windmills in the North Sea. It sort of seemed plausible. After all, once you've put down your solar panel, it looks after itself. And once you've built your windmill, it produces free energy. To be fair to Tony Blair, it's worth remembering that Nigel Lawson, I think was a hero of yours, had sort of got rid of the idea of energy white papers. There hadn't been one since the 1980s. And the energy secretary had disappeared as well because that was all the market was doing that now.

9:42So Blair brings all this back and has an energy white paper in 2003. And he basically says, well, look, we should be thinking about building nuclear power stations if we're going to decarbonise. But for various reasons, all to do with the early 2000s, one of which was that Britain's nuclear industry had just gone bust in 2002. Do you remember that? I do indeed. British energy, yes. Yes. Nuclear was the fuel that dare not speak its name because it wasn't even in the name of the company that ran it. And it was privatized at a very knockdown price since the government was so desperate to get rid of it.

10:17But even that price proved to be too high, which unfortunately, as you well know, and as you've chronicled many times, is the story of nuclear energy in the UK. but somehow it got sidelined I think probably because of the terrifying capital costs before you actually got something that worked and the fact that it seemed to get more and more expensive with time to build these things rather than cheaper. Well I think it was shelved for several reasons. One essentially Britain had sort of got out of it after building Sizewell B in the 1980s. The second is a lot of the opposition to nuclear energy in Europe was basically about safety and Chernobyl.

11:04People like the Austrians were incredibly opposed to any public money being used for this purpose whatsoever. And the EU had basically said in the mid-1990s, normally we don't like subsidies, but we're fine about renewable subsidies. So whereas the path towards the state being involved in nuclear construction was somewhat closed, the path to the state intervening in the market by encouraging renewables to be built was wide open with sort of everyone waggling fingers at the entry point. Yes, nuclear had been demonised. But so basically, at a really early stage in 2002, Britain basically puts all its chips, essentially, on building renewable, in Britain, really, wind farms, because solar is not particularly promising technology for weather reasons to deploy in the UK.

11:59Okay. We'll just very quickly summarise the subsidy regime that was created to take advantage of the window that was open to use effectively public money. I mean, there is a debate about whether it is public money. My view is taxpayers and people who buy electricity are one and the same. So it's basically a tax. But the subsidy system is created, which effectively offers people a premium over the wholesale price. If you build a wind farm, you're guaranteed that all your output will be purchased, and you will be paid a premium over the wholesale price of electricity, which is what you'd normally expect to get if you've sold it.

12:42And you get that indexed for 20 years. So it's a pretty good deal. And of course, that wholesale premium is paid for by the customer. Yeah, the risk to the investor is pretty marginal. The other point that's worth making is that this system, and indeed the one that followed it, are so complicated that there's plenty of room for politicians to hide, rather than exposing the true cost of what these both systems produced. Well, it's worth dwelling for a second on the concept of a subsidy, because both of us would probably agree that the idea behind a subsidy is to help an industry get going, which will then basically stand on its own two feet.

13:27You want a sunrise industry with a sunset subsidy. But in this case, it hasn't really worked out that way, because the subsidies have turned out to be pretty ineradicable. The subsidies have risen from 2.6 billion a year in about 2005 to more than 20 billion, in fact, heading out quite rapidly towards 30 billion now. Even though to some extent, you can argue that they moderated per unit of power generated, they're still very substantial. And there's no sign that they will ever go. I was going to say, I'm not even sure that I would agree with that, because some of the assumptions made on these offshore wind farms are heroic in terms of the life of the plant in this very harsh environment.

14:15The only way that the government is encouraging new development is to raise the price and extend the length of the contract, both of which are entirely against the spirit of a subsidy that you were talking about a moment ago. Sure. So we've described the world that's created, a world where this industry is going to be subsidised. It's not that people think that it's going to be permanently subsidised. There's constantly a kind of refrain that just round the corner, the problem will go away and everything will become cheaper. But I think it's interesting to look at how politically this whole idea got incredibly entrenched.

14:57The renewables obligation, which is this original subsidies created in 2002. Blair becomes very enthusiastic about building more renewables. He goes to an EU summit in 2007 and essentially agrees to an insane target which was never met, which was that 15 % of Britain's entire energy would come from renewables by 2020, which essentially would require almost the entire electricity system to have been turned to a renewable park by 2020. And his scientific advisor, a man called David King, says afterwards, quite coolly, he had no idea what he was signing up to. He didn't understand what was being asked.

15:39No. Which is worrying. I mean, the total energy, of course, includes things like motor cars. Yeah, yeah, sure. But despite all these things, there's a kind of suspension of realism, one senses. In 2000, I think it's 2006, when Lord Stern comes out with his report on the costs, the economics of climate change and all of that. He basically says it's going to be an absolute freebie. And everyone leaps on this and says, well, that's great. We can set even tougher targets for ourselves than the ones we've already set. So in 2008, the government then passes the Climate Change Act, which essentially locks this policy or sets it in stone or whatever, makes it incredibly difficult to tweak anything because it's entirely at that point driven by an outcome, which is cutting emissions.

16:31And the assumption is that the cost will be reasonable. But the point is the timetables have to be met, no matter what the cost. Is that not the case? Yeah, I think so. I think that when we look back from a safe distance, the climate change act may prove to be one of the acts of self-immolation of the british economy and it was passed with almost no discussion and with just five mps voting against one of the consequences of course of the climate change act in 2008 is it it means that you have to deploy even more of these renewables even faster. So the policy reaction in the Department of Energy is to find ways of building renewables quicker and scaling the whole thing up as fast as possible.

17:27And it's worth remembering that this is the period when the Liberal Democrats were running the Department of Energy. And essentially, once again, there was a sort of faltering thought that maybe we should do some nuclear power. Not with the Lib Dems. Not with the Lib Dems. Found lots and lots of ways to sort of make this even more expensive than it would otherwise have been. It was basically nuclear power, no thanks. Yeah, there's no real change in direction at all. But for the first time in the 2010s, you do start to see people slightly scratching their heads about the system that's been created.

18:01And there's one speech I'd quite like to draw your attention to, made by Amber Rudd, who was briefly the Energy Secretary in 2015 under the Conservative government. And she gave a speech where she basically raised two issues. She said, oh, one, the subsidies in this industry seem to be very, very stubborn. They don't seem to have gone down at all. In fact, they're going up a lot. What can we do about that? And the second thing she did was she noted the very fundamental point about renewables, which is that they are intermittent in the sense that They don't generate electricity all the time. They generate it when the sun and wind play ball.

18:39And the cost of backing up those units when they're not generating did not fall on the people who were building them. It fell on everybody else, the customer. Keeping the lights on is suddenly rather expensive. It is extraordinary then and now that they hadn't noticed that sometimes the wind didn't blow and sometimes the sun didn't shine. They seem to ignore that. Yes. So Amber Rudd, to her credit, raised the question, shouldn't they be responsible for meeting the costs of supplying power all the time? That idea kind of is kicked around for a couple of years. And Dieter Helm, the Oxford brain box.

19:23Voice of sanity, I think I would call him. case, the voice of sanity basically says this really ought to be done. And everything is too complex. And no one really understands what it costs. But he is sort of slightly cast into the outer darkness. And then we have the prime ministership of Theresa May, who starts by observing a bit like Amber Rudd had observed with the intermittency problem, observes that the cost of electricity has become surprisingly expensive in Britain, and is now becoming quite oppressive for poorer households, who she refers to as just about managing or jams, and says that she's going to do something about it and make their lives easier.

20:03But by the end of her prime ministership, which isn't overwhelmingly successful, she's complete or even long, complete or long has completely changed her mind. And despite the fact that she was concerned about these just about managing people. She basically moves the climate target from 80 % cut in emissions by 2050 to what we now call net zero, i.e. zero. And once again, to go back to your point, this is passed literally on the nod in the House of Commons. They don't even have a debate about it. It's passed through something called a statutory instrument, which is where a minister just turns up with a piece of paper and says, we're doing this.

20:42And it's just passed on the nod. We talked a lot about subsidy, But I think it's worth just looking at the actual price consequences of what the UK has done, which actually make it very clear to see why all these industries are now closing down. These are non-domestic prices of electricity per kilowatt hour. In 2004, if you were in a business in the UK, you would pay 3.72p per kilowatt hour of electricity. By 2009, that had gone up to 8.56. So it had more than doubled, it'd gone up 130%. And in part, that was because fossil fuel prices went up in the 2000s. But it's also because of all the subsidy, which you're effectively paying.

21:26By 2019, that had risen to 13.25p. So that's up 256 % over 2004 prices. And by 2024, it's 25.45p, which is 584 % increased on 2004. So is it any surprise that businesses can't justify investing in the UK when they're going to have to pay these massive premiums? So that's five shillings to run a one bar electric fire for an hour. Yeah, and if you think about the steelworks, it requires a lot of electric bar fires. I mean, the other thing to notice about what's happening is the fact that effectively, the world which we're supposed to be creating is one in which electricity usage increases across the economy as we switch from oil and gas to electricity to do things.

22:21But in fact, what we see is, is actually electricity supply is falling. And it's falling largely because what we are doing is the most incredible thing. We are basically replacing the existing infrastructure we have to supply power in the UK with a system which has the dual characteristics of being incredibly capital intensive, i.e. you've got to put a lot of capital in to get the whole thing up and running, but also considerably less productive than what it's replacing. So people talk about there's a productivity puzzle in the UK, but is it such a puzzle when we do things like this? No, there is no puzzle.

23:04And the reason why electricity consumption is falling is because the price has been pushed up so far. As you said at the beginning, it's leading to closures of all these plants. It's leading to painfully high domestic electricity bills. we are replacing what was a reasonably sophisticated and efficient system with one which is by its very nature unreliable. And therefore it needs to have backup from some more conventional supplier of electricity for the days when the sun doesn't shine and the wind doesn't blow. And there are more of those than you might imagine. So what can we do? we now have a situation where we are I think we're about 45 % of our electricity comes from renewables now under the great 2030 plan it will be close to 100 and of course these problems we've been talking about become more and more acute the bigger the proportion of the overall electricity system it represents we are now I think in a situation where it's becoming genuinely questionable whether we can continue to, I mean, forget about all the idea that Britain is going to be part of some AI revolution with enormous data sensors consuming terawatts of power every year, because we can barely do what we're doing now.

24:31Barely keep the lights on. Indeed, there have been one or two times when it's been quite close to rolling blackouts, when there's been no wind and very cold, which is what happens in the winter. A bit like today. What we know is that politically, we described a kind of consensus. And that consensus is clearly beginning to break down in that certainly the Reform Party basically just want to ditch net zero altogether. And the Conservative Party want to cut carbon taxes on gas, fire, electricity and at least one of the big subsidy schemes, the so-called renewable obligations scheme, in a kind of dramatic way trying to bring down some of the costs which are falling on consumers.

25:18I would say the present government's approach is by and large to offer cross-subsidies from one set of users to another to try and sort of staunch the problem in industry, for example, by saying, well, the average consumer should just cross-subsidise the costs which will still be there, the subsidy costs which will still be there, in order to help industry bring down its bills a bit. Yes, they're not actually helping industry as a whole. They're picking individual businesses and individual companies and basically saying, oh, well, you can have a subsidy. Yes. And by the way, it'll be paid for by everybody else, which of course means that over time there'll be more and more industries and businesses which say, well, we can't afford to continue here because the cost of electricity is too high.

26:08So the government will then be in a position to say, well, sorry, you either go out of business or we give you another subsidy which will be paid for by the remaining consumers of electricity who are not getting the subsidy. and you can see this most dramatically in the steel industry yeah where as far as one can tell the way that the steel industry is being kept alive is by the promise of continuing subsidies for the foreseeable future so i think you have to do something to sort of change the weather and i think the first thing you have to do is you clearly have a piece of legislation in the climate change Act, which is incredibly unhelpful and makes it almost impossible really to change direction at all.

26:57Because once everything is agreed, it's locked firmly into law and can't be amended apart from amending the whole statute. So my view is, if you have a Climate Change Act where the body's so-called Climate Change Committee, which oversees it, is operating on the assumption as it currently is that the price of offshore wind is£51 per megawatt hour, when the government is in the middle of an auction where it's going to be trying to pay or get taxpayers to pay£113 for megawatt hour. That's clearly a non-functioning system and needs to be reformed. I would go even more fundamental than that and say they really have to tell the truth.

27:41And that's the most difficult thing for a politician to be able to say that we got this wrong. and the path we are on is unsustainable and therefore we must not sustain it. And then you say the first step is to at least severely amend the Climate Change Act, if not abolish it. Politicians generally, and certainly the Labour administration, is still in denial that this is a really important systemic problem. I think that's right. Although I think the government has this capacity, a very curious one, which is they kind of acknowledge the existence of problems, but they put them into separate boxes.

28:27So they say, well, we have a problem with the steel industry, so let's give them a subsidy. So everything is about patching up immediate problems rather than dealing with the underlying issue, which is very simple, that if electricity costs remain at stratospheric levels, you will find that all high energy using industry will either abandon you or will not get built in the first place in the case of all these data centres that they want to populate the UK with. But all manufacturing requires energy. In the end, the things that manufacturing makes will be made in areas where the energy price is competitive.

29:11There's also an urgent issue, which is to keep the lights on. That would be a help, yes. And I do think that the other thing which the government urgently need to do is to switch from a policy of building more renewables to one of building more gas powered. If we're not careful, we will find ourselves because building gas power stations is itself not easy because apparently the lead times on ordering gas turbines, we haven't ordered any for about 20 years, for power stations is now quite long. So we will end up building coal-fired power stations if we're not careful because we'll have no alternative.

29:53I don't think they're any easier because the real bottleneck is in the turbines and the turbine manufacturers are the ones that are overwhelmed with orders. So I think that the same applies to coal as applies to gas. But something needs to be done pretty damn quickly, I think. And it goes all back. I mean, essentially, it does go back in a way to, I think we should end with Mrs. Thatcher's original observation, which is if you tinker with this system, you have to get your technologies right. Because structurally, this touches everything. I would end by saying that the first move of any addict is to admit they have a problem and they have to address it.

30:39That was A Long Time in Finance with Jonathan Ford and Neil Collins. Production and editing by Nick Hilton and our sponsorship partner is Briefcase.news. If you enjoyed the show, please rate and review it on your podcast app, as that will help new listeners find us.