277. How to make green energy a vote winner

0:00Energy is really misunderstood. Costing households and it's costing businesses and it's making the economy uncompetitive. Completely agree that the electricity price is a problem. I think the next sentence though often in the political debate is, and that's because of net zero or because of the renewables. Which is rubbish. Which is rubbish. Investors, as you know, Robert, aren't fans of change and change to markets and 25-year infrastructure projects. Investor certainty to get the stuff built or consumer benefit pre-2030. Clean energy is a very attractive destination. Why is it so apparently politically unpopular?

0:34And what does any government do about it? We're delighted to say that this year the rest is money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six? You know what? We've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. We thought the market was stable, then Aldi and Little turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that.

1:15Energy could well be going that direction. Cheers, Greg, and thank you for powering this episode of The Rest is Money. We're the Hartford, with decades of experience insuring millions of unique small businesses. When it comes to your small business insurance, Thank you. one size absolutely does not fit all. Get a quote or find an agent today at thehartford.com slash smallbusiness. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more.

1:49Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs.

2:17Hello and welcome to The Rest is Money with me, Robert Peston. Steph's away doing exciting stuff, but I'm delighted to be joined by Emma Pinchbeck, who is the chief executive of the government's climate change committee. That's the body that advises it on whether it's meeting its climate targets, whether the government is protecting us enough from heat waves and floods and even droughts in some circumstances that are the result of climate change. Before that, she actually represented the energy industry. She was on the other side of the fence running a body, a trade body called Energy UK. And what I really want to talk to her about are really two big questions.

3:04One is, how do you get the cost of energy down now without knocking us off course when it comes to meeting climate targets? If indeed, you know, some of you may not think climate targets are important. And again, let's let's let's one of the things I'm going to talk about with her is whether in a Trump world we should be so fixated on hitting those climate targets. But then there's another big thing, which is actually the big prize if we make this climate transition to a UK that no longer has to import oil and gas is we're going to be self-sufficient. And actually, the marginal cost of renewables is pretty low.

3:49So why this route that we're on to self-sufficiency in low-cost energy, seemingly so politically unpopular? A lot to chew over with Emma Pinchbeck, and here's our conversation. Emma, very good to see you. I suppose what I wanted to start by asking you is a very big question, which is, you know, at a time when we've now seen these two major conflicts, Putin's illegal invasion of Ukraine, Trump's war against Iran, which have led to these energy shocks. there are quite a lot of politicians and not just at the fringes who say this is not the moment when we should be spending money on climate transition I mean I know the arguments why that may not be wholly credible but take us through your thinking okay that is a big question both 2022 which I worked on really closely with the energy sector because I was leading the energy trade body at the time and responsible for the response to that crisis and then now have been caused by a spike in the price of fossil fuels and underneath that a global market that the UK has little influence on but is in the receipt of the unpredictability of that market and of the prices that come out of it.

5:25And so I think at common sense level, most people would understand the idea that reducing your exposure to that volatility means getting off the fuel that's causing it or separating yourself somehow from that global market. But if it's costing them money on their bills now, they're going to say, I don't want to pay that now. Two things. Firstly, the renewables that we've got in the system now are already helping a bit to insulate us from some of that shock because in having renewables on the system, they're displacing the fossil fuels that you would otherwise be buying in. And we know that from the last crisis that having renewables on the system, having insulated homes, that in itself helped reduce some of the exposure to the gas price shock in particular.

6:05It's a slightly different shock this time, of course, being oil, not gas, but the principle holds. And then if you think about how you fund the transition, one of the things the Climate Change Committee has said is we would like to see those levies move into taxation or elsewhere. And the reason for that is underneath this, cheap electricity coming from renewables, coming from clean sources of power, flowing through to electric technologies in people's homes, will already be saving some households' money. But if electricity were cheap, we'd be saving many, many more households' money, particularly for things like driving costs.

6:38Some of the reason that people are paying more on their bills is a political choice rather than the cost of transition. But the thing that I want to say is that we've done some analysis on the exposure to a price spike, the entire cost of the net zero transition from 2025 to 2050 is less than the cost of a spike in fossil fuel prices of the kind we saw in 2022. So we've just done a piece of additional analysis that shows that really clearly. So we save, I think, about 30 billion pounds worth of wasted energy through a net zero energy system rather than the one that we have today, because it's just more efficient to move energy around the system.

7:19If you say to people, we are throwing 30 billion quid's worth of energy at the ball at the moment in the middle of an energy crisis, that in itself is, I think, a common sense reason for moving to something more efficient. So just reducing our dependency on volatile markets really does help. Now, I'm not trying to escape the idea that you have to pay for the infrastructure, but I think the advice of the committee is you have to pay, what,£6.9 billion? pounds, 6.9 trillion pounds over the next 25 years to invest in the economy, in infrastructure, in new gas, in new cars, business as usual. Just so people understand that, that's more than twice UK national income.

7:57It's a lot of money. And that's business as usual, though. That's just to run as we are, because cars get old, power stations get old, grid gets old. The cost of net zero on top of that is about 110 billion over 25 years. It's about£4 billion a year, 0.2 % of GDP. But for that, you get benefits at household level. You get benefits we don't even cost in that analysis, like improved air quality, improved health outcomes. You avoid£40 to£130 billion worth of climate risk and climate impacts. And then on top of that, you avoid these risks of volatile international or fossil fuel price spikes. And can I just ask you, so there's two things.

8:37Obviously, I think people do understand, because it is just straightforward common sense, that if home energy system was 100 % and business energy system was 100 % wind, solar, nuclear, what happens to gas prices in the rest of the world wouldn't matter to us anymore. And that would be an enormous advantage. and since the marginal cost of output from a solar farm or a wind farm is basically zero, that looks like a tremendously exciting place to end up. I can't remember what it is. What are we now? About 50 % renewables in the UK? More. What is it now? It's about, I think we're at about 70 % clean overall, including nuclear.

9:25All right. So 70 % clean, including nuclear, something like that. Yeah, like top end. And then, of course, renewables are variables. Yeah. What people don't, I think, understand is why we nonetheless are so vulnerable to the gas price. And, you know, because all the international comparisons show that we are probably more vulnerable to the global price of gas than any comparable economy. It's one of the reasons why the IMF is forecasting that our economy will slow more than anybody else because the costs of Trump's war for us are higher than anybody else. And the bit, I know that you are a, you know, somebody who is in the past said that the pricing system should be changed.

10:13But it's probably worth my just explaining to listeners the slightly surreal nature of our pricing system. We're going to do marginal pricing. It's going to do marginal pricing because it actually, you know, it massively matters to people's lives, marginal pricing. And we have this ridiculous system where people bid into, what is it called? What's the ESO stand for? So it's the national energy system operator now, but markets. Markets. Basically, the way the market works is everybody bids their energy into the system. And then it is the marginal price that clears the system that sets the price for everybody.

10:58And the marginal price is usually the world price of gas. And that means that, I mean, and there are so many madnesses about the way that we price power, which I do want to talk to you about. You know, you are a wind farm and your marginal cost of production is basically nil. And yet you are being remunerated at the cost of a gas plant of a really expensive gas plant. And that is just I mean, you know, when you just describe it in that way. And I understand the economics of why they've done it in that way. But when you just say it out loud, you just think this is insane. Yeah, there's I mean, I'm an energy specialist of nearly two decades standing now.

11:41And there are some things about the energy market where if you're just trying to explain them in the pub, people are like, what the hell? But their reaction is rational. We should do the good faith. Why do we have marginal pricing and what are the advantages of it? Before you trap me into talking about alternatives. But it's common in most commodity markets, first thing, and it is common across most major economies and power systems. Critically, it's also common in Europe, who we trade energy with across the interconnectors, as well as gas and... Common doesn't always mean optimal, of course. No, but the logic for it is this.

12:19We have half-hourly markets, so every half-hour power plant bid in to provide power to the system, and the system operator stacks them in order of cost, and they procure everything they possibly can, as cheaply as they can, down the bid stack, and then where there is a gap, so the last plant available to meet need is the one that sets the price for the whole market. Now, I'm explaining economics to you. But the economic reason for that making sense, even if it doesn't intuitively, is it prevents people from gaming the market. The idea is they're all forced to bid in the most efficient price they can to try and get higher up the merit order.

12:59And also that you're mostly procuring the cheap stuff in the stack and so you're getting, that is more cost effective overall. But you could have a situation, a system, where the purchaser, on behalf of all of us, simply paid the marginal cost of each producer. So, you know, you can basically say with a wind farm, all right, you've got some sunk capital costs, we will remunerate you for some of those sunk capital costs. People, again, should probably need to understand that some of our energy, and this is true of wind, I think solar, it's certainly true of the new nuclear that's being built. They're on fixed price contracts.

13:45What happens is the price that they receive will be fixed, and if they receive more than that because of marginal pricing, they have to pay that back into the system, don't they? And if actually the price plummets below what they get, then we pay them back so they get their fixed price. So that is a way of shielding. But there are also all these older power stations that are on, that basically just get the market price. So there are a few, as you say, the older schemes. So we've done much of the project. The logic of it is it kind of, from a security supply point of view, across the whole system allows you to procure the stuff you need most cost-effectively overall.

14:30Do you believe that? I think... Because that is the point. Do you think that that is the most cost-effective system? I think market design stuff, there are like 10 people who are really nerdy about market design in the UK. I have occasionally been one of them. In this job, I should say, the Climate Change Committee doesn't work on policy design. And the reason is it's because in every... And this is to a point, good or bad. In every decision you make about the energy market and its structures and policies, there's normally a winner and a loser. And that takes us quite into political territory.

14:58Although I would argue that if you could demonstrate that renewables were rewarding people directly in their pocket, support for the kind of things you think, as the Climate Change Committee, need to take place in the UK to get us to net zero would be much greater. So we'd agree with that bit in that our recommendation was move the levy so you get the cheap electricity signal through early. And pre the 2030s when we're expecting it to come through the markets as older renewables projects roll off the contracts you're talking about on CFDs and elsewhere and the merit order starts to change. In this period where the merit order, this is the thing where gas is still setting the price in that stack, that will change over time.

15:43when we were looking when i was spending a lot of time looking at market design most of the alternatives have drawbacks as well so if you look at we do if you look at payers bid or payers clear auctions which is different ways of doing the auction stack you get competitive behaviors that are less less good from a different kind of auction system because they're not incentivized to bid their literal costs they start in in other systems where that's the case they start to game the system. After the 2022 crisis, Spain implemented a system where they started to separate off the gas and electricity price by subsidising the cost of gas to make it cheaper.

16:18Italy did something similar. Wherever there were interventions in the market, there turned out to be unexpected trade-offs, like in the Spanish example. It reversed the interconnector flow between France and Spain, and then basically Spanish consumers ended up sending their cheap gas over to France. Nonetheless, the big fact is we pay more for energy in this country than any other comparable economy. And it's costing households and it's costing businesses and it's making the economy uncompetitive. Completely agree that the electricity price is a problem. I think the next sentence though often in the political debate is, and that's because of net zero or because of the renewables.

16:54Which is rubbish. Which is rubbish. So I'm agreeing it's rubbish but then why won't they reform the pricing system? I think, and this was well outside of my current job, but when we were looking at the review of electricity markets in my last job, the trade-off between do something pre-2030s when we're expecting that low price to start coming through and the merit order to naturally change, taking that decision in the period they were in, this government had a clean power 2030 target. there's a huge amount of infrastructure bill to do, building the kits, networks and power plant. Investors, as you know, Robert, aren't fans of change and change to markets and 25-year infrastructure projects mid-flight.

17:36And I think there was a judgment call between investor certainty to get the stuff built or consumer benefit pre-2030. Let me, therefore, do some of the work that you don't want to do. So if you look at something like zonal pricing, It is so obviously the case that from basic economics, right, we should not be paying wind farms in Scotland to switch their power off because, you know, they can't get it through the interconnector down to London and the southeast where they need it. That's obviously an unbelievable waste. And it's also really bad for the climate as well. and so what they really I mean you know what a brave government would have done would have been to go to a system of zonal pricing and then frankly if there were investors in big infrastructure projects who said we only invested on the basis of national pricing then you have a conversation with them about how you compensate them for the change in the contract but what you don't do is basically have a situation where you're throwing away cheap clean power an enormous cost both to the environment and to British people and you don't have the incentives to basically create whether it's battery storage in London and the south east or new cheaper renewable power in London and the south east.

18:57Yeah, although this is very much like the very strong view in favour of zonal. So like my job, I should just say, this is giving me post-traumatic stress from my last job. My last job was another thing we should get across to people is how diverse and vast the energy market is and the companies operating within it. And you've got folks who specialize in what we might call, what nerds call the demand side, but like the consumer and kind of services, products, technologies, which are smaller and sit this side of the grid. And then you've got the folks who build like big stuff on the other end of the grid.

19:32You've got the network companies in the middle. You've now got lots of companies joining those things up. There are very few energy companies that do end to end and then oil and gas companies are a separate thing entirely. One of the challenges about my last job for sure is that no one could really agree on the right way forward. But there were very strong views depending on which bit of the market you represented because you had the incentive depending on which bit of the market you sat in. And fundamentally, what that comes down to is a political choice between an immediate consumer benefit in the short term, but maybe risking your long term investment and the infrastructure that you need for 2030, 2040 and beyond.

20:12But government always has the ability, if the incentives are going to be changed, government always has the ability to change the incentives. Yeah, apart from it took us like five to 10 years to do electricity market reform the last time around. It was slow and complicated because of the complexity in the markets. So, again, I studiously avoided having a dog in the fight in the last year. All right, well, let's put it a different way. How is it, therefore, because this must be central to the kind of thing you've got to think about, right? How is it that you can actually build, you know, wind in Scotland and then not have in place the network that allows it to be shipped to the rest of the UK?

20:51How does that mismatch? I mean, that is like the stupidest mismatch of decision-making. Now we're going to do like post-1980s market liberalisation. How does that happen? Because they're set through two different bits of the market and those two sets of companies are different too. So I think until 2022, this is an honest assessment, I think from the 1980s in the UK, one of our fundamental problems is post-1980s, we've been used to an economy with lots of cheap and available gas. and over the last um like in my lifetime over 25 30 years we've watched cheap gas become less available there's more competition from it from asia and new technologies have come forward and we are in what i always described as the crunchy bit of the energy transition where you're putting on new technologies and services into an old grid set of policies and set of politics which are entirely geared around the idea that you have like cheap and available gas.

21:54And so I think if you think about the network costs or the wind farms, there was an idea that it would be, we had more time than we did to get the renewables on and then to get the power flowing. So the example you gave of Scotland, Scotland is not going to be a problem post the early 2030s because they're building the connection that moves that power. They had the time, what's changed is we've had two now fossil fuel price shocks which have put that pressure quite rightly on the cost of living and the need to do something about bills immediately. You know, if you think about what that's done to the world, to my world and kind of energy conversations over the last 10 years, I think it is entirely welcome that there has been a rebalancing away from we just need to build loads of stuff as fast as possible to how can we get the benefits of that new infrastructure to people.

22:43So Greg Jackson, who is the chief executive of the energy giant Octopus Energy and is also a partner of this podcast. He says, ludicrously gold-plated, there's way too much being built. I would have done in my last job where I didn't represent the network companies either, I should add, but I would have done my last job. Honestly, one of the great gifts of this job for me is that it is a different way of looking at things. I spend my time thinking about 12 years ahead. Okay, so let's then focus more on the climate side of things. One of the things that people would say is we are now gold plating the journey to net zero in the way that no other economy in the world is doing.

23:33We are the holiest of the holy for no benefit either to us or to the world because we're a tiny economy. How do you respond to that? I was just struck by that language which I haven't heard before though I have heard the argument look the UK is not the leading nation on a move to net zero we should get that right firstly we're in a group of 10 or so big economies that are moving in that direction but we're not streets ahead of everyone else because the political rhetoric of the reform or the Tories would be that we're somehow ahead of comparable nations but you don't think we are I think we can be rightly proud of the track record in this country and that emissions are very measurably, tangibly, factually down over half now from 1990 levels.

24:21But we're not saintly or, you know, hair shirt or... No, I wouldn't describe us in that way. And a lot of those emissions have been reduced through the investment in renewables over the last 15 years. So who's further ahead than us? I mean, it depends on how you look at the question. I would argue that China and a lot of the Asian economies are electrifying very quickly. are leaders. So you're saying they're catching up really fast? I think over the last few years, we've started to see data points, for example, from China that show that their electric vehicle rollout is starting to eat into their oil demand.

24:56They've been building coal-fired power stations, but many of them will be mothballed. They're not getting money from them through their equivalent of our capacity market, which procures power plant out for security supply reasons in the future, because that market's being eaten into by their renewables fleet now. There is a fascinating economic model coming from China where they are building energy resilience through electrification, as well as an all of the above strategy, but they're going for electrification because they think they can own that bit of the economy. And the thing I was going to say is, what's the argument for us doing it in the UK?

25:32Well, it's that. So it's more to do with security of supply than it is. I can give you the climate answer, which is, you know, 40 to 130 billion of avoided impacts. But is that really true that simply through our, you know, we will still in the UK get to 130 to 140 billion of savings of climate-related costs just through our own... That's just climate damages. So the savings are bigger. Because even though, you know, we're an island in an enormous world of people spewing out CO2, you know, even our little bit will save us money. Yeah. Emma, we're nowhere near getting to the bottom of all of this.

26:16Much more to talk to you about, but we're just going to go to a quick break.

26:24This episode is sponsored by Starling, the bank that helps you organise your money, build great habits and stay in control of your spending. Now, I talk a lot about financial literacy and its importance in our economy, you know, giving people knowledge, but also confidence with money too. And Starling reckons anyone can be good with money and you can start simply by checking your balance daily. It gets easier every day and it takes the mystery out of it. And then the real value comes from digging into the details with tools like Starling Spending Intelligence. So this is an AI powered search bar within Starling Current Accounts where you can ask a question about your spending habits and get an instant answer in app.

27:08It helps deepen your knowledge and make more informed money decisions. It's a little like having a financial co-pilot in your pocket, mapping out exactly where your money goes. Search Starling Bank to find out more. Good with money starts here. Snoring? Gasping during sleep? Feeling fatigued? Ask your doctor about ZepBound, Terzepatite, the first and only FDA-approved prescription medicine for moderate to severe obstructive sleep apnea, OSA, in adults with obesity. ZetBound is a prescription medicine used with a reduced calorie diet and increased physical activity to help adults with moderate to severe obstructive sleep apnea, OSA, and obesity to improve their OSA.

27:50ZetBound is approved as a 2.5, 5, 7.5, 10, 12.5, or 15 milligram injection. ZetBound contains terzepatide and should not be used with other terzepatide-containing products or any GLP-1 receptor agonist medicines. It is not known if ZEPBound is safe and effective for use in children. Don't share needles or pins or reuse needles. Don't take if allergic to it or if you or someone in your family had medullary thyroid cancer or if you've had multiple endocrine neoplasia syndrome type 2. Tell your doctor if you get a lump or swelling in your neck. Stop ZEPBound and call your doctor if you have severe stomach pain or a serious allergic reaction.