Time for Think Tanks to Think Again

Free market think tanks need to challenge the Net Zero orthodoxy.

Introduction

We are blessed with a wide range of think tanks in this country that approach deep-seated societal problems from different political perspectives. In a democracy, it is important that we hear ideas from all colours of the political spectrum, even if we conclude that some of those ideas are barking mad and should be consigned to history as soon as possible.

However, the one subject where just about all the think tanks agree is Net Zero. They all think we should implement Net Zero, with the only argument being over the pace the minutiae of policy details. But as John F Kennedy said, when everyone is thinking alike, no one is thinking at all.

It is therefore more in sorrow than in anger that I write this review of a new paper published by the Centre for Policy Studies, founded by Sir Keith Joseph and Margaret Thatcher and styles itself as “Britain’s leading centre-right think tank.” Without further ado, let us dig into the paper in question, A Cheaper Route to Net Zero, authored by former Tory MP John Penrose.

A Cheaper Route to Net Zero?

The paper puts forward twenty ideas that the author claims are “low-cost,” will cut energy bills and boost investment. Penrose’s biography on page two of the paper claims he “campaigns for small-state, supply side reforms so Britain’s economy and society work for the many, not the few.”  I can think of no better supply side reform than delivering cheap, abundant energy which will assist many of the poorest in society, but as we shall see, this paper fails on almost every level.

The main problem with the report is that it does not start from first principles and ask whether Net Zero is either necessary or desirable. The title of the report is an implicit acceptance that Net Zero is a good strategy and that with a bit more tinkering we can make it palatable. But the inescapable truth is that intermittent renewables can never compete on level terms with hydrocarbons, so renewables will always need big-state interventions to force them on to the market. This should be anathema to free market think tanks. With that in mind, we can now delve into the detailed recommendations in the report.

Decoupling the Gas Price from Electricity Markets

Despite correctly identifying that energy bills for British households have not fallen as fast as international gas prices, the report recommends that we “rewire UK energy markets” and stop using the short-term gas price as the benchmark for electricity prices. Penrose does not explain exactly how this should be done, nor the impact that it would have. As a reminder, there are three types of renewables subsidy: Renewables Obligations (ROCs), Contracts for Difference (CfDs) and Feed-in-Tariffs (FiTs).

ROCs are the most expensive scheme, with the OBR forecasting a cost of £7.9bn this financial year. ROC-funded renewables receive certificates in addition to the market price they receive for the electricity they sell. Offshore wind generators receive ~1.9 certificates per MWh of generation with a value this financial year of £64.73 each, so the subsidy amounts to £123/MWh. It is unclear how cutting the link to natural gas prices would alter market price they receive, but it would certainly do nothing to reduce the subsidy level.

The OBR forecasts CfD subsidies will cost £2.3bn this year. They also forecast these subsides will rise to £3.1bn by 2029/30. CfD-funded renewables receive an index-linked fixed price for their output, regardless of the prevailing market price. If cutting the link to gas prices reduced the market reference price, then they would just receive more subsidy to top them up to the CfD strike price. So far this financial year, the average strike price for offshore wind has been about £150/MWh, compared to the market reference price of £62/MWh. The reference price has been rising over the past couple of months to over £75/MWh, driven by higher gas prices, but this is still well below the average strike price for offshore wind.

FiTs cost us about £1.7bn in the 2022/23 and these renewables receive an index-linked fixed price for the electricity generated, plus a small top up for the amount exported. Decoupling the gas price from electricity markets will not change the amount these projects are paid.

It is not clear how this “decoupling” will work and even less clear how it will deliver lower bills. Penrose also calls for future CfD contracts to be amended to use a wider range of longer-term reference prices. If those reference prices are lower, then the CfD generators will receive more subsidy to top them up to the strike price. If they are higher, the CfD owners will receive less subsidy, but we will pay more for the non-renewable electricity. The report also calls for the Government to stop offering CfDs to “repower existing green energy generation,” by which I think he means stop subsidising the refurbishment of worn-out wind turbines and solar panels. Without subsidy and some sort of guaranteed price, these projects are unlikely to happen at all.

Choosing the Cheapest Green Energy

The report calls for measures to address the challenges caused by intermittent renewables. This is one of the more sensible recommendations in the whole report. Penrose wants CfD auctions to be amended so the generators must promise to produce dispatchable power. This would mean that as well as building the wind turbine, they would have to build batteries or another form of storage to provide backup for when the sun is not shining or the wind is not blowing.

The challenge would be deciding the duration of the firm power being available. In winter, solar power produces only a tiny fraction of the output in summer months. Sizing a battery to provide year-round firm power would be prohibitively expensive. We often see periods of low wind for a week or more. Sizing a battery to provide backup for a week’s worth of wind output would make these projects uneconomic too. Ironically, this recommendation for achieving Net Zero would likely stop new build renewables in their tracks.

Slashing Transmission Costs

The report acknowledges that it is going to be “enormously expensive” to upgrade the grid to connect lots of remote renewables to sources of demand. The most obvious way to reduce these costs is not to build so many remote renewables hundreds of miles from the source of demand and instead concentrate electricity generation on existing nuclear sites and place SMRs on old coal-fired power stations. But the Penrose report makes a set of recommendations that will not reduce the actual costs at all. He wants to introduce “local pricing” for energy transmission costs, effectively reducing prices for users who are close to the source of generation or storage. First, while this approach might reduce constraint costs a bit and introduce greater variability in the price of using transmission assets it is far from certain overall costs will come down. This is because the overall cost of the new transmission lines still needs to be recovered and it is unlikely this will outweigh the savings in constraint costs. Moreover, by adding more storage to the grid, overall system costs will rise because capital expenditure will be higher with no increase in output. Finally, it would be perverse to incentivise industry to move to some of the most beautiful landscapes on our coasts where the power lines make landfall from offshore wind farms.

Penrose also wants to introduce local discounting to bribe customers who live near new pylons or onshore wind farms so they agree to them being built. Again, this will not reduce overall costs, because the rest of us will have to pick up the bill for those local subsidies.

The report also recommends that demand management measures are further developed so penal prices are charged for using electricity at peak times. As discussed earlier, these time of use tariffs are simply another example of people being asked to run their lives around the needs of the grid, rather than designing the grid to meet the needs of consumers.

Cutting Red Tape and Reforming the Price Cap

Penrose makes a series of recommendations for cutting red tape. On the face of it, cutting red tape sounds like a good idea. The report waxes lyrical about Ofgem sclerosis and the power of competition to bring down prices. The problem is the proposals for cutting red tape include adding three new obligations on to Ofgem and other regulators without taking any obligations away. These recommendations are to introduce pro-competitive interventions (PCIs), give Ofgem the legal duty to publish red tape costs and to give regulators a new duty to report on and minimise economic and regulatory costs. The report also recommends changing the price cap rules.

It is very hard to see how three new obligations will reduce red tape or cut the cost of the bloated regulator. All new obligations do is add complexity and cost. Much better to get rid of things like the price cap altogether and cut down the size of the regulator.

Levelling the Playing Field

The final set of recommendations are an attempt to level the playing field for UK manufacturing by introducing a Carbon Border Adjustment Mechanism (CBAM) to attempt to mitigate the impact of high energy prices. In other words, another set of regulations on top of all the other regulations we have governing the energy market.

The idea is that if we tax the embedded carbon on imports, then UK manufacturing will be better able to compete with imports from countries like China that use cheap electricity generated from coal to produce their goods. It is interesting that introducing the idea of a CBAM implicitly accepts that “green” renewables are much more expensive than other forms of electricity generation. If renewables really were cheaper, then UK manufacturers would have a competitive advantage from cheaper energy.

The whole idea of a CBAM is spectacularly misguided. If energy prices are very expensive, then UK manufacturers are simply not going to be competitive on the world stage, even if they are exempt from the Emissions Trading Scheme as recommended. Companies are simply going to relocate their operations to places where energy is cheap and they can be globally competitive. CBAM together with expensive energy will likely accelerate deindustrialisation.

Conclusions

As Dieter Helm said two years ago, our energy markets are a mess. They are mired in a morass of complex, contradictory rules and regulations, some of which are designed to mitigate the impact of earlier interventions. For instance, we have introduced subsidies on renewables that make electricity more expensive, added carbon taxes to gas-fired generation to level up prices and then added energy intensive industry support schemes to try and mitigate the impact of high prices. It is an expensive and self-destructive shambles about as far from free markets as it is possible to get. This new report will only make things worse.

The root cause of all these problems is the ideological pursuit of Net Zero in defiance of common sense and economic reality. But instead of starting from first principles and challenging the whole idea of Net Zero, the CPS and Penrose accept the premise of Net Zero and offer platitudinous ideas to attempt to mitigate the damage. Keith Joseph and Margaret Thatcher will be turning in their graves after seeing such intellectual weakness.

It is time for our think tanks to start thinking again and challenge the whole idea of Net Zero from first principles. First, why is Net Zero required? It is a manifestation of the “Mitigation Strategy” to combat climate change, but why is mitigation the best strategy? For mitigation to be effective, it requires CO₂ to be the only influence on climate change and for every other country to be reducing emissions to zero. Neither condition is being met and the risks of Net Zero “cure” are far higher than the supposed climate change “disease.”

Yet, we are hurtling down the road to serfdom by pursuing policies that will halve per capita energy use by 2050. We already have the most expensive electricity in the IEA, and under current policies of carbon taxes, more intermittent, expensive renewables and massive extra spending on the grid, prices are heading even higher.

The alternative is the adaptation strategy, where we focus first on cheap, abundant energy and take a chainsaw to the current regulations. Ideas would include:

• Repeal the Climate Change Act and abolish the Climate Change Committee.

• Eliminate carbon taxes.

• Stop subsidising new renewables and find ways to mitigate the costs of the existing subsidy regimes.

• Restart development of North Sea assets and lift the moratorium on fracking to increase the supply of natural gas.

• Slash Ofgem red tape and get rid of the price cap.

• Overhaul nuclear regulation to cut costs and speed up delivery.

• Invest in a fleet of new nuclear plants.

If climate change becomes a problem, we can use some of our energy to invest in adaptation measures like flood defences and new crop varieties. These have the advantage of being effective regardless of what others do and will undoubtedly cheaper than destroying the economy.

This problem we face is similar to the destructive power of the unions in the 1970s and 80s, but instead of tackling Red Robbo we need to face down the Green Blob. There is nothing intellectually difficult about this, it just requires courage and determination, like that shown by Thatcher at the time using the intellectual framework provided by the CPS. The free market think tanks need to rise to the challenge and start thinking again.

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