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Coffee House

The Treasury sides with the consumer over climate policy

23 July 2012

2:30 PM

23 July 2012

2:30 PM

Tim Yeo is now posing as a friend of the consumer. Launching the latest report from the Energy and Climate Change Committee this morning, he attacked the Treasury for ‘refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage’. The report argues that could ‘impose unnecessary costs on consumers’.

The basic logic of his claim is this: investments are more expensive when they are riskier. Investors expect to be compensated for the risks being taken with their money. If the Government offers guarantees that reduce the amount of risk energy companies run by investing in expensive sources of energy like offshore wind, then those firms can invest at a lower cost. They can then pass those lower costs on to their customers.

It isn’t quite that easy though. The price of conventional energy may not be as high as the Government thinks it will, particularly with a seemingly bottomless well of shale gas out there. That is a genuine risk to the economic viability of extremely expensive alternative sources of energy. You can’t wish it away with Government guarantees.

What those guarantees would do is transfer that risk from energy company investors to taxpayers. If you do that, you might get more investment and lower prices right now but more than pay for it with huge bills in the future thanks to inappropriate investments. On top of all the other costs of current climate policies. In the end, it is best if the sector makes the right amount of investment on the basis of an honest assessment of the risks, rather than the Government intentionally blinding investors to the risks.

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The Department of Energy and Climate Change, and allies in Parliament like Tim Yeo, are engaging in a lot of Whitehall warfare at the moment. The Treasury isn’t their only antagonist. Recently they failed to stop the Department for Business, Innovation and Skills releasing a report by the consultancy ICF International which revealed the real cost of their expensive energy policies to industry.

The results are damning. The report finds that by 2020 the European economies included in the study – Denmark, France, Germany, Italy and the UK – will all be adding over £15 per megawatt hour to the energy prices facing energy intensive industries. By contrast, in China those policies would only increase prices by around £10 – largely thanks to differential prices targeted at restraining growth in certain sectors – and in other countries such as India and the United States the impact would be negligible. Industry in the UK will suffer the most of all, facing additional costs of over £30 per megawatt hour. The Osborne Doctrine is in tatters.

Some industries are going to face punishing rises in their costs as a result of climate regulations. For every tonne of steel produced in Italy or Britain, industry will be paying around £20 in additional energy costs by 2020. By contrast, energy policy in Russia will be reducing their big, inefficient steel industry’s costs by more than £15 a tonne. In China, policy will be adding less than £5 a tonne to those costs.

The aluminium industry is in even worse trouble. It faces an increase in its costs of nearly £600 a tonne by 2020 in Britain and over £400 in Italy because – as the report points out – ‘electricity is the dominant energy source’ for the sector, and that is where most of the costs for expanding the use of renewable energy are going to fall. Similar impacts can be seen in a number of other industries, from cement to fertilisers. And it won’t only be those industries which are affected as the impact cascades through supply chains.

The consumer’s dog in this fight is the Treasury and BIS challenging the costs of unaffordable climate change policies, not DECC or Tim Yeo wishing them away. You can see that from the fact that the committee also attacked the Treasury for imposing a cap that ‘limits the green levies that can be passed on to consumers in energy bills’, as it would pose to much of a risk to offshore wind farms. The fact such a cap is seen as a threat shows how uneconomic some of these sources of energy still are.

After a long time getting their own way, it is good that proponents of exorbitantly expensive renewable energy are moaning about some setbacks. Not good enough though. So long as Britain remains committed to the current set of European targets we will continue to have an unaffordable and ineffective set of climate policies. With an urgent need to revive the economy, tinkering around the edges isn’t nearly good enough.

Matthew Sinclair is Director of the Taxpayers’ Alliance.

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