Energy Policy: Cool Heads Required

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Energy policy is in urgent need of reform. With tens of billions of pounds of investment needed to reinforce and clean up the nation's creaking electricity infrastructure, the government must get a tough juggling act right - attracting major investment whilst keeping things affordable for consumers.

And the blueprint for the reforms being pursued could, in theory, be a ‘win-win' situation for investors and consumers. The centrepiece is a new way of supporting low carbon energy which will guarantee generators a premium price for their clean power. Certainty over returns should lower their cost of capital, thus reducing the overall subsidy that consumers have to fund. That's the theory at least.

In practice things are rather more complicated. On the upside, the government has recently given an indication of how much support individual low carbon technologies will receive and how much money will be on the table to fund the whole exercise. So generation projects are starting to get the details they need to secure finance and get projects moving.

On the downside, a lot more work needs to be done to reassure consumers that they will get a fair deal and won't end up on the hook for unsustainable and open-ended subsidies. The recently issued draft ‘delivery plan' is a case in point. Two major opportunities were missed.

First, there needs to be a clear plan for moving to a competitive market for low carbon power. Whilst a number of low carbon technologies need support in the short-term, significant subsidies cannot be provided indefinitely. The government needs to set out a clear timetable for when low carbon technologies will need to stand on their own two feet in the market.

Second, the government's approach to controlling the cost of subsidies must be strengthened. To its credit, it has introduced a cap for all green subsidies funded by consumers. But this is still set to rise from £2.35bn today to £7.6bn by 2020. So it must commit to controlling the cost of individual policy measures. Lower than anticipated costs in one area should not automatically allow unbudgeted ones in another as has been the case to date.

For manufacturing, keeping energy prices affordability is a crucial issue. The sector is relatively energy-intensive, with energy costs accounting for around three times as much of total costs as they do in services. And manufacturers need to compete in global markets where major costs stemming from national policies are hard to pass on to international customers.

And by the government's own admission, the cost of its green energy policies is set to balloon. Earlier this year it estimated that they would push business electricity prices up by 45% in 2020 and in 66% 2030, up from 22% today. That's a big hike in anyone's books.

So to make sure that the costs do not get out of control whist still facilitating the investment that is urgently needed, the government needs a cool head. The time needs to be taken to make sure that the new arrangements deliver for consumers as well as investors. There's no margin in rushing through reforms that quickly need to be overhauled or revisited because they prove economically unsustainable. That would be bad for investors too, a ‘lose-lose' situation.

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