Dieter Helm: The Lost Gamble Forcing Up Our Energy Bills
The Government was sure gas and electricity prices would rise. How wrong can you be?
Ed Miliband, Chris Huhne and Ed Davey — the three most recent Energy Secretaries — all agreed on one thing: the price of oil and gas would keep going up. It was therefore their job to protect us from ever more expensive fossil fuels.
Armed with this certain knowledge of the future, it was a small step to arguing that Britain had to promote current renewables as a way out of the future hell of fossil-fuel dependent energy prices.
By about 2020 it was assumed that expensive technologies such as wind farms and solar panels would be competitive against what would by then be much more expensive fossil fuels. Add in a bit of energy efficiency, and ministers could confidently predict that household energy bills would be 8 per cent lower by 2020 than they would have without their policies.
Almost everything that could be wrong with this is in fact wrong, and it explains the mess that British energy policy has got itself into. There is no shortage of oil, gas or coal. We are not running out of any of them. There is enough to fry the planet many times over. There is no reason to assume that oil and gas prices will go on ever upwards, and it is at least possible that they will fall, joining the sharp fall in world coal prices. If so, renewables are unlikely to become cost-competitive by 2020. The subsidies will not then wither away. They would be permanent. Therefore, bills would be higher than they would have been as a result of government policies, not lower as Mr Davey claims.
Shale oil and gas are not temporary aberrations, but permanent facts on the ground. The US has the fastest-growing oil production and a very rapid expansion of gas. North America is on the way to rough energy independence over the next decade. Energy-intensive industries are reshoring to the US, rather than to Europe. There is virtually no energy- intensive investment in Europe. The US is about to start exporting gas, it is flooding the market with refined oil products and is holding back its carbon emissions by switching from coal to gas for electricity generation. Instead of burning that coal, it is exporting it to Europe. None of this featured in the mindsets of Messrs Miliband, Huhne and Davey.
It is not just the US. Shale oil and gas are widely distributed. It will take time, but Argentina, China, Algeria, Russia and the Middle East have lots of the stuff. If the US-Iran relationship thaws and Iran provides the key to unlocking Iraq’s enormous cheap conventional reserves, it is possible that in a decade or so the three countries now producing 10 million barrels of oil aday will become five — Saudi Arabia, Russia, the US plus Iran and Iraq.
What will all this mean for prices? Already the total fuel input costs to electricity generation in Britain are falling. The price of coal has fallen and the share of coal in electricity generation has risen from about 28 per cent to nearly 40 per cent. Gas prices are no longer rising, and the oil price has been flat for a couple of years.