The Cost of the United Kingdom’s Energy Policy
Decarbonizing the United Kingdom’s energy production comes with costs. A rough estimate of its cost to the U.K. as a whole can be gained by multiplying the annual costs or the cumulative cost by the roughly 27.1 million households in the U.K. That yields roughly £15.8 billion in the year 2020 alone and £292.68 billion cumulatively through 2030.
Through the first two decades of this century, the government of the United Kingdom has adopted an energy policy designed to reduce the use of fossil fuels, especially coal, to generate electricity and replace them, as much as possible, with renewables, especially wind.
What has been the impact on its citizens? Is the policy wise?
Dieter Helm, professor of energy policy at the University of Oxford, performed a review of the U.K.’s energy policies, released last fall. Citizens and governments around the world should take some lessons from his work.
Most economists acknowledge the benefit of unfettered supply and demand in determining the allocation of scarce resources. But many people think government must intervene with regard to some commodities. Electricity is one.
There are three stages in getting electricity to consumers: generation, transmission, and distribution. This article focuses on generation.
Unlike most products, electricity must be generated in a way that meets the instantaneous demands of consumers. Current technology allows for little storage of electricity during low demand. Therefore, generating capacity must at every moment be sufficient to meet peak demand.
This is the argument for government regulation. A for-profit company would not invest in excess capacity. Instead, its generating plants would meet average, not peak, demand.
This argument for government regulation (if not ownership) could become moot if battery (or some other storage) technology improves. If an electricity firm could store excess electricity generated during low demand and transmit it during high demand, then most economic regulation would become unnecessary. However, environmental regulation is a different matter.
In the United Kingdom, as in most developed countries, environmental regulation has already succeeded in reducing “traditional” pollutants from electric generating plants – soot, sulfur oxides, nitrous oxides, carbon monoxide, and heavy metals – to levels so low as to be of little or no risk to health. Practically, the only things coming out of the “smokestacks” of most coal and natural gas electric generating plants are water vapor and carbon dioxide.
But some people now think of carbon dioxide – emissions of which are thought to drive dangerous global warming – as pollution. That makes it the new focus of environmental concern with electricity generation.
The U.K. government passed the Climate Change Act in 2008, aiming to achieve an 80% reduction, compared with 1990 levels, in carbon dioxide emissions by 2050. Multiple policies have been introduced to achieve this goal, and many, Helm among them, have argued that some are contradictory, redundant, or superfluous.
Helm does not oppose carbon dioxide emission reduction, but he believes that it should be achieved in the least costly fashion. He does not perform a cost-benefit analysis of carbon dioxide reductions, for he takes the benefits as given. Unfortunately, those who favor the objectives of the Climate Change Act are likely to overstate the benefits, while opponents are likely to understate them.
Costs, on the other hand, can be more objectively determined. Helm estimates that, regardless what the benefits of emission reduction are, the government policies have wasted around £100 billion to date, and the waste will continue to rise unless reforms are made. He is particularly concerned that the government picks which new technologies to back, leading to “regulatory capture” by special interests. “Regulatory capture” denotes a situation in which a government agency meant to serve public interests serves the interests of affected commercial or political entities instead.
As Helm notes, “[g]overnment has got into the business of ‘picking winners.’ Unfortunately, losers are good at picking governments, and inevitably – as in most such picking-winners strategies – the results end up being vulnerable to lobbying, to the general detriment of households and industrial customers.”
The £100-billion waste Helm identifies is due largely to redundant and overlapping regulations. Nowhere in the 230-page report does Dr. Helm estimate the total cost of the policies under the Climate Change Act. The Global Warming Policy Foundation estimated the average household cost to be £324 in 2014, rising to £584 per household in 2020, £875 in 2030, and £1,390 in 2050. From 2016 to 2030, this puts a cumulative burden of £10,800 on the average household. However, these estimates assume constant energy use and no energy savings due to technological advances.
After six months, there has been no change in government policy in the United Kingdom in response to Helm’s call to streamline regulation and replace the myriad of environmental taxes and levies, which favor some corporations while harming others, with a single carbon tax that would affect all indiscriminately. This should be no surprise. Vested interests will ensure that the privileges they currently enjoy remain in place.