The government wants to emphasise the affordability of climate change mitigation. It produces low estimates of the cost of low-carbon technologies. In the recent 2009 budget documents, the government estimated a cost of 1% of GDP to meet the tough new 2020 targets. In his pronouncement on carbon capture at coal-fired power stations, energy and climate change secretary Ed Miliband later said that his proposals will add 2% to electricity bills.
Are these numbers reasonable? Professor Sir David King, the former chief scientific adviser, says no. In a BBC interview of 26 April, he indicates that he thinks that the cost of reducing the UK’s emissions is much higher than the government indicates but also that the financial implications of not dealing with the climate change threat are far higher than even Nick Stern suggests.
I strongly suspect that David King is right about the costs of decarbonisation. Let’s look at the electricity supply industry. Almost all of our electricity today comes from fossil fuel and nuclear power stations. Before 2020, we have committed to multiplying the contribution from renewable electricity 10-fold. This is not a misprint – and it was repeated in the budget statement of April 2009. And then this extraordinary pace will have to quicken further. To get on the road to near-full decarbonisation of electricity supply by 2030, which is the key plank in the Climate Change Committee’s recommendations, we need to take the following measures as a country: a) complete carbon capture on coal- and gas-fired power stations; b) huge growth in renewables; c) possibly huge investment in nuclear power stations; and d) an unprecedented investment in an improved and expanded transmission grid.
How much will these actually cost? Here are some rough-and-ready numbers:
- a) Complete carbon capture and storage on fossil fuel plants: Most estimates suggest that this will add approximately £30 to the cost of producing a megawatt hour of electricity. On top of today’s wholesale price of about £50 per megawatt, this will add about 60% to the cost of producing electricity from fossil fuels.
- b) Huge growth in renewables: Onshore wind would be cheaper, but it looks as though only offshore wind is politically acceptable. Very substantial growth in new generating capacity is possible. Perhaps costs will come down, but including the cost of ‘grid balancing’ to deal with intermittency, the incremental cost of offshore wind above today’s wholesale prices is probably between £30 and £40 a megawatt hour.
- c) Nuclear power stations: The Climate Change Committee offered an extremely optimistic cost for nuclear electricity, suggesting it is cost-competitive today. Frankly, I think they were dreaming when they let this assumption into their hugely impressive December report. All the evidence is that robust and safe nuclear power stations are going to need at least £25 a megawatt hour more than today’s fossil fuel power stations.
- d) The cost of a new grid: We need new connections of very substantial transmission capacity between Scotland and England and between this country and Scandinavia, the Netherlands, and with France. The key purpose of this is to allow easier flows from where power is plentiful to where it is scarce. When the wind isn’t blowing, the UK will need power from Norway. And, by the way, we will have to pay handsomely for it because the Norwegians don’t partly want their enormous hydro capacity to be tapped to provide power security for the late-moving British. It’s little more than a guess but new grid investments may add as much as £5-£10 to the cost of each megawatt hour.
These numbers are at the highest level of approximation. But they suggest that the market price of electricity at the wholesale level will need to rise from about £50 to about £80-£90 a megawatt hour within two decades. And, importantly, the cost will have to jerk upwards soon, otherwise the crucial investments will not be made by private industry in time.
What is the overall impact of the likely sharp rise in electricity prices? It will probably add about a third to prices paid by final retail customers like businesses and homeowners. This alone will cost the equivalent of 1% of today’s GDP. This is before considering the need to divert very large budgets into government-sponsored R+D for offshore wind, tidal power and (dare one say it) nuclear. In other words, decarbonising electricity generation will alone cost as much as the government’s rather easy assumption of the costs of climate change avoidance measures. It may be worth pointing out that electricity supply is only about a third of total UK carbon emissions.
But the high cost of building an entirely low-carbon electricity industry is a cost worth paying. You don’t have to believe in the urgency of the climate threat to realise that fossil fuel resources are going to get more expensive. The right comparison to make is not between the cost of fossil fuel electricity today and what it is going to cost in the low-carbon future. No, the correct assessment should estimate the likely cost of energy in ten and twenty years time. Then the incremental cost of low-carbon energy may well actually be negative. But none of us should be in any doubt that electricity prices are going to be much higher in 2030 than they are now. It would be better for the government to admit this, rather than hide behind what I think is the comfortable fiction that the climate change and energy security problems can be dealt with at minimal cost to living standards. As a society we also urgently need to recognise that electricity prices will have to rise sharply soon – this is not a problem that can be dealt with by a slow and graceful upward curve. The implications of this for the poorest members of British society must be addressed now.