Britain's economic suicide

At the Rational Optimist blog Matt Ridley writes on energy policy in the U.K., and why its wrong.

The future belongs to countries that can get their electricity, heat and fuel supplied as cheaply and reliably as possible. That is the priority, not the carbon fetish.

Ridley opens by noting,

British Gas is putting up the cost of heating and lighting the average home by up to 18 per cent, or about £200 a year. Indignation at its profiteering is understandable. But that can only be a part of the story: the combined profits of the big six energy supply companies amount to less than 1.5 per cent of your energy bill, according to the regulator, Ofgem.

Demand for energy is rising around the world, so what does the U.K. government plan to do. The wrong things of course.

So what does the Government plan to do? This week it publishes a white paper on electricity market reform that will be predicated upon, indeed proud of, pushing up prices even faster. To meet its self-imposed green targets, the Government’s policy is to tax carbon, fix high prices for renewable electricity and load extra costs on to people’s electricity bills — but without showing them as separate items.

This policy is beyond foolish. While you might just get away with driving up energy bills in a boom, to add green stealth taxes on top of supply-driven price increases at a time of economic misery is asking for political trouble.

In the past cheap energy has helped drive productivity increases and increased growth and thus created jobs. But

[...] a dear-energy policy destroys jobs. Not only does it drive energy-intensive business overseas; according to Charles Hendry, the Energy Minister, the average British medium-sized business will face an annual energy bill £247,000 higher by 2020 thanks to the carbon policy. That’s equivalent to almost ten jobs it must lose, or cannot create.

So what are the questions facing the U.K. government,

So the hijacking of energy policy by carbon targets is mad. Far more urgent questions face us than that. How do we replace the one-third of coal-fired stations that will close by 2015? Not by renewables, that’s for sure. How do we replace the capacity of our nuclear power stations, all but one of which will close by 2023? How do we compete with China, where it takes five years, not 15, to build a nuclear power station? How do we compete with America, where companies are now swimming in cheap domestic natural gas, half the price it is over here, thanks to shale gas exploration?

Gas already dominates the British energy market, providing about half of all joules. That dominance will only grow as abundant shale gas joins Russian and Iranian supplies. Given that renewables are an irrelevance in terms of supply, and that coal is being slowly phased out, the key question the Government needs to answer this week is where it wants to fix the price of nuclear electricity to ensure the long-term certainty nuclear investment requires.

Ridley notes the advantages of market liberalisation and the problems of bureaucratic interference, ,

Twenty years ago Britain liberalised its nationalised energy markets, introduced competition and the result was one of the cheapest and fairest regimes in the world. Gradually, the bureaucratic yearning to interfere and pursue ideology gained the upper hand again, especially with Tony Blair’s ludicrous “renewable obligation certificates” (ROCs) whose perverse consequences include the shipping of Californian native forest timber to Drax power station in Yorkshire at consumers’ expense.

Ridley ends by noting the need for energy entrepreneurs,

Yet government has done very little to unleash energy entrepreneurs. We could have started the shale gas revolution here, as we started the fossil fuel revolution itself. We could still start the underground-coal gasification revolution here: according to a Newcastle firm called Five Quarter, huge amounts energy could be extracted from coal seams under the North Sea by partial combustion of the coal to make gas underground. We could push thorium reactors. But starting a business in Britain’s regulated economy and planning system is like swimming in treacle.

A lesson for most countries is the importance of entrepreneurship in energy, and everywhere else in the economy.