The Spectator by Spectator Briefing
How can we keep energy bills down? It’s a question that has been at the top of the political agenda since Russia’s invasion of Ukraine sent gas prices soaring. With the government forking out eye-watering sums to guarantee prices for consumers and businesses, a longer-term solution has to be found. But are renewables the answer?
In January, The Spectator had the opportunity to discuss this issue, when we hosted a roundtable lunch (made possible by RenewableUK, the UK’s leading renewable energy trade association) at Old Queen Street. With a number of energy experts and analysts around the table, our editor Fraser Nelson and economics editor Kate Andrews sought to clarify the burning questions around UK energy security.
As CEO of RenewableUK, Dan McGrail has supported and advocated on behalf of over 450 companies to increase renewable electricity generation in the UK. The focus of reporting in this energy crisis has often been on the high profits of the oil and gas industry, yet renewable sources are also now subject to a windfall tax of 45 per cent, above that on oil and gas. Renewables companies say they haven’t made huge profits off gas prices as most of their power is traded a year in advance.
Dan McGrail was keen to set the ball rolling discussing changes in government policy. He recalled the urgency with which Boris Johnson treated the speeding up of renewables, calling for a ‘vaccine mentality.’ In March, the British Energy Security Strategy, along with a newly appointed offshore wind champion reporting directly to the Prime Minister, seemed to send a clear message. Ten months later, ‘the supply side reforms that were in the British Energy Security Strategy, like speeding up planning, like reforming the grid: all of these things are still yet to reach the statute.’
That means Britain could be falling behind. He continues: ‘We’ve achieved a huge amount through successive governments’ ability to bring forward policy to enable the growth of renewables in the UK and accelerate the energy transition.’ Yet, with the Inflation Reduction Act in the US and the EU scrambling to respond, ‘we are now being overtaken by other countries.’
Since the Russian invasion of Ukraine, discussions about energy security have become more acute. But alongside security are serious questions about affordability. It is, we discovered, no longer the case that renewables are more expensive than fossil fuels. Dan McGrail told us that: ‘A megawatt hour of electricity coming out of a brand-new constructed wind turbine is about one-fifth of the cost of a megawatt coming out of the back of a gas fired power station when the cost of carbon is taken into account.’
Some might rightly question whether these costs are comparable: after all, they may not include the cost of producing the backup energy for when there is no breeze. Even so, we can use ‘levelised cost’, as a measure. That refers to the cost over the lifetime of a power station to produce a megawatt hour. Despite the government’s failure to update its 2016 data on this, the bottom line is still crystal clear from independent analysis. Tom Glover, UK Country Chair at energy company RWE, emphasised that ‘all of those models show that 70 to 80 per cent renewables are the lowest cost solution for delivering energy systems. The huge question is about where the remaining 20 or 30 per cent comes from. But I’ve never seen any report that says that’s not the lowest cost.’
And what of improving our energy security through fracking? Sam Richards, CEO at Britain Remade, explained that, regardless of government policy, this was always going to be a non-starter. ‘It’s a combination of the economics of fracking, the UK, and the geology of the UK. We’re not Utah, and the way that the fracking rigs are set up, you need hundreds or thousands of them in order to get the level of gas.’
How much has policy shifted in recent months? Sam Richards agreed that there was a noticeable lack of urgency. ‘I don’t want to wind-splain to people, but it takes up to 13 years to get an offshore wind farm up and running despite the fact that the construction of the wind farm is a fraction of that time, like three years. We had various potential reforms in place to curtail that timeline, these appear to have been put on the backburner.’
Josh Buckland, a Partner at Flint Global advising on energy and sustainability, thought there had been less of a domestic change in policy. ‘I don’t think the policy regime is actually that different from Boris to Rishi. The thing that’s changed is the external environment: the US has had a massive intervention, a bunch of tax relief trying to pull in investment from European companies as well as elsewhere. You’ve then got Europe; Von der Leyen announced today this Net Zero Industry Act. It’s a competitive environment where the UK hasn’t quite stepped up now to offer something that’s as substantive.’
The UK has a huge natural asset in all this: the North Sea. Currently, the UK has around 13 gigawatts of offshore wind capacity, and the government target is to reach 50 gigawatts by 2030. Pavel Miller, of SSE renewables, was keen to stress the opportunity this trebling in capacity offers. ‘That means a huge opportunity to develop a domestic supply chain, create jobs, and regional investment. Each year that there is delay to achieving that target, it means less jobs and investment, and higher priced electricity bills than necessary.’
That brought the conversation onto what is holding Britain’s renewables sector back. Charlie Jordan, Chief Executive of ScottishPower Renewables cautioned that: ‘In the UK, we’ve got the potential, but there’s a danger that potential is not realised. We’ve got the ambition set out: you mentioned the North Sea, but at the moment, they’re all just bits of paper. There’s a great appetite, but the supportive planning regime isn’t there.’
As to the windfall tax, Tom Glover argued that: ‘if we were making excess profits and the way it’s calculated is fair then, fair enough in the current crisis that we give some support to consumers, right? And I think that’s fine, but I think if you look at the Implementation and what it means for future investment, we’ve got windfall tax for 2028 (at least) overhanging investment yet assistance to the consumers is only for a year or two.’
The question is how it will affect investment. Delving into some of the technicalities, Andy Mayer of the IEA argued that ‘it does not relate to future investment because those are CFD schemes. The windfall tax hits the renewable obligation projects that constitute about 70 to 80 per cent of the industry, which we are overpaying their for wind power. Now, I appreciate there’s an investor certainty point, which is why would anybody in any industry to invest in the UK and the government seems to arbitrarily change the terms of tax on a regular basis, but the point is that we are overpaying dramatically for wind projects that were installed 10-15 years ago given their reward is linked to the price of gas.’
These CFDs are the Contracts for Difference Schemes, under which companies receive a fixed price for electricity. Dan McGrail was keen to clarify how this works: ‘If Tom and Charlie sell their electricity for £100 per megawatt hour and they have a contract for 50, they have to give £50 back to the exchequer. And that’s happening, hundreds of millions of pounds at the moment.’
For investors, Tom Glover told us: ‘The CFD regime is probably one of the best investment instruments you can have. This is the cheapest cost to the consumer, the biggest investment certainty drives lower return requirements for investors.’
Some renewables are sold according to these contracts, meaning higher energy prices yield to them no additional profit. Others are not, though not all have made additional profits. Pavel Miller was keen to clarify that: ‘Actually, companies like ours, you don’t sell their power on a spot market basis, they sell it ahead of time. So, if renewables generators are selling up to 2 years out, it’s not right to say that they have been making excessive profits from the higher prices on the day. The question for me is how they electricity markets are reformed in a sensible and considered way which keeps investment flowing into renewables.’
Tom Glover contended that ‘to the extent we’re making excess profits, [it’s] perfectly reasonable to have a windfall tax. The issue is first of all the term limit and second of all the mischaracterisation that it won’t affect future investment because at least 60 per cent of all solar projects are done on a merchant basis not under a contract for difference… So if you set a tax that takes away revenue for six years, and as you quite rightly said, give the indication that it’s there to stay, you have to reduce your expectation of future earnings from all future investments that aren’t under a CFD… it definitely has a negative impact on investment.’
The other key issue holding back renewables development is planning. Tom Glover noted that: ‘General opinions are all fully for renewables, at 75 to 80 per cent. There’s two problems. One is it’s great until we say we’re going to put a wind farm in your back garden and then it’s not in my backyard. Also, those people are a lot more vocal, you don’t write to your MP to say I’m quite happy.’
There was a consensus on a need for general planning reform, which is important both for solar and wind. Dan McGrail noted wryly that ‘the last six offshore wind farms that have been consented in Britain; all required the Secretary of State to overturn the Planning Inspectorate’s decision’.
Tom Gloverexplained the difficulties of getting a project approved. ‘You can’t have a development without some negatives. So, what we’re trying to do is make sure all our projects have a biodiversity net gain in its total. So, if it’s disturbing kittiwakes here then we’ll go and do some investment somewhere else to protect kittiwakes somewhere else. That’s quite hard in the planning framework for a planning specialist in one area to take that strategic view… and that’s one of the reforms that’s being suggested.’