Here’s how to make energy cheaper
Tax cuts, radical planning reform and massively expanding nuclear is the answer to the energy crisis, says Sam Richards
How do you respond to an energy crisis? That’s the question ministers will be asking officials as war in Iran sends oil and gas prices soaring. I know, because I was sitting in Number 10 being asked the same question when Russian tanks rolled into Ukraine.
Back then, Boris Johnson deployed the secret weapon of the British state – endless Cabinet Office committees – to tackle two problems: how to shield billpayers from surging gas costs in the short term, and how to stop taxpayers footing the bill again in a future crisis.
Boris would erupt with fury when civil servants explained how a few hundred kittiwakes were stopping us building vital energy infrastructure. His answer was 2022’s British Energy Security Strategy, which I helped write. Its premise was simple: speed up homegrown energy – new nuclear, renewables, and oil and gas – to insulate Britain from global price shocks.
On any reasonable measure, it failed.
Four years on we have the highest industrial energy costs in the world, the second highest domestic bills in Europe, and our energy system remains reliant on imported gas that spikes in global crises. The government is again considering paying everyone’s bills. What went wrong?
This government would argue we didn’t go fast enough on renewables. Their policy is to buy lots of renewables very quickly to replace gas. There’s a logic to this – and we can and should remove the planning barriers that slow down deployment and increase the cost of all new energy, including renewables. The catch is that while solar and batteries work in Spain or Texas, the cost of building wind turbines, our main option, has soared.
Buying lots of offshore wind in 2021 made sense at £57/MWh. But the latest deals cost nearly double that. In trying to avoid volatility, the government has bought a record amount of the most expensive wind power in a decade.
Wind farms also require more grid than a smaller number of assets like nuclear power plants, both for themselves and for the backup gas they rely on. The cost of building that grid will add £108 per year to bills by 2031 yet we’ll still pay billions to switch wind farms off when it’s too windy for the grid to handle.
There are other hidden bill costs: from carbon pricing levied upstream, to subsidies for industry. It’s gotten so bad that energy bosses have said that even if the wholesale price fell to zero, bills would still go up. Even if we bring down the cost of wind through planning and market reform, a grid dominated by it faces a core challenge: the wind doesn’t always blow.
Solving this problem leads you back to burning gas. While more wind in the mix means we burn less gas – handy when prices spike – the trade-off is the cost of building the system twice: once for wind and once for gas backup. And if gas plants run intermittently, their economics get much worse.
If we’re going to burn gas anyway should we have ignored renewables and gone hell for leather on gas? Our current crisis suggests otherwise. The North Sea is not what it was, leaving us reliant on imports and exposed to global events.
That doesn’t mean current policy makes sense. Banning new exploration licenses in a gas-hungry system that imports half its supply is self-defeating, and the windfall tax is clearly accelerating the North Sea’s decline.
But that decline is geological not political; it began well before net zero. New licenses and a better fiscal regime can extend its life, not reverse its fortunes.
Could fracking have saved us? My view then and now is that the geology, geography, population density and politics of Britain make the economics of US style fracking impossible here. Would a country that struggles with objections to new homes accept thousands of fracking pads across our countryside? Lancashire’s new Reform council certainly doesn’t seem to think so.
The deeper problem is the 2022 Strategy, in true Johnsonian fashion, set boosterish new targets, but lacked the concrete plan for achieving them. Fortunately this government now has practical plans it can implement today.
First: radical supply side reform to make it easier to build new nuclear. Nuclear cuts the gordian knot; it reduces our reliance on both imported fossil fuels and kit from China, insulating us from price shocks. It carries fewer hidden costs because it is on whatever the weather, and it is zero carbon to boot.
Going nuclear
The challenge is that our current approach to building nuclear is ruinously expensive – but it doesn’t have to be. Korea builds them six times cheaper; in this country we built nuclear power stations for a quarter of current costs.
The Fingleton review, which the government has said they will deliver in full, provides a roadmap for getting costs to that level again – the government should commit to passing the regulatory changes and legislation needed by the end of the year. Think of it as a vaccine taskforce for nuclear.
Second, we need market reform to cut waste. We can drive down the cost of renewables and add more to the grid, but they should stand on their own two feet. If data centres want to sign a deal to build solar and batteries we shouldn’t stand in their way, but our energy system should be guided by prices not planned from Whitehall. The same applies to grid queues.
Finally, cut unnecessary taxes and remove levies to slash bills now. Carbon taxes on electricity have got coal off the grid and now only serve to make all types of power more expensive. They should be removed.. Government handouts to industry should not be hidden on bills but moved to general taxation or scrapped.
Taken together this would cut the cost of electricity in the short and long term. Good for industry, good for households, while making the shift from the imported fossil fuels we use in our boilers and petrol cars more attractive for consumers. The heart of the 2022 strategy: making it easier to build energy infrastructure in Britain, remains correct. The government has a blueprint. It should get on with it.
Sam Richards is CEO of Britain Remade