By Jane Fae
Britain's energy deal with China is remarkable. It will see us stump up some £18 billion on a "flagship project of cooperation", commit to a new generation of nuclear power plants and make us dependant on a major power whose politics and strategic interests are a world away from our own.
We are investing in the potentially ruinous white elephant of Hinkley Point and simultaneously slashing support for solar at precisely the point when the latter looks set to start paying its way. Whatever became of austerity? Or even plain old-fashioned common sense?
The government argues harsh necessity – a need to keep the lights on, no matter what the woolly-hat brigade might prefer. Behind the practicalities, though, sit some rather less palatable political choices: a preference for central control and big business over anything which smacks of democracy.
The conventional headline case goes something like this. An energy gap is looming – not years ahead, but now. Many older plants have been kept in service long past their use by date. They are now closing. Gas plants, which are traditionally used to plug short-term energy gaps, are being mothballed because they simply cannot compete with an abundance of cheap coal-generated electricity. New plants are not coming on stream until 2017/18.
Most of the year, it won't matter. But at peak periods in winter, according to Ofgem, the supply margin has dropped from a relatively relaxed six per cent to just two per cent. But even that appears to be as much a function of recent efficiencies and a sharp fall in consumer demand. If either of those go into reverse, we're in trouble.
And it isn't just the overall level of generation that counts. It's the type of generation.
This is how it works. Some of our power is generated by baseload plants – traditionally coal, nuclear and hydro, which work best when satisfying standard day-to-day demand. But the power generated to meet daily surges in consumer demand comes from peaker plants – primarily gas, but also renewables such as solar and wind. The latter, though, suffer from the fact that they are intermittent and not available 24/7.
The received wisdom is that baseload plants are less responsive to abrupt changes in demand, but are cheaper. But this has become increasingly untrue over the last decade, as the cost of renewables – particularly solar – has plummeted. Compare that to the deal struck with China, which commits the UK to paying for electricity at an eye-watering two and a half times average wholesale price for a minimum of 35 years: £92.50/MWh (in 2012 prices) agreed vs £40/MWh average this year (£39.14/MWh in January 2015).
So much for the practical business case. For at least a decade, the UK has put off taking difficult decisions over power generation. Now we're on the brink of crisis so, the government argues, drastic action is needed. If that means not getting quite the best deal for UK plc, so be it. Needs must and all that.
The construction cost has already escalated from £16 billion to £18 billion. Any additional costs for a project of such strategic importance are likely to be picked up in full by the UK taxpayer.
Behind all this, there is a wider political perspective, which is on the brink of being revolutionised by changes in energy technology – firstly by our ability to store electricity and secondly by reducing usage through more effective control.
Earlier this year, a report from Deutsche Bank suggested energy storage – the "missing link of solar adoption" – will be cheap enough, and technologically ready, to be deployed on a large-scale within the next five years.
Meanwhile, the smart grid promises greater energy efficiency through the increased ability of central generators to take control of local devices. They may not be switching off our toasters any time soon, but cycling non-essential functions in large enterprises could soon be a reality.
The problem – the political problem – for government and business alike is that both these developments are disruptive and upturn over a century of conventional wisdom. Combined, they usher in an era in which the traditional economic premise of big utility companies controlling electricity generation and supply will be undermined, perhaps fatally.
For in place of this top down command-and-control structure, imagine a world in which individual citizens capture electricity through small scale home initiatives and then feed this back into the grid. Once you add storage to the mix, you can imagine individuals building up a significant credit. Community and collaborative initiatives will contribute to that. Internet-enabled price negotiation will give communities the power to deal with the power companies on the basis of commercial parity.
All these changes are knocking at the door. In some places – California, Germany, Spain – they are already across the threshold and the cracks are beginning to show.
In Germany, the BDI industry federation, representing about 100,000 companies, has been lobbying fiercely against the feed-in tariffs which guarantee above-market payments to the owners of new clean-energy plants. The issue, they claim, is structural. Government support for renewable energy is too much, too fast and the sector needs to be integrated into the market.
They have a point. Upending a system this long in the making so suddenly is bound to bring about major dislocation.
There will be consequences, as there have been every time the old gives way to the new. Our government's view – when it comes to old industries such as coal, steel and manufacturing – is that, while regrettable, workers must get with the programme.
At least, that seems to have been the message to workers. The suspicion is that when it comes to the bosses, a double standard is in play. Faced with a choice between encouraging technologies that will in time reduce the power of the utilities and introduce some rudimentary democracy to our electricity contracts, the government has opted to pile most of its eggs into one very expensive Chinese nuclear basket.
Even allowing for the traditional Conservative distaste for renewables, which has only focussed on price so long as it worked in their favour, this looks remarkably like a desperate attempt to maintain the status quo.
So this isn't just a bad deal when it comes to traditional accounting measures. It's a bad deal all round. It fails to take account of where the electricity industry is headed or recognise that, as this century unwinds, power will, bit by bit, return to the people.
Jane Fae is an commentator and writer, including on energy and climate change issues. She wrote a series of major reports for research companies and has consulted extensively on behalf of UK energy providers.
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