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What Is The Price Of Energy?

by Lisa Waters

Economist Lisa Waters takes a look at the current state of the UK energy industry…

There seems to be a rather odd row appearing where the energy experts try to outdo each other in telling us how bad things are getting on the energy security front.

First we had out going energy regulator Alistair Buchanan, Chief Executive of Ofgem, suggesting that blackouts could occur as 10% of coal and oil-fired power stations are being shut down.

A few weeks later and MPs on the House of Commons Energy and Climate Change Committee said that “Ministers must stop ‘crossing their fingers’ and urgently develop a back-up energy strategy” in case new nuclear stations are not built.

In the intervening period Centrica (aka retailer British Gas Business) announced its profits were up by 11% and faced a huge backlash for being a profitable firm.

Given the economic climate, the UK should surely be happy to have some profitable business, but more importantly if the regulator and the MPs have worries about keeping the lights on we need profitable companies who can invest in the GB market.

In fact what Ofgem told us was nothing new; the retiring plants are shutting due to environmental legislation, and most people would support a move to a cleaner energy fleet. What is creating more of an issue is what will fill the gap?

All the policies of the previous and current government have not created a very stable energy policy background against which companies – and their financiers – can invest.

We have reached the odd situation where customers are:

  • Paying for renewables (wind, biomass, etc.);
  • About to pay for new nuclear power (and most customers will think guaranteeing a price for output is a subsidy, no matter how much Mr Davey says it is not);
  • Subsidising companies to try and get carbon capture and storage (CCS) to work on a commercial scale. (The rules do not allow anyone to build new coal stations without CCS and, with everything else relying on subsidies, only gas fired power stations are being offered market entry with no leg up from the customers’ wallet)

I am not sure why anyone would be surprised that companies are not rushing into this market.

Not only is there a general lack of cash following the banking crisis, it requires investors to take a punt on the subsidies they could get or a bet on the market and hope their competitors with subsidies do not get so much money that they can squeeze them out.

Assuming a company takes the bets – either on the subsidised kit or the unsubsidised market – if it makes a profit its CEO can expect a dressing down from most commentators as well.

Personally I do not think UK energy customers are as naive as ministers may hope. The Government keeps telling us what it is doing to keep the lights on: deals with EDF for new nuclear and more subsidies for renewables.

What it fails to mention is how much this is costing us – the customers.

As well as the energy companies (many of whom are in a far worse financial state than Centrica) other UK companies are suffering from the recession. Do they really want to pay these hidden taxes to energy companies and, even if they like the Green Deal, can they afford it?

So I am with Ann Robinson of uSwitch, who has suggested:

“The Government needs to pause and consider the impact large scale investment is having on consumers and the affordability of energy. We need some renewables but maybe not as many as people say.

I would add that we need some power plants with economics that stack up in a competitive market and that we – the customers – pay for via energy bills alone without all the add-ons.

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