DESPITE its reputation for wind and rain, Britain is not used to cold weather. Unseasonal snow over the past couple of weeks has blocked roads, shut airports, closed schools and brought the army out to help clear Edinburgh’s streets. Energy-watchers, meanwhile, have been fretting about the spike in energy consumption caused by the chill. On December 6th prices rose to a two-year high as Britain recorded one of its highest-ever levels of electricity demand.
Such figures are in the news because Britain is facing an energy crunch. All but one of its nuclear stations, and about half of its coal power plants, will shut by 2023 and must be replaced. Left to its own devices, the market would replace them with natural gas, but the government has committed itself to eye-wateringly tough climate-change targets, aiming to reduce emissions of planet-heating gases by 2050 relative to their 1990 levels by 80%. To that end, ministers hope to encourage a mix of nuclear reactors and wind-, wave- and solar-powered electricity.
Two developments, one last month and one to come next week, suggest how hard it is going to be to achieve that aim. On November 26th Ofgem, the energy regulator, announced an inquiry into competition in the energy sector after profits in the industry jumped by around 40%. Several big suppliers, including Scottish and Southern Energy and British Gas, have imposed price rises of up to 9%. Previous inquiries have found no evidence of collusion. But high energy bills remain politically poisonous: at a time of street protests over university fees and an embarrassing series of WikiLeaks, David Cameron, the prime minister, was asked about energy bills at his once-a-week question session in Parliament this week.
Next week, perhaps on December 16th, the government will publish proposals for reforming the energy market, in an attempt to secure the £200 billion ($316 billion) of investment in new generating capacity that Ofgem thinks is needed to keep the lights on while hitting carbon-reduction targets (see chart). Ministers talk of a renaissance of nuclear power, involving the construction of up to eight new reactors over the coming decade, coupled with a huge expansion in renewable energy. According to a European target that Britain has signed up to, renewables will account for 15% of total energy consumption by 2020, up from 3% today.
So far at least, it isn’t happening. Chris Huhne, the energy secretary, admitted recently that Britain ranks 25th out of the EU’s 27 member countries in the amount of energy generated from renewable sources (only Malta and Luxembourg do worse). And although several sites in Britain have been earmarked for new nuclear reactors, construction—or, indeed, licensing of reactor designs—has yet to start.
The issue, say the power firms, is one of risk. Neither nuclear nor renewable energy is competitive with gas or coal unless there is some form of government support. Nuclear plants in particular have low running costs but enormous capital costs: investors must make a 20- or 30-year bet that power prices will remain high enough to pay off the cost of building the plant. Both the previous Labour government and its coalition successor have insisted that nuclear power will not receive public subsidy. Utility bosses, meanwhile, are making it very clear that Britain is not the only place where they can invest their cash.
Ministers have not been short of advice, and the theme underlying most of it is that, with the government desperate to secure investment, the no-subsidy pledge will have to be torn up. On December 7th the Committee on Climate Change (CCC), which polices Britain’s 2050 commitment, published a report saying explicitly that there needed to be much greater state involvement and control. It recommended that the government award decades-long, more or less fixed-price contracts to firms to make sure that nuclear plants and wind farms get built. For a country that pioneered liberalised energy markets in the 1990s, that is quite a reverse.
As The Economist went to press, the government was hinting that it would seek to impose a floor price for carbon and European-style “feed-in tariffs”, designed to increase the cost of fossil-fuelled electricity and ensure that nuclear and renewable electricity is profitable. Other possible plans include rewarding firms for maintaining stand-by capacity to supply power to the grid in an emergency, and preventing the construction of new coal stations that do not have some way of capturing and storing their planet-heating emissions.
The trouble is that all this will mean higher bills. Britain now pays around £1 billion a year in subsidies for renewable energy, which adds some £80 to a typical household’s annual bill. Projections from uSwitch, a price-comparison website, suggest that propping up nuclear and renewable energy could cost every household more than £500 a year by 2020.
Paradoxically, the very size of the required subsidies may make firms reluctant to invest, says Peter Atherton, a utilities analyst at Citigroup, a big bank, out of fear that the government may not honour the commitments if voters start to complain. “After all, the build time of a wind farm or a nuclear plant is longer than the lifetime of a parliament,” he points out. He cites experience in Europe, where generous German and Spanish subsidies for renewable energy were hastily clipped once it became apparent how popular (and therefore costly) they were.
Mr Atherton reckons that the long-term, high-price contracts recommended by the CCC might persuade firms to pony up, since these commitments would be hard to wriggle out of. That may secure the needed investment, but it would mark the end of Britain’s love affair with liberalised energy markets—and would make the cost of clean energy uncomfortably explicit.
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