Conservative Home: Clean energy needs less regulation, not more

Published 27 Feb 2014

In most sunny parts of the world it is cheaper to generate power from photovoltaic modules on your roof than to buy it from your utility.  The best newly-built wind farms are selling power at the equivalent of 3p/KWh before subsidies, which neither gas, nor coal, nor nuclear power can match.  LED light bulbs can be bought for a few pounds, providing home-owners a quick and cheap way of cutting their utility bills.

The fact is that wind and solar have joined a long list of clean energy technologies – geothermal power, waste-to-energy, solar hot water, hydro-power, sugar-cane based ethanol, combined heat and power, and all sorts of energy efficiency – which can be fully competitive with fossil fuels in the right circumstances.  What is even more important is that the cost reductions that have led to this point are set to continue inexorably, far out into the future.

For the past ten years, my team at Bloomberg New Energy Finance has been documenting ‘experience curves’ for clean energy technologies: the rate at which their costs drop for each doubling of cumulative installations.  We have had privileged access to data from clients, many of whom are manufacturers and project developers.  What this data tells us is that all clean energy technologies, without exception, benefit from strong experience curves.  Where Moore’s law has given us dirt-cheap electronics and phones, Liebreich’s law is going to give us abundant, cheap clean energy.

Meanwhile, over the past decade, the world has been waking up to the true cost of fossil fuels.  It’s not just the half-a-trillion dollars a year or more of direct subsidies to fossil fuel consumers.  What is becoming increasingly clear is that further hundreds of billions of dollars in energy costs are borne not by the fossil fuel industry or directly by energy consumers but by the general public.  These so-called externality costs include medical costs of air pollution, negative economic impacts resulting from commodity price spikes and the cost of defending our energy supply chains.  They pop up in our medical bills, our unemployment figures, and our defence budgets.  And that is before bringing the environment or climate change into the equation; or the heightened geopolitical risk caused by dependence on some of the world’s most volatile countries; or the corrosive effect on our political life caused by fossil fuel stakeholders fighting to preserve the status quo.

So we have ever-cheaper renewable energy versus increasingly obvious costs and down-sides to fossil fuels.  Are there any game changers on the horizon? Shale gas has certainly been an astonishing success story in the US and looks promising in the UK, Poland, Mexico and China.  Gas has a lower carbon footprint than coal, and domestic production offers significant economic and geopolitical benefits over imported resources.  But there are economic caveats, aside from any environmental concerns.  The US natural gas price has already more than doubled from its historic lows in 2012 to over $4.00/MMBtu; operators will need a long-term price of around $5.00/MMBtu to justify continuing to drill, frack and build pipelines. And that is in a country where conditions are ideal.  Elsewhere in the world, it is hard to see shale gas coming to market much below $8/MMBtu, around the same as the wholesale prices which have been driving up European utility bills so sharply over the past few years.

Before the Fukushima accident in 2011 there was much talk of a nuclear renaissance, and some countries remain committed to building new plants.  However, the UK experience is instructive: the government had to offer a power price of £92.50/MWh, adjusted for inflation over 35 years, to get new nuclear power stations built.  Nuclear power works and it is low-carbon – but it’s not cheap and most likely never again will be.

The bottom line is that there are no silver bullets on the horizon.  The electricity system of the future will be based on a mix of super-efficient appliances, renewable energy, natural gas and nuclear power.  Our cars will either have to be vastly more fuel-efficient or else they will be electric.
We will, of course, have to learn how to manage the intermittency of renewable energy.  That means improving resource forecasting and interconnecting the power grid over larger areas to smooth out the variability of individual renewable energy assets.  It means power storage, currently mainly in the form of pumped hydroelectric power but in future most likely in the form of batteries for electric vehicles.

But the killer app is a digitally-controlled smart grid, which will provide the ability to shift demand to match supply in ways either imperceptible to the consumer or else remunerated by the energy provider.

This energy system of the future is not a pipe dream.  Worldwide, over a quarter of a trillion dollars a year is being invested annually in renewable energy, energy efficiency and supporting technologies.  Germany derives over 25 per cent of its electricity from renewable energy.  Texas, synonymous with the oil and gas industry, generated nearly ten per cent of its electricity from wind last year.  China is the world’s largest player, with around half of its new power capacity over the next 20 years expected to be renewable, rather than coal, gas or nuclear.

The problem for the political right is that this epochal shift to clean energy has completely wrong-footed it.  For too long it has allowed the left to claim ownership of the environment, despite its own achievements in the area (as described elsewhere in this booklet by Geoff Lean).  For the left, being pro-environment and anti-business are one and the same: its approach to environmental protection is based mainly on controlling or blocking enterprise.  The mistake of the right has been implicitly to accept that protecting our environment is in opposition to achieving a prosperous and free society.
In particular, the right has allowed the left to make all the running on clean energy.  Feed-in tariffs are nothing less than state price controls.  Renewable energy targets are indistinguishable from Soviet five year plans.  Over-regulation and complex planning requirements add costs, slow down projects, reduce transparency and increase risk.  Green Investment Banks are the very embodiment of state capital allocation.  Capacity payments and carbon price floors are evidence of failure in the design of markets.  Don’t get me started on price caps.

We have seen the results of these approaches.  Germany may have reached over 25% renewable electricity, but at what excessive cost to its household energy users?  Spain reached 42%, but its retro-active policy U-turns have left its entire economy all but uninvestable.  Around the world the energy industry – fossil fuels as well as clean energy – is in the grip of a pandemic of rent-seeking, subsidy-farming, inefficiency, misallocation of resources, and the inevitable picking of losers.
The big mistake of the right has been to leave unchallenged the assumption that leftist tools are the only ones available to manage the transition to clean energy, instead of coming up with good conservative solutions – ones which have improved services, lower costs, competition, wealth creation, pricing in of externalities, personal responsibility and freedom at their heart.

Wind power in Brazil is among the lowest cost sources of electricity in the world.  Why?  First, a reverse auction system forces providers to compete on cost.  Second, Brazil has a grid which, if superimposed on Europe, would allow a Portuguese wind farm to sell its electricity to a client in Moscow.  In Europe, a Portuguese power producer can’t even sell its electricity in France.  Meanwhile the EU is trying to impose more top-down renewable energy targets on member countries rather than focusing on creating a single market for energy and related services.

When it comes to energy, the right has to regain its reforming mojo. It has retreated into corporatism – hunkering down with its corporate funders and resisting change instead of taking up the cudgels on behalf of the individual, the consumer, and then reaping the electoral benefits.

Where is the self-confidence with which it transformed the world’s other major industries?  Time and again we were told that telecoms, airlines, steel, cars, mainframe computers, yoghurt – or whatever – were natural monopolies and strategic industries which had to be protected from competition; and  that only central planning could provide stable outcomes.  In short, that leftist, statist solutions were the only ones available.  Luckily Thatcher, Reagan and their successors rejected that narrative and the results are history.

The time has come to apply this sort of rigour to the energy sector.  Where is the Easyjet of clean energy, or the Virgin Atlantic?  Where is the Vodafone, the Safaricom?  Where are the new services, the new providers?  The answer is they don’t exist because policy is being written with the state and industry incumbents in mind, using mainly the tools of the left.  Only by releasing a maelstrom of entrepreneurial and competitive activity will the world be able to build a high-performing clean energy system without driving costs to unacceptable levels.  And only by leading the process will the right find its natural voice on energy and the environment.