Energy Prices-The Times

The Times   20 December 2013

The lost gamble forcing up our energy bills

Dieter Helm  (

The Government was sure gas and electricity would rise. How wrong can you be?

Ed Miliband, Chris Huhne and Ed Davey — the three most recent Energy Secretaries — all agreed on one thing: the price of oil and gas would keep going up. It was therefore their job to protect us from ever more expensive fossil fuels.

Armed with this certain knowledge of the future, it was a small step to arguing that Britain had to promote current renewables as a way out of the future hell of fossil-fuel dependent energy prices.

By about 2020 it was assumed that expensive technologies such as wind farms and solar panels would be competitive against what would by then be much more expensive fossil fuels. Add in a bit of energy efficiency, and ministers could confidently predict that household energy bills would be 8 per cent lower by 2020 than they would have without their policies.

Almost everything that could be wrong with this is in fact wrong, and it explains the mess that British energy policy has got itself into. There is no shortage of oil, gas or coal. We are not running out of any of them. There is enough to fry the planet many times over. There is no reason to assume that oil and gas prices will go on ever upwards, and it is at least possible that they will fall, joining the sharp fall in world coal prices. If so, renewables are unlikely to become cost-competitive by 2020. The subsidies will not then wither away. They would be permanent. Therefore, bills would be higher than they would have been as a result of government policies, not lower as Mr Davey claims.

Shale oil and gas are not temporary aberrations, but permanent facts on the ground. The US has the fastest-growing oil production and a very rapid expansion of gas. North America is on the way to rough energy independence over the next decade. Energy-intensive industries are reshoring to the US, rather than to Europe. There is virtually no energy- intensive investment in Europe. The US is about to start exporting gas, it is flooding the market with refined oil products and is holding back its carbon emissions by switching from coal to gas for electricity generation. Instead of burning that coal, it is exporting it to Europe. None of this featured in the mindsets of Messrs Miliband, Huhne and Davey.

It is not just the US. Shale oil and gas are widely distributed. It will take time, but Argentina, China, Algeria, Russia and the Middle East have lots of the stuff. If the US-Iran relationship thaws and Iran provides the key to unlocking Iraq’s enormous cheap conventional reserves, it is possible that in a decade or so the three countries now producing 10 million barrels of oil aday will become five — Saudi Arabia, Russia, the US plus Iran and Iraq.

What will all this mean for prices? Already the total fuel input costs to electricity generation in Britain are falling. The price of coal has fallen and the share of coal in electricity generation has risen from about 28 per cent to nearly 40 per cent. Gas prices are no longer rising, and the oil price has been flat for a couple of years.

This should all have fed through to lower household and industry energy prices — but it has not, and probably won’t anytime soon. There are two reasons why electricity prices are likely to rise. First, lack of investment is causing a serious crunch in the next couple of years. As old power stations close down, the gap between supply and demand will close up, and the likely result is a sharp rise in prices. That alone should send shivers through British households in future winters. Second, Britain has chosen some of the most expensive technologies on a crash course to meet a short-term 2020 European renewables directive.

The fallacy of “knowing the future” is all too seductive, especially when it is convenient for picking politically favoured “winners”. The scale of the resulting mistakes is awesome. Britain — as well as Europe — is already saddled with uncompetitive energy prices. These render energy-intensive industries uncompetitive and inflict pain on households. But the real tragedy is that all this has done nothing in the fight against climate change. As investment in energy-intensive industries shifts overseas, we import the carbon rather than produce it. It is hard to make up the result — higher prices, lower competitiveness, serious risks to security and more carbon consumption.