The think-tank Civitas has today published a short paper, "Are Green Times Just Around the Corner?", by REF's director, John Constable.
The paper asks whether a low carbon economy can sustain contemporary standards of living, and argues that it can only do so if the costs of renewables fall to make them competitive with current fossil fuels. The paper further suggests that subsidies to renewables are actually counterproductive, and discourage invention and innovation.
Various estimates of the costs of current renewables subsidies are offered, with the suggestion that the total annual cost of renewable electricity policies alone will be about £16 billion, about 1% of current GDP. That amounts to approximately £600 per household, assuming 26 million households, with about 1/3 of the impact falling directly on domestic bills, and 2/3s affecting industrial and commercial consumers and then hitting households through the increased cost of goods and services.
The story has been widely covered in the press, with articles in the Sun, the Daily Mail, and the Daily Telegraph. Other online services are also reporting the story, for example politics.co.uk, and, with some innaccuracies (now, 20.05.13, corrected), BusinessGreen.
The Department of Energy & Climate Change (DECC) has responded to this paper, by saying that they "don't recognise the numbers", though they do not reveal the scale of the discrepancy between their cost estimates and those put forward in the Civitas paper.
DECC offers several other points of criticism, namely that the majority of the increase in domestic energy costs is because of rising gas prices; that the costs of renewables will fall in the future; that the effect of increased energy efficiency in domestic houses will protect consumers from the price impacts of the policies; and that green growth creates jobs in the renewables industry.
With regard to the gas impact on contemporary price increases, this is true but irrelevant to Dr Constable's paper, which discusses the future impact of renewables subsidy costs. As Dr Constable has argued elsewhere the renewables policy is a gamble on the future price gas, and will only look sensible if gas prices rise stratospherically (see Patrick Heren and John Constable, "An Alternative To Our Reckless Energy Gamble", Standpoint (May 2013)). But this is uncertain. Prices may rise, but then again they may fall, and at present the latter scenario looks fairly likely. But no one has any idea where gas prices will go in the next decade, and government shouldn't be betting consumer funds on such an uncertain matter.
With regard to falling renewables costs, this claim is simply implausible. Apparent declines in solar costs are largely the result of competition from Chinese manufacturers that have been subsidised by the Chinese government in order to gain market share, and, ironically, have low fossil fuel energy costs. Wind power costs have shown no sign of significant reductions, otherwise government would have been able to make bigger cuts in the subsidies than the trivial 10% reduction announced last year for onshore wind. In any case, as the Civitas paper notes, a large part of the cost of uncontrollable generators such as wind is in the grid and system management costs that they impose, and there is no sign that these costs are coming down or that they are likely to.
However, DECC claims that energy efficiency policies will protect consumers. No one believes this claim, which rests almost entirely on the extremely dubious assumption that electricity price impacts, which government estimates to be + 33% in 2020, will be offset by more efficient set-top boxes, fridges, dishwashers, kettles, and other appliances. It is not clear whether consumers will be able to afford to replace such goods in the current economic climate, and even if they do so, it is far from certain that they will deliver the savings required.
Finally, DECC argues that increasing numbers of jobs in the green energy sector will bring prosperity. However, it is precisely this assumption that the paper tackles head on. No one doubts that subsidised green energy will employ very large numbers of people. But this simply tells us that renewables are a low productivity sector; high employment indicates that the energy is expensive to produce, and that wages will be low. As Dr Constable writes in the paper:
The fact is that renewable energy is still far from competitive with fossil fuels, and nowhere near as economically productive. Consequently, shifting to current renewables for the bulk of our energy would result in a reversal of the long-run economic trend since the industrial revolution. More people would be working for lower wages in the energy sector, energy costs would rise, the economy would stagnate, and there would be a significant decline in the standard of living. The population would begin to step back towards the condition of ‘laborious poverty’ noted by Jevons as characteristic of the pre-coal era.
It should be recalled that three quarters of the working population was employed on the land in low paid jobs before coal delivered extraordinary growth and wealth through the industrial revolution. The pre-coal, agricultural world had a green economy, but it is not of a kind to which any sensible person should wish to return. DECC's standard line, that there will be very large numbers of green jobs, is self-indicting. If it is true, then there is no desirable green economy just around the corner. Yes, there will be many low paid jobs in a low productivity green energy sector, but the resulting high energy costs will have destroyed jobs throughout the rest of the economy. Only cheap, green energy, will result in a prosperous low carbon economy, and there is no realistic prospect of cheap green energy without radical invention and innovation. However, subsidies to existing technologies discourage such experimentation. Why would an investor put capital at risk when they can make very good rates of return by building with existing equipment.
In conclusion, the Civitas paper presents a reasoned and realistic appraisal of current policy costs and attempts to avoid wishful thinking. DECC, on the other hand, seems unwilling to consider anything other than optimistic, best case, scenarios, which is, surely, unforgivable when the hazards of policy error are so significant.