Is Policy Exchange playing to the tabloid agenda on renewables?
- 18 Jan 2012, 15:00
- Robin Webster
Yet another
report has been released today by a right-wing think tank
attacking the cost of developing renewable energy technologies.
This time the
top-line finding, presented in media-friendly form, is that
"renewable energy will cost households an extra £400 a year" (the
actual figure they come to is £415).
So far, this news has been given a
fairly muted welcome by the media, and the
government has responded (rather irritably), labelling the
report "flawed" and "not credible".
However, it's a fair bet that this will gain some more traction
later on in the day, and if it's in the Daily Mail tomorrow we
wouldn't be shocked, shall we say.
The report is by Policy Exchange, an
influential think tank
closely linked to the David Cameron project that promotes free
market solutions to policy questions.
Over recent months they have consistently
argued against various parts of the government's green agenda,
suggesting that free market policies like the Emissions Trading
Scheme would work better, and be cheaper than other policy measures
like
feed-in tariffs. Unlike some other players in the energy
debate, however, they aren't a fly-by-night outfit, so you'd expect
their reports to be pretty sane and substantive.
In assessing costs, Policy Exchange have taken a similar approach
to other recent work by, amongst others, the TaxPayers
Alliance and Civitas.
They attempt to assess the full impact of carbon and energy
policies on households rather than just looking at their impact on
energy bills. They go further, arguing that the government's
approach to assessing the cost on energy bills is
"misleading".
A "government source", which spoke to BusinessGreen, was less than
complimentary about this approach, arguing that it is just one of
many similar reports which make bold statements which "don't quite
stack up" when the assumptions behind them are analysed. With this
in mind, it's interesting to have a look at what some of those
assumptions are.
A significant chunk (45%) of the £415 comes from what are called
'pass-on costs' - where businesses experiencing higher energy costs
pass a proportion of those costs onto consumers by raising the
price of the products and services they sell.
The report says:
"About 70% of UK electricity is consumed
by the non-household (business) sector, which also pays a share of
the costs of renewable energy subsidies. We assume that 80% of the
renewable subsidy costs on non-households are ultimately borne by
households. This amounts approximately to an additional £185 a year
per household by 2020."
£185 is 45% of Policy Exchange's total estimate of a £415 cost.
It's difficult to interrogate how reasonable the figure is in the
report because it rests on a number of unknowns and Policy Exchange
don't explain how they arrived at it.
It does raise a number of related questions - for example, will
businesses always respond to rising energy costs by putting up
their prices? What if they are working in a competitive sector and
can make savings elsewhere? What proportion of a product or service
is accounted for by the cost of energy? If you're smelting
aluminium, it's probably a lot. If you're a blogger, (for example)
it probably isn't.
Author Mark Lynas has taken a look at some of the cost issues in
the report
here, (with a particular focus on offshore wind). Simon Less,
the author of the Policy Exchange report,
responded on Lynas' blog, including having this to say on
pass-on costs:
I refer in the report to five impacts
that higher energy costs for a business could have: higher consumer
prices, lower employee wages, lower shareholder (much of it pension
fund) returns, higher prices to foreign customers and (potentially)
offsetting by productive efficiencies. On the basis that these are
probably in order of scale and most of the first three ultimately
hit households, I consider 80% is a reasonable assumption.
In our view doesn't really answer the questions above and we'd
be interested to hear the thinking on why 80% is a reasonable
assumption. Otherwise, this is a pretty opaque figure.
An important point on equity
There is a very interesting point made in the report about equity
which is worth paying attention to. The government argue that
although the price of energy may rise because of a shift to
renewables, the average household will see its energy
bill go down, relative to what it would have been, as
householders take advantage of energy efficiency measures.
The PX report states that
"According to the documentation
accompanying Chris Huhne's annual energy policy statement, only a
third of households are expected to be able to benefit from at
least one insulation, renewable energy or rebate measure by 2020.
For the poorest households (in the bottom three expenditure
deciles) only slightly more - 40% - of households could benefit
from at least one of these measures."
If this is right, it makes DECC's claim that energy bills will
on average go down as a result of energy efficiency measures a bit
suspect, as many households will not benefit. This will fall harder
on poorer sections of society.
This seems to reflect an
argument which has been raging in the
pages of the Guardian over the last week or so, about the
impacts of the Government's 'Green Deal'. Poorer households may be
less likely to be attracted by measures to help them get a loan to
improve their household's energy efficiency. Will they really want
to take on debt in order to pay up-front costs, even if it could
save them money in the longer term?
Again, if DECC want to make their calculations stack up, they have
to make their proposition on energy efficiency believable and
ensure that they are adequately targeted at the poorer section of
society. So far they haven't managed to convince.
What are Policy Exchange arguing for?
The report says that
By clarifying the full impact on
households in this way, it does not mean that Policy Exchange is
arguing against the importance of spending money on reducing carbon
emissions. Far from it. What we want to see are policies which can
command sustained public support over the long-term timescales
needed to address climate change.
In terms of reducing domestic emissions in the short term, the
main policy which PX seem to support is the EU-wide Emissions
Trading Scheme (ETS), which they argue is more cost-effective -
"saving carbon emissions at a marginal cost of only £5-15 per tonne
of carbon".
There are two points worth noting here - first, a significant
chunk of emissions reductions through the ETS are delivered through
'offsetting' through the Clean Development Mechanism (CDM). The
problems with the CDM are pretty well documented - "emissions
reductions" delivered through the CDM may be cheap, but there isn't
much evidence that they actually work.
Secondly, if Policy Exchange are right and we can meet emissions
targets to 2020 by burning less coal and
even more gas than we are currently are, this could make sense
up to 2020.
Between 2020 and 2030 though, it might present something of a
problem. The
Committee on Climate Change suggests that we need to
decarbonise the power sector by 2030 in order to meet emissions
reductions targets. You can't do that by burning gas, barring
substantial developments of CCS technology. And that really is
expensive.
Finally, the PX report also expresses all of these costs - which
are not added onto an energy bill - as though they were. The report
says that
If these additional renewable subsidy
costs to households identified by Policy Exchange are added to
DECC's figures, then the total net cost (not just through energy
bills) to the average household of carbon and renewable policies
will be equivalent to 15% of the (without policies) energy
bill.
They claim this is to compare with DECC's figures, but as the
two exercises are quite different it doesn't make a lot of sense.
We have our suspicions as to why this has been done, which revolve
around giving tabloid newspapers the headlines they are
after.
There's the rub. This reports focuses on the costs of shifting to
a low-carbon economy, whilst rubbishing the benefits. It produces
tabloid- friendly numbers for those who want to attack domestic
climate policy. If, as they claim in the report, Policy Exchange
really want to see policies that "command sustained public support
over the long-term timescales needed to address climate change",
they could perhaps start by not playing into a tabloid agenda that
appears to be trying to avoid exactly this outcome.