18 May 2012

Should we re-nationalise the utility companies?

I've done the conservatory tax to death. On its own, it's perhaps not the biggest of stories and doesn't rate more than a footnote in the annals of the political machinations of the Coalition. But the problem is that it's not on its own. It's symptomatic of a whole raft of fudged decisions and misunderstanding which are beginning to taste of a deep rooted crisis in our energy policies.

On the plus side, we have in force a Climate Change Act which commits us to an 80% reduction in carbon emissions by 2050. We are, apparently, just about the only country to have done this. But as far as the plus side goes, that's just about it. I quite fail to see exactly who will be held responsible for us failing to meet this "legally binding target." But, despite this conundrum, it does at least show that the government of the day understands the nature of the problem facing us with climate change and carbon emissions.

But the big problem is how do we get from A to Z. How do we bring about an 80% reduction in carbon emissions by 2050? This is where the roadmaps come in. They offer the opportunity to map out a strategy to power society in a less carbon-intensive way.

Now you can take two approaches to energy roadmaps. You can meticulously map out scenarios for every form of energy use you can think of from cooking to commuting, pointing out just where improvements can and cannot be made. Or you can take a broad brush approach and just reduce the amounts of carbon we are allowed to burn each year and let society organise itself as best it can. Having been studying several of the micro-management roadmaps over the past year or so, I have come to the conclusion that the latter approach is preferable. The basic problem that cannot be addressed by the white-box, micro-approach is that we have no idea how much energy we will have in 2050, nor what price it will be, and without this information we can't begin to make sense of what we should be doing in the lead up to 2050.

A good example of this is the issue of the Green Deal and the retrofitting of insulation to our existing housing stock. Technically, we can do it to any standard, from simply filling up existing cavities, to undertaking radical Passivhaus-style retrofits. The difference in cost is maybe a few hundred pounds per house for the former, or a sum equivalent to rebuilding the entire house from scratch for the latter. Or, indeed, we could head somewhere in between these two extremes. But without knowing the cost of low-carbon energy in 2050, we can't make an informed decision about which way to go.

So we end up with a miasma of polices that sound like they are pointing generally in the right direction, but which in reality no one has a clue about. The Green Deal is a perfect example of this. Under it, you'll be able to borrow money for home energy improvements and you will be able to pay them off by adding the repayments onto your future energy bills. The idea — the Golden Rule, no less — is that your future fuel savings will more than compensate for the cost of the repayments added onto your fuel bills.

But there will be no guarantees about the cost of energy in the future, nor about whether the work carried out on your house will actually deliver the savings promised. The Green Deal pretends to be a hard-headed business decision, but it's no such thing, because the outcome is so tenuous.

Or take nuclear power. It's future is also in doubt and the underlying issue is surprisingly similar. Whilst businesses can calculate how much it will cost to bring a new power station on stream, they can't count on there being a sensible return because no one will guarantee them a price for the electricity they will produce. To do so is said to be anti-competitive, to be rigging the market or, as some green groups claim, to represent a subsidy. So the one form of baseload low carbon power that we know is technically feasible is unable to make any progress in the current environment, not because of people's dread fear of there being another Fukushima but because governments won't provide any guarantee that the product will be sellable.

No wonder all the energy companies are having second thoughts about new nukes. It's a bit like building a new hospital or school under a PFI scheme but without any forward contract indicating that the government would ever pay for it. Energy is seen differently: it's not a social good, like health or education, but a marketable product which we have to buy.

Or at least until people can no longer afford to pay for it. In fact, we have a new category of distress, fuel poverty, as if this is different to food poverty or clothing poverty, or just plain poverty.

And here we stumble upon the very crux of the problem. Much of the ongoing discussion about the Green Deal (and all the other energy subsidies that are flying around at the moment) centres on whether they are regressive, in effect transfers of money from the poor to the rich. It tends to be the rich that do things like do up houses and fit solar panels and to date much of this work has been paid for by hidden taxes loaded onto our fuel bills. Actually, there isn't much of a discussion to be had here because the answer is clear cut — yes, they are regressive, at least in the way they have been formulated to date.

Somehow the idea has taken root that the changes to our energy-burning habits must be funded from our existing energy consumption (i.e. our utility bills), a prime example of a hypothecated tax, and a prime example of why hypothecated taxes are not such a good idea. No one insists that the money raised from motoring taxes should all be spent on roads, or even that National Insurance should all be spent on pensions. So just why has the idea taken root that subsidies for low carbon energy or energy efficiency measures must come from our burning of high carbon energy? If these goals are socially desirable (which they are), then it's plain wrong to load them onto utility bills at a time when utility bills are already very high. People can see the connection, and the hoped-for improvements very quickly become unpopular.

In essence, energy policy is now trapped somewhere between the old Thatcherite dream of it being a privatised commodity and the new reality of it becoming a social good, like the NHS or the education system. Left to the market, it will continue to burn oil and gas, and exploit shale gas and tar sands and whatever else is around to keep the fires burning. But it will simultaneously be pumping CO2 into the atmosphere at an alarming rate, as if there is no tomorrow. Capital intensive projects like nukes and offshore windfarms and housing retrofits will be be ignored because the financial outcomes are too unpredictable, and just raising taxes on fossil fuels to pay for capital intensive low-carbon projects is becoming self-defeating.

Which begs the question, is it time to remove the utility companies from the market and make them, temporarily at least, more like the NHS? It seems politically completely off the radar, but it would enable the big infrastructure decisions to be made with long term planning in mind. If coupled with a guarantee to keep people warm through the winter (isn't that a social good to rank alongside the work of the NHS?) and to engineer a switchover to low-carbon power by 2050 at a price which wouldn't cripple the economy, then it makes sense. At least it makes more sense than allowing the current market failure to continue unabated.

After 2050, the utility companies could once again be sold off with a proviso that they could never again make money by burning fossil fuels. We did it for the banks. Arguably, this is more important.