You can avoid reality, but you cannot avoid the consequences of avoiding reality

My blog is 8 years old today!

The past year has seen my business develop in ways I did not expect even a year ago when I was celebrating my higher profile. I am still regularly quoted in the press and have written regularly for the Telegraph website, but the biggest difference is in the levels of engagement I am having and growing signs that my contrarian views are no longer quite so contrarian! This is greatly encouraging, not just on a personal level – this notice is translating into more business opportunities – but more broadly it provides signs of hope that hitherto unrealistic policy ambitions may be tempered. This week someone told me that I’m an energy “influencer”!

A year ago I noted that the discourse around climate policy had changed, prompted by the security of supply and affordability concerns emerging in the wake of the Russian invasion of Ukraine, a conflict that sadly continues. The trilemma was back with a vengeance and has not gone away – recently the UK Government announced a renewed desire to see the delivery of more gas power station this decade, despite the lack of available abatement technology.

“There are no two ways about it. Without gas backing up renewables, we face the genuine prospect of blackouts. Other countries in recent years have been so threatened by supply constraints that they have been forced back to coal. There are no easy solutions in energy, only trade-offs. If countries are forced to choose between clean energy and keeping citizens safe and warm, believe me they’ll choose to keep the lights on. We will not let ourselves be put in that position. And so, as we continue to move towards clean energy, we must be realistic,”
– Claire Coutinho, Secretary of State for Energy Security and Net Zero

But probably the most seismic change in past year came in July when the Labour Party failed to win the Uxbridge by-election as voters rebelled against the expansion of London’s emissions charging scheme known as “Ulez” (Ultra-low emissions zone). As a result, councils up and down the country abandoned plans for similar schemes, and the unpopular incumbent Conservative Party saw an electoral opportunity, shortly afterwards watering down the electric car mandate and plans for heat pumps. The Labour Party is not immune to climate u-turns having recently abandoned its green-spending pledge.

However, it hasn’t all been good news. In February I took part in IE Week, speaking on the final day of the conference in a session devoted to electricity. Too many of the speakers spouted out-of-date mantras about renewables being “cheap” and painting a naïve picture of a green utopia with green energy, green jobs, sunshine and flowers. I likened it to a child’s picture of a house – ask any child to draw such a picture and you get something along the lines of the image shown – charming, but hardly realistic.

When asked about people sitting in the cold and dark in order to save a few pennies under the Demand Flexibility Scheme, one speaker hailed the “social media buzz” they were generating, failing to recognise that they were driven by poverty and not a desire to be “down with the kidz”. However on a more positive note these remarks did not go down well with the audience, many of whom thanked me for being the “voice of reason” in the room. Still, we need to do more to avoid designing energy markets with the affluent in mind, while ignoring the reality of the majority.

The tone at the Flame gas conference this week was markedly different. Speaker after speaker stated, clearly and unequivocally, that net zero targets are unlikely to be met and that there needs to be a “plan B”. In the past, gas executives shied away from such statements fearing a “you would say that” response, and accusations that entrenched interests made their statements inherently unreliable. This is a common refrain from too large a segment of stakeholders, and just this week I was accused on LinkedIn of being funded by fossil fuel companies and essentially being a “climate denier” (and likely anti-vaxxer to boot!)

These more realistic statements also need to come out of the closet in the power sector. I hear time and again both directly and indirectly that senior executives in the sector share these views, but they need to express them in public so policy-makers can understand the likely failure of their targets. Indeed, at Flame, it was also noted time and again that success in meeting the targets, which are expressed in terms of territorial emissions, would likely result in wide-spread de-industrialisation as energy intensive industries fail to compete with exporters in countries with a less green approach to energy policy.

And despite the more positive tone from the UK Government, it has not been able to prevent further de-industrialisation in Britain, with the news that refinery activities at Grangemouth will cease and that the last blast furnaces in the Port Talbot steelworks are to close with the loss of 2,800 jobs. There are plans for the site to convert to the use of electric arc furnaces, but the loss of the coke ovens will see two thirds of the workforce made redundant.

As Dieter Helm points out, reducing our emissions in this way may well make climate change worse, since we will import more goods from countries with dirtier production methods and there will be an environmental cost to transporting them over longer distances. Helm is a big advocate of carbon pricing and believes that a strict carbon border adjustment mechanism (“CBAM”) – a carbon tax on imported goods that are not subject to the same strict environmental rules that we have – would deliver global results. But it would also be hugely inflationary, making goods significantly more expensive. While the EU (and a little further behind, the UK) plan to introduce CBAMs, I can’t help wondering if when the time comes, they are not weakened out of concerns over affordability.

Another key message from Flame was that while Europe had coped well with the near total removal of Russian pipeline gas from the market following the invasion of Ukraine, it had yet to be properly tested after two unusually mild winters. Several speakers also cautioned that there is now very little supply-side flexibility left in the market and that further disruptions would cause prices to spike again. Further escalation of the conflict in the Middle East would potentially threaten the ability of Qatari LNG to reach international markets and could lead to production shut-ins which would not be recoverable from elsewhere as other producers are already at maximum output.

There are also stresses in the power market. Ratcliffe-on-Soar, Britain’s last remaining coal power station, has announced its closure while the opening of Hinkley Point C has been further delayed. Up to 10 GW of firm, dispatchable generation may close by 2030, but only 2.5 GW of similar capacity is expected to open. Last year when I wrote my anniversary blog, I noted that there was almost no wind on the system that day – the same was true today.

Yet we still have celebratory social media posts from National Grid ESO and others when there are days that wind dominates. This is all very well, but it does not mean we have energy security, and it’s dangerous to be too excited about it, because days like today are not uncommon. And this illustrates very well why renewables are not cheap, because for every MW of wind and solar power that is installed, a corresponding MW of another form of generation or storage will need to be built to cover days like today. And at least twice as many grid connections will be needed with all the associated network infrastructure.

But the financial cost of renewables is not the only downside. Renewables are heavily resource intensive, requiring large amounts of metal. Metals are produced by digging or blasting rock out of the ground, and using heat and often toxic chemicals to separate the metals from the rock, leading to localised pollution, water shortages, and related adverse health impacts. Mining is also associated with labour and even human rights abuses. Public opposition in mineral-rich south America is growing, which is threatening the supply chains for renewable generation. And, while these metals are also used for conventional generation, its higher energy density means that much less of it is needed per MW of capacity and per MWh of electricity generated. Renewables, and in particular off-shore wind, are inefficient both in terms of capital and resources.

More people are now accepting that renewables are not cheap. I hope that they will also start to realise that the environmental cost of extracting the critical minerals required is also an important consideration. I have often advocated for a more holistic approach to sustainability that goes beyond just carbon dioxide, and with material costs rising, and growing concerns over Chinese dominance of supply chains, it is to be hoped that policy-makers will start to focus on using financial and material resources in the most efficient way. And this will inevitably point to nuclear power as the optimal solution to the de-carbonisation challenge. The recent renewal of interest in atomic energy is a reflection of its high energy density and reliability, with several countries including the UK re-starting their nuclear programmes.

The increasing realism about the sector is positive but there is still a way to go – there are still fanciful ambitions to create an EU-wide hydrogen pipeline network for example, and there is still insufficient honesty from policy-makers about the costs of the energy transition and the impact on living standards it will have. The green utopia is all very well, but the reality is that the energy transition is delivering neither cheap energy nor a lot of green jobs – the US which has seen a record-breaking increase in fossil fuel production in recent years enjoys both cheaper energy and higher economic growth than Europe and the UK. This is not a co-incidence since access to cheap energy is a major driver of economic growth.

The energy transition is not going to deliver the beautiful and naïve ambition of green energy and green jobs and there will be no successful green industrial strategy. This is not a licence to pollute, but it does require a re-calibration of energy and economic ambitions, and the UK and Europe must decide how far they are willing to go to reduce territorial emissions when they are just a tiny proportion of the emissions that will come from Asia and Africa as they continue to develop.

And as Dieter Helm points out, 28 COP gatherings have singularly failed to deliver any reduction in global carbon dioxide emissions – indeed, since the 1960, only the 1990s saw any reduction in average decadal concentrations, and that reduction was more than wiped out in the subsequent decade. Of course, some would argue that without the interventions of the past thirty years, atmospheric carbon dioxide levels would be higher, but the question is by how much, and whether the cost of these actions is justified.

It is likely that policy-makers will need to pivot from devoting all their efforts to prevention, to considerations of mitigation, and while the results are clear, the consequences in terms of climate impact are not. Many people believe we are on track for warming in the 2.5 – 3.0^oC range, but climate models are notoriously unreliable. In any case, the only thing Europeans could do to meaningfully impact global emissions would be the imposition of strict CBAMs, and that would come at a high cost, potentially higher than its voters will be willing to accept.

It will take time for these realities to sink in, but we are finally moving in the right direction. Hopefully the next year will see further progress. Here in the UK, there will be a General Election that will force all political parties to develop fully costed manifestos, setting out the trade-offs they intend to make across all areas of policy and the economy. There’s nothing like financial accountability to concentrate minds – it will be interesting to see how energy and climate concerns influence electoral posturing and whether the indications of public displeasure in Uxbridge will influence the Election outcome. Energy markets are never dull and the coming year may well be more interesting than most.

.

I would like to thank all of my clients, colleagues and readers for their support over the past year. Despite being a sole trader, I feel I have a very large number of colleagues, and I would particularly like to thank the people in my network who are ready to offer help, advice, information and moral support, and I am always happy to reciprocate. It’s fantastic to be part of several international energy networks, sharing ideas and helping each other with market insights.

.

“You can avoid reality, but you cannot avoid the consequences of avoiding reality”

– Ayn Rand