“Demand-side management”: Blackouts by another name

..and why “green energy” is economic nonsense

In a recent speech Ed Davey announced that energy intensive companies would be paid to switch off their machinery during times of high demand. As many have noted, this not what happens in healthy energy markets. Although this policy is called ‘demand-side management’, jargon does not disguise what is still a blackout. But simple economics can determine a much better approach to energy policy than the managed decline preferred by the deeply unpopular minority party in the coalition.

The problem of the UK’s diminished capacity is caused by energy policies, (not shortages of fuel), largely but not entirely driven by EU directives to reduce CO₂ and other emissions from power stations.  Much of the UK’s generating capacity has been forced to close by the EU’s Large Combustion Plant Directive (LCPD), followed by the Industrial Emissions Directive (IED), both of which are intended to reduce the emissions responsible for pollution. Nobody is against clean air, but the combination of these policies has compounded the UK’s energy problems, leaving an energy gap which threatens wide-spread blackouts.

The LCPD and IED force the operators of coal-fired power stations either to shut down within a given time (17,500 operational hours between 2016 and 2023), or to add systems to comply with the standards they set out.  Retro-fitting older but still serviceable plants may not be economically viable, so the operational lifespan of these plants is reduced by a decade or more.  Somewhat late in the day, the Department for Energy and Climate Change commissioned a report on the feasibility of building new gas and coal-fired capacity and extending the life of the UK’s existing power plants by making them compliant with the IED.

The existence of the report demonstrates that the current and previous governments’ plans for a greener energy sector have not materialised, and cannot now be achieved. No amount of wind turbines and domestic solar PV installations can replace the capacity that has already been lost to the LCPD and will be lost to the IED. So the government is now forced to face the consequences: begging energy companies to keep remaining coal and legacy gas plants operational for as long as possible in order to avert a deeper crisis.

Along the way, the report shows some interesting things about the history of the UK’s fleet of power stations. The following graph shows two main periods of building. Approximately 3.3GW a year of coal plant between 1965-75 and 2.5GW a year between 1990 and 2000, under different economic regimes.

This demonstrates that relatively rapid deployment of conventional plant is technically feasible. In contrast, the UK’s onshore wind fleet expanded by an average of just 0.5GW a year between 2004-12, equivalent to just 0.15GW when we take into account the variability of wind energy. At this rate, it would take nearly 80 years for onshore wind to replace the 11.8GW of coal and gas-fired capacity that will have been shut down by 2020, by the LCPD and IED. If we include the 6.1GW of nuclear capacity that will have been closed by 2020, the current rate of onshore wind farm construction will take 120 years to replace what took fewer than 6 years to build in the 1960s. So much for green economic ‘progress’.

And the cost? The report rules out building new coal-fired plants, but more interestingly finds that new gas-fired plants can be built for around £500 per KW of capacity – £500 million per GW at a build rate of up to 6GW a year. This is consistent with DECC’s own estimates, which includes onshore wind at £960 per KWh of capacity, or £3,300, when we take into account wind variability. That’s £3.3 billion per GW.  So to close the energy gap with gas-fired capacity would cost around £9 billion, and take three years. But closing the gap with onshore wind energy would cost £59 billion (not including the cost of extensive changes to the Grid to cope with intermittent sources like wind) and take longer than a century. And we’d still need to spend the £9 billion on gas-fired back-up anyway.

It is remarkable, given these facts, that the government should ever doubt the need to keep the legacy power stations open. According to research by The Tax Payer’s Alliance, green energy subsidies will amount to £5.8 billion a year by 2018-19. That could pay for the energy gap to be closed in just 18 months.

These are of course, rough calculations. And they don’t take into account the cost of fuel. But the cost of financing £59 billion worth of wind farms – interest payments – would be far greater than the cost of fuel for gas plants, which is one reason why wind farms need to be so heavily subsidised. No wonder green campaigners are so violently opposed to fracking, and so resistant to a second ‘dash for gas’. The argument for closing down coal and gas-fired power stations, and replacing them with wind farms and other renewables is factually, empirically and morally bankrupt. And no wonder the government is so worried about keeping the lights on that it is asking factories to shut down. It is policies, not technical, economic or environmental challenges, that have caused the energy gap to open up.