Like a zombie in some cheap horror movie, John Major has elbowed his way out of retirement and obscurity to deliver his aperçu on the state of the energy market. And he’s calling for a windfall tax on energy companies.
It is fairly shocking that a former Conservative Prime Minister would give credence to the myth that high energy prices are merely the result of profiteering by energy suppliers. This is a popular misconception that serious politicians should be challenging, not swallowing without question or critical analysis. I am very uncomfortable with windfall taxes under any circumstances (unless balanced by a bad-luck rebate for “negative windfalls”). But I’m especially against windfall taxes when there isn’t any windfall.
If John Major has evidence that energy companies are profiteering, let him show us. The fact is that they make returns on capital broadly in line with other Footsie 100 companies. And in exchange for average returns, we expect them to cope with massive, arbitrary and irrational taxation and regulatory impositions. And then we expect them to invest in a new generation of power stations.
If John Major had sat over his breakfast corn-flakes trying to work out the best way to deter investment in energy in the UK, and to ensure that the lights went out, he could hardly have done better than to propose a windfall tax on energy utilities.
I’ve said it so many times, but it seems we have to keep on saying it: it was the politicians who did it, not the energy companies. It was Brussels that set up its climate and energy package with its wholly unrealistic emissions targets. It was our UK government that passed the Climate Change Act (with only a handful of votes against) – which actually went beyond what Brussels had demanded. It was the politicians who created feed-in tariffs and renewable obligations and carbon floor prices. It was the politicians who signed up the EU’s farcical Emissions Trading Scheme. It was politicians who agreed to accept the EU’s Large Combustion Plant Directive, and close down perfectly good coal-fired power stations which were delivering reliable and affordable electricity.
It was the politicians who decided to squander tens of billions on useless and pointless wind turbines – and billions more adapting the grid, and trailing pylons over unspoiled landscapes to reach remote wind farms. It’s the politicians (of the three old parties) who dithered for decades over new energy investment, and simply threw away Britain’s commanding position in civil nuclear energy, so that today we can only build a new nuclear plant with French technology and Chinese money. I yield to no one in my pride in our country, yet we can only be ashamed of the demise of our domestic nuclear industry.
Which brings us to Hinkley Point. When I heard the news on Monday, I Tweeted “Two cheers for Hinkley”. Of course I’m delighted that at last we have a new nuclear project. But there are huge questions over the financing mechanism – as Jeremy Warner described in an excellent piece in the Telegraph (Oct 22nd) The government has placed a huge bet on energy prices, guaranteeing EDF a strike price nearly double current wholesale prices (although less than the cost of off-shore wind) for 35 years. The bet depends on the assumption that fossil fuel prices can only go up. To which I answer: look at the shale gas price in the USA.
All my life I’ve believed in free markets, and I’ve hated nationalisation and state intervention. So I was shocked when an heretical thought crossed my mind: maybe we’d have done better to have the state fund the project to start with. We’ve already sold the pass on free markets. In a free market, investors carry the risk. There’s no risk when a price premium is locked in for decades. The risk falls on the tax-payer (and consumer – though they’re much the same) anyway. So the question is not whether the state should be the ultimate backer – just how it should best do it. Of course the government would then sub-contract design, construction and operation to the private sector.
It’s worth noting why the free market can’t underwrite this kind of project. First the sums of money, in tens of billions, are very large. Second, the time horizon – sixty years on a new nuclear plant, plus ten more in the building – is far longer than for normal commercial projects. But the biggest problem is regulatory uncertainty. Osborne seems to introduce some new tax or incentive gimmick for the energy business every few months – so how can you plan for sixty years? Or Angela Merkel can come along and pander to a short-term populist concern by shutting down the whole German nuclear fleet. Then to cap it all, John Major pops up with a windfall tax proposal. Banks and hedge funds don’t want to face that sort of risk. At least if the government were the investor, it might think carefully before regulating itself out of business.
Last week I was invited to set out UKIP’s stall on energy at the AGM of SONE, Supporters of Nuclear Energy (Sir Bernard Ingham is the General Secretary). I expressed my doubts about the Hinkley Point funding model, and I was asked what UKIP would do. The fact is that right now we don’t have a fully-worked-up financial model to contrast with the government’s scheme. So in reply, I said “If I were sitting in Ed Davey’s chair, I should ask McKinsey to come up with funding alternatives, and to compare and contrast the benefits of each”. I would be surprised and disappointed if they couldn’t devise a better approach.
Not only are there questions about funding. There are also questions about technology. There is talk of mass-factory-produced modular reactors, which could deliver much more manageable economics. I shall be in the States next week, with the South Carolina Electric and Gas Company, looking at some new nuclear developments there, and I hope to learn more about modular reactors.
Finally there’s George Osborne’s problem. He doesn’t want tens of billions added to the deficit. But we have experience of clever financial schemes designed to keep public investment off the public accounts. Private-public partnerships seemed a neat financial trick at the time, but their success has been (to say the least) mixed. Maybe we should bite the bullet.