Energy prices? Blame the politicians!

Major

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.

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23 Responses to Energy prices? Blame the politicians!

  1. Jeremy Zeid Chairman Harrow UKIP says:

    Roger. If the cost for 2x Nukes for Bangladesh is coming in at £2Bn aided with £500M loan from Russia, why shoukd 2x Nukes at Hinkley Point cost eight times more at £16Bn. Someone is taking the piss.

    • Colin Kay says:

      workers in Bangladesh probably get at least 10x less and probably there is very little h&s which bumps up the price 2x at least.Talking about h&s had to do a test earlier this year to get a C.I.S. card to allow me to work on building site,a lot of stuff about attending inductions,warning people of hazards and shouting warnings ,just made me think that all those e.u. migrants working in the building industry must have a good understanding English.

      • Colin Kay says:

        just read it back and noticed i`d missed an “of”out before some clever arse points it out,cheers

  2. Me_Again says:

    …and it was politicians who PRIVATISED the energy industry instead of MUTUALISING it.
    I am a little concerned that UKIP seems more in the big business pocket for utilities, services and transport than is healthy.
    Free market economics are one thing but some things should remain under the distant control of elected government. The two most important strategic necessities in my opinion are Power generation [not distribution] and transport services. Both of them in the end determine the economics of British industry, both of them should not be subject to shareholders and share prices, only real cost.

    • Of course they do remain under the control of the government, through massive and contradictory regulations and price provisions. It would be easier to make the case that government control is the problem, not the solution.

      • Me_Again says:

        Yes, you and I are both old enough to remember the bad old days of bad state control. It doesn’t have to be like that though Roger. We’re in a different era with different problems and solutions.
        Whichever way you look at it, private control of utilities must build in a layer of profit for the company and a layer of profit for the shareholders.
        In a mutualised setting e.g. the nationwide building society or a slightly different model John Lewis, there are good wages, good control of expenditure, good working practices, good harmonious working relations between management and shop floor AND good prices. It doesn’t have to be like it was in the 70’s with modern management and better working relations.

        British steel were making 3/4 of a BILLION profit when Maggie sold them off. Not subisidised, running on their own steam. That could have continued to pour money into the treasury as north sea oil did [hopefully not wasted]

        When I say state owned/involved it is a means of maintaining the ability to ‘step in’ because the product is a national strategic asset not a pack of plastic coated playing cards or some plastic doggy poo.

  3. Mike Spilligan says:

    I’ve read two website articles (Telegraph / Tebbit and Mail) on this subject and from the comments I’ve become puzzled and even annoyed as many seem to support the view, or maybe the interpretation of it, that Major’s suggestion would “do something” – as Sir Humphrey once said. The majority seem to think that adding another tax would in some way help them. Is it that old problem of education; education; education?

    • cosmic says:

      It’s about a curious sense of satisfaction that the wicked energy companies, being painted as the villains of the piece, would be punished in some way. It doesn’t help that the head honchos of some of them receive huge salaries and bonuses. Of course it does nothing for the customer.

      Miliband’s suggestion doesn’t make much sense, Major’s is entirely risible.

      My own view is that the energy companies are not particularly the villains of the piece (or at least there’s a lot more to it) and that there are mechanisms to control cartels and unfair trading which should be used, if they are indeed operating unfairly or price fixing.

      • Colin Kay says:

        Any windfall tax would end up being paid by the energy user,another kind of stealth tax,and anyway surely alot of these profits go to the big pension companies which use these profits to help pay peoples private pensions,but then again politicians don`t need prvate pensions because they all vote that we ,the workers ,have to pay them.

  4. cosmic says:

    The three old parties have created over many years the mess we are in as regards energy (with the influence of the EU in the background). Now the cost of their folly is starting to be realised, it’s not their fault, it’s the wicked energy companies and they seek to put some sort of sticking plaster on the sore, carefully avoiding the causes.

    Miliband is sillier than ever with his notion of completely decarbonising electricity generation by 2030.

    From the Conservative point of view, Miliband definitely scored with his price freeze. They have to find something else by way of a Band Aid. Of course, they are not about to say that they made a huge mistake in pursuing measures to tackle climate change. They seem to be hinting that green taxes need tuning and rolling back a bit.

    Major seems to be wheeled out every now and then to fly kites for the Cameron clique. Not so long back he was telling us about the wonders of Britain becoming an aid superpower. I suppose he has prestige for some reason and is presented as the elder statesman and the caring side of Conservatism, the better to help apply the band aid. I see him as an empty vessel.

    As for the Hinkley point deal, given the constraints the UK government has placed upon itself and the mess it’s created over the years, it’s extortionately expensive, but probably about the best we can expect given the current restrictions and thinking.

  5. Mike says:

    Whilst off school sick I would watch OU programmes in the mid 1970’s. One discussed super conductors but found them, at that time, infeasible as it involves freezing aluminium cables to absolute zero, then there is no loss to the surroundings. They demonstrated that power stations, lots and lots of them would only need be as big as the average garden shed. Technological progress has made some leaps since then and I believe nuclear power stations will become so reliable and so very small, housing estates will have one locally

  6. Neil Craig says:

    I have, in various places, compared the blaming of the recession on bankers and the electricity shortage on electricity producers with the way German nationalists blamed the socialists and Jews for losing WW1. I have been given no reason to doubt the validity of the comparison.

    While it is possible some of the more stupid of the Labour backbenches do not know the electricity companies are not gouging there is no possible doubt that John Major knows he is deliberately and wholly dishonestly trying to blame the innocent. This is the man who supported Germany’s desire to put genocidal ex-Nazis in control of Croatia & Bosnia in exchange for Germany allowing us an opt out of the Euro so I should not be surprised that he is as grey a moral vacuum as Himmler was.

    I broadly agree with you about Hinkley.

    I would also welcome a factory building small/medium reactors (SMR) here & it would be profitable for government to own much of it. Big enough & it could ultimately pay off the national debt. I suspect if the locals were given a decent sum in compensation per head it would be popular. It would give Britain the same edge that having the world’s biggest aircraft factory gives the US.

    When I started maintaining that 90% of the electricity bills are state parasitism I thought I would get at least some serious argument but I have had nothing beyond the “you smell” level to which the ecofascists always descend and some quiet support. If I am correct unlimited cheap power is possible and both a massive reduction in the 25,000 unnecessary pensioner deaths and the biggest economic boom in the country’s history can be achieved.

  7. Bellevue says:

    But, Roger, what about the EU putting so many obstacles in the way of fracking that it becomes unfeasable to even try???
    What are you going to do about THAT?

    • Mukiwa says:

      Bellevue,
      If you vote for UKIP and we win, then there will be no more UK & EU. We will be free, so who cares what the EU does after that🙂

      • Colin Kay says:

        What a beautiful thought,I was very happy for a few seconds until I remembered those in power at the moment and those who wish to be in power will do anything,say anything to discredit UKIP and ignore all the lies and false statements from the past to try and keep us tied to the EU and all it involves,do we have hope?

  8. Chris Wardle says:

    Roger, I’m in favour of nuclear power. However, I agree absolutely with your point about the advent of new modular reactors. I’m particularly interested in the development of Liquid Fluoride Thorium Reactors (LFTRs). I’m sure you are aware of this technology which was developed in the States in the 1960s and has recently been taken on by the Chinese who expect to have a prototype reactor up and running by 2020. This is essentially a very simple reactor design, extremely safe, little waste and uses Thorium of which there is a huge resource just over the North Sea in Norway and enough globally to power the entire planet for at least a 1000 years.

    This technology is so superior in every respect to the uranium fueled PWR that I now think we would be better cancelling all new nuclear build until a commercial LFTR is available, if indeed we cannot develop a program to build a reactor ourselves. In the meantime let us not decommission any coal fired power stations and pursue fracking as a stop gap until LFTRs can be rolled out on a large scale. Commercial designs that can be mass produced in factories could be only a decade away, perhaps even before they manage to commission Hinkley.

    I’d like to see UKIP talking about LFTRs. I’m in no doubt that this is future. We should get ahead of the curve.

    • Me_Again says:

      Very good points Chris.
      I have mentioned Thorium on several occasions but it hasn’t been taken up on here.

    • neilfutureboy says:

      We should not let the best become the enemy of the good. Thorium reactors probably can be developed as said by 2020 but we have uranium fission as a mature technology now & could have inexpensive new reactors in 3 years. I suspect the world economic demand for cheap energy is not unlimited but several times all current capacity so we need not fear one practical system excluding another.

      Also there is the phenomenon of “environmentalists” who now wax lyrical about fusion or thorium having a record of turning against things when they become practical. Such Luddites cannot be placated..

  9. Alan Bailey says:

    I withdrew all my savings and took out a bank loan to fund a 4kw solar pv installation. I now intend to install solar thermal. Hopefully my gas consumption will also reduce dramatically.
    The incentives of FIT and the new RH(?) payments will help, but the main advantage for me is to be as self-sufficient as I can. I have already turned my garden into a mini orchard/allotment with keeping chickens and ducks. My ex-wife would be horrified! – lol!

  10. Charles Wardrop says:

    Opt out , completely, since it’s none of their biz.

  11. Richard111 says:

    A late post but this is the first energy thread I found.
    The wonderful EU intends to ban powerful vacuum cleaners to save energy!!!
    http://www.dailymail.co.uk/news/article-2486045/Now-Europe-wants-make-harder-clean-carpets-new-rules-BANNING-powerful-vacuum-cleaners.html
    This is a prime example of mental moron thinking.
    It will simply take more time to do the cleaning and use MORE energy!

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