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My Lords, it is a great privilege to open this debate, especially with the high calibre of people proposing to participate in it.
The basic science of global warming is rock solid, but we have been told fairy tales about its economics ever since the Climate Change Act 2008. We all love fairy stories. The essence of most of them is the same: the country faces enormous challenge that can be overcome only at huge cost and sacrifice. Then our hero, through determination, clear-sightedness and a magic wand, finds a way to defeat that challenge which, far from involving cost and sacrifice, makes everyone better off and they all live happily ever after. The climate change version of this fairy tale is that, to avoid human extinction, we must eliminate wicked fossil fuels. This looked as if it would involve daunting costs and sacrifices, but along came Prince Miliband who announced that his magic wand—renewables—would not merely banish emissions but give us cheaper, reliable energy and green growth so that we can all live happily ever after.
The United Kingdom has been one of the first countries to embark on the quest for renewables. We have gone further and faster than most other countries. Our emissions are back at the level they were at in 1879. Two decades on, we have the highest electricity prices in Europe, and Europe has the highest electricity prices in the developed world. Far from enjoying green growth, we have seen our energy-using industries decimated, a third of our refineries closed, chemicals and fertilisers thrashed, aluminium and steel shattered, ceramics, bricks and cement rendered uncompetitive.
We are all told that these high electricity costs are a temporary phenomenon, entirely caused by the wars in Ukraine and Iran and our reliance on gas. High gas prices have exacerbated our problems, but even in 2019, before those wars and the pandemic, when gas prices were at the fairly typical level of the previous two decades, our electricity prices were the third highest in the OECD. Why is this? Surely sun and wind are free. That is true but, unfortunately, they are intermittent and capital intensive. Solar is now a competitive source in sunny countries because the main variable demand there is for air conditioning, which is perfectly correlated with the sun shining. Alas, in the UK the sun does not shine when we need the power most: in winter, in the evenings and at night.
That leaves us with wind. In 2024 Prince Miliband, newly reinstated in his palace—I mean his office—as Secretary of State, assured us that new offshore wind was now cheaper than new gas. Unfortunately, that year’s offshore wind auction set the CfD price for wind at £80 per megawatt-hour in 2021 pounds. His own department’s estimate for the levelised cost of new gas was £55 per megawatt-hour, pre-tax.
There is a respectable case for imposing a tax on fossil fuels to pay for the external costs that global warming will impose on the world. Unfortunately, DESNZ has stopped estimating the social cost of carbon because the conventional estimate, used by the Americans and others, of $20 per megawatt-hour was insufficient to make gas appear uncompetitive. Now DESNZ, in assessing the relative costs of different modes of generation, imposes a theoretical policy cost on fossil fuels, which is calculated as the tax necessary to render fossil fuels less competitive than renewables. I kid you not—that is the methodology. Even then, it is on a levelised cost basis, which takes no account of intermittency. Since the wind often does not blow for quite long periods over the whole UK and much of Europe, we need back-up capacity roughly equal to the wind capacity. At present, that can be only gas. If we then have to eliminate emissions from that gas, we will need an equivalent capacity of carbon capture and storage. That is a threefold investment in capital expenditure for one lot of electricity.
Unfortunately, wind blows best in the wrong places: the North Sea and the Scottish highlands, so a major factor is building additional transmission lines, which already add about a tenth to the final price of electricity. Until those transmission lines are built, we often cannot get the electricity from the north to where the power demand is in the Midlands and south. We have to pay the wind farms for the electricity they cannot produce and simultaneously pay for gas-fuelled power.
The Climate Change Committee and the Government themselves insist that the cost of new wind farms is coming down and will come down further. As it happens, we do not need to rely on guesstimates and campaigners’ forecasts. We can find out the true costs of wind farms already built and those under construction because each wind farm is usually owned by a special purpose vehicle, which has to publish its audited accounts. Professor Gordon Hughes, the professor of energy economics at Edinburgh University, has gone to the trouble of analysing 247 wind farm special purpose vehicle accounts and found that their capital costs are not falling in the way the Climate Change Committee predicts or the Government wish. Moreover, as fields age, operating costs rise significantly and the output of a field falls.
I put down a Question to the Minister asking whether the Government had analysed this data; after ignoring it, the Minister said that estimating prices was not a matter for his department but the responsibility of the independent National Energy System Operator, NESO. It too initially ignored the question, but, after I persistently put it again, it eventually admitted this: “We do not draw on the information from SPV accounts. We used data published in the Government’s electricity generation costs”. The Government imagine that NESO is producing independent figures, and NESO is actually recycling figures produced by the Government.
What is to be done? Unfortunately, we cannot undo foolish and costly past commitments. We heavily subsidised the cost of renewables when they were still immature technology. As Professor Dieter Helm has estimated, that premature subsidy for immature technologies has cost us up to £100 billion. The renewable obligation, which we entered into as part of that subsidy process, still accounts for nearly 10% of prices to energy users. If we want to have the cheapest, most reliable energy in future, we should stop offering subsidies—then we will get the cheapest price available. We should remember Dieter Helm’s remark that Governments are not very good at picking winners but losers are very good at picking Governments. We should require firms to bid firm prices—to offer a contract including paying for the back-up dispatchable supply needed to offset their intermittency—and we should base policy on audited facts, not educated guesses. Above all, we should stop believing in fairy tales.
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My Lords, it is a pleasure to follow the noble Lord, Lord Lilley, but also a problem, as he has said almost everything that needs to be said on this subject already, and in a style that few of us can imitate.
In the time available, I want to critique one particular argument that we hear quite a lot nowadays: that we just need energy abundance. The argument runs: “We just need more of everything—nuclear, gas, wind and solar. Let’s just get building—it doesn’t really matter what. Let’s just get on with it”. In a way, it is a good thing that we hear this argument. I think it is put forward precisely because people sense that there is something awry with the arguments for renewables but do not want to follow the logic through to its conclusion. Indeed, the argument sounds superficially logical: let us maximise our ability to use everything—the wind is free, so let us use that when we can, and use other things when we cannot. It is said that building lots of everything makes sure we can do that.
There are two problems with this. The first is the best-known one: intermittency. You cannot control when the wind blows, so you have to have enough capacity to replace all your renewables capacity when there is zero wind and zero sun. The more renewables you have on the system, the more back-up you need and the bigger your problem is. Having more renewables requires even more capacity overall, and that brings more cost.