12 October 2011

The Iron Law in the UK

From the FT earlier this week is this remarkable graph on energy costs in the UK. Will there be a political consequence? If so, and it seems inevitable, when and what?


  1. One question that seems obvious: can opposition to nuclear power survive?

  2. dagfinn

    More to the point, can opposition to shale gas and gas power plants survive? While attractive in the (very) long term, nuclear plants are extremely expensive, take a very long time to build, and are therefore all but impossible to finance without government guarantees. It is highly unlikely that a large nuclear program would deliver enough power soon enough to avert the upcoming crisis, and the huge costs involved are almost certain to further increase power costs.

    Whereas shale gas is likely to soon be abundant and less expensive than conventional gas, and gas power plants are cheap (less than a quarter the cost of nuclear) and can be built in a couple of years, as opposed to the thick end of a decade.

    The most likely political consequence, I would suggest, is that telling the voters they can't have cheap clean shale gas, in the face of crippling fuel costs, will soon become political suicide.

  3. I saw your graph showing the increase in the cost of energy vs. the increase in the rise in wages and I wondered how could any government create such severe imbalances that it resulted in so much lost income to higher prices for something as essential as energy. I thought those Brits are just crazy until I realized that our know it all government(US) has done the same thing, only worse, with another essential consumable, health care. Is there such a metric such as health care poverty?

    I read a statistic that the median US household income is now just under $50K per year. This has been stagnant for the last 3 years. On the other hand, the NY times reported the average expenditure per family for health care is now $19,400 per year. I realize that about half this cost includes the amount of money employers are paying for health insurance (which doesn't show up in family income) but if you add that in, out of $60K of earning, $20K goes to health care for families with the median income. How did we get to the point where a third of the median family's earnings gets diverted to health care? So two questions:
    1. Do you have any other iron laws of regarding market imbalances created by the government policies?
    2. Should the US have a criteria called "health care poverty" and what percentage of family's income would have to be diverted to it before they are considered to be "health care poverty"? 10%, 20%, 35%?

  4. Peter Wilson,

    "nuclear plants are extremely expensive, take a very long time to build,"

    The first point is related to the second. The second point is only correct because the permitting process for a nuclear plant takes so long. The actual physical construction takes very little longer than for a fossil fuel powered plant.

  5. Peter Wilson said... 2

    It is highly unlikely that a large nuclear program would deliver enough power soon enough to avert the upcoming crisis, and the huge costs involved are almost certain to further increase power costs.

    In the UK, talking sensibly about Coal and costs related to coal is almost impossible. The 'Coal Mining' community still hasn't gotten over Thatcher's decisions related to 'British Coal'. The same is true in Germany where coal mining is heavily subsidized.

    The UK currently imports about 40% of it's coal and ever since China and India joined the 'coal importers club' imported coal is no longer 'cheap'.

    Nuclear competes well against coal at about $4/MMbtu and against natural gas at about $6/MMBtu.

    IMHO Short term scale up of shale gas in the UK isn't likely to produce enough gas to replace coal imports and drive the price of natural gas below $6/MMBtu.

    The problem for Nuclear in the UK is that generous feed in tariff's for 'intermittent' power sources favor 'variable supply' technologies rather then base load technologies.

  6. Roger -

    Do you have some data on the attribution for the causes of the increase in energy costs?

    The FT article is behind a paywall.

  7. The price of paying the Green Religious Tithes.

    When the flock realizes they are paying for a false greenie god they will rise up and throw off the shackles of Al Gore's false green god.

    And the people will not be happy at being taken, being conned, being duped.

    Not happy indeed.

  8. It isn't just fuel, they want to push up the price of rent and food to make as many people financially insecure as possible. Insecure people are easy to manipulate in terms of working harder for longer hours.

    That's why I have always referred to global warming / carbon trading as class warfare.


  9. @Joshua

    attribution for the causes of the increase in energy costs?

    BP 2011 Statistical Energy Review Coal Section -

    1999 Northwest Europe benchmark price for coal was $28.79/tonne. 2010 benchmark price was $92.50/tonne.

    2011 Natural Gas Section

    1999 UK price for natural gas = $1.58/MMbtu 2010 price = $6.56/MMBtu

    The price of coal tripled and the price of gas quadrupled.

    Of course there are additional costs like feed in tariffs and carbon permits which make what I am sure is an already painful economic adjustment for many even more painful.

  10. I'd be interested to see some breakdown of costs as well. The politicians, unsurprisingly, put the blame squarely on the energy companies. The energy companies blame rising fuel prices.

    Of course, if it was only easier for consumers to find the best deal, this wouldn't be happening.


    "Friends of the Earth energy campaigner Donna Hume said Mr Huhne's "fighting talk" must be matched with action.

    "It's right that people should be able to switch tariffs and companies more easily, but this won't ease householders' pain in the long run, with all six major energy firms putting up prices and the cost of gas rocketing," she said."

    "Behind closed doors, the energy companies are attempting to lock us into expensive gas power plants for the next two decades instead of investing in the home-grown clean energy that could keep our bills stable and cheaper in the long run."

    Ms Hume also criticised the government for cutting the feed-in-tariff support scheme which pays businesses and homes which generate their own clean energy if they also contribute some to the National Grid."

  11. From the FT article:

    "High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/f4213ec2-f287-11e0-931e-00144feab49a.html#ixzz1agROAAUL

    Wholesale gas prices, set by the international market and beyond the power of any British politician, have been the governing factor behind higher bills since 2004.

    The profits of the “big six” utilities are less significant than might be thought. Deutsche Bank forecasts that UK households will spend £48bn on energy in 2015: of this, only £1.3bn will be the post-tax profits of retailers.

    “A political expectation is being created in people’s minds that if we can bash the retailers, that will lower bills. But the numbers just don’t support that,” said Martin Brough, director of industrials research at Deutsche Bank.

    If the government wants to bear down on bills, it would have little choice but to reassess its own policies. At present, “policy costs” add 10 per cent to household energy charges, principally via the “renewables obligation”, which compels suppliers to buy a proportion of their electricity from renewable sources, and the European Union’s carbon trading scheme."

  12. .

    How did we get to the point where a third of the median family's earnings gets diverted to health care?

    Largely because automation has reduced the cost of food and manufactures. Health care is still largely delivered by skilled (not cheap) labor. As the cost of producing most everything else has fallen, the portion of the family budget devoted to will naturally rise.

    The other driver is we now have treatments that keep people alive longer, and as you know the dead spend nothing on health care. For example, in the old days HIV was more or less a death sentence. Now a person with HIV can consume health care services for much longer than before.


  13. Roger,

    I curious if you agree with the thrust of the last section of the article that you just pasted. Do you think it is good policy to focus on the bit that increases costs by 10% or the one that increases costs by 90%? I'm simplifying of course, but it seems to me that by not offering any commentary on the validity of the article you're simply giving red meat to those who reflexively oppose green energy policies.

    After all, do you not think that it could just as easily be argued that the sustained rise in fossil energy sources since 2004 vindicates the government's push to diversify the UK's energy portfolio by increasing the uptake of non-fossil sources?

  14. -13-Marlowe Johnson

    The UK is indeed taking a hard look at policies to address that 90%, but I am afraid that it is just more red meat (for those who support shale gas):


    But make no mistake, policies that serve to increase the costs of energy (whether they be considered green or not) will get a good hard look in this context. That seems common sense.

    Where I'd argue with UK energy policy is the idea that rapidly deploying expensive renewable energy technologies is a viable route to diversification of energy supply. (How diverse to you think UK energy supply is now?)

    More fundamentally, where is the focus on innovation in parallel, focused on driving down the costs of fossil alternatives? (Hint: you won't find it).

    Diversification, to succeed, must be economically sustainable. We shall see soon I'd guess, but I suspect that the present approach is not going to sustain. As I wrote in TCF, something will have to give, guess what?

  15. Roger Pielke, Jr. said... 14
    As I wrote in TCF, something will have to give, guess what?

    If I read Energy Secretary Chris Huhne comments as reported in Platts...opposition to nuclear power is what will give.

  16. This is the future of UK energy. Not one cubic foot will be left in the ground without a fight. The name of the game is to raise energy prices, not save the planet.


    An energy firm which has been test drilling for controversial "shale gas" in Lancashire has said it has found vast gas resources underground.

    Cuadrilla Resources began testing for gas on the Fylde Coast in March, using a technique known as "fracking".

    It said it had found 200 trillion cubic feet of gas under the ground, which if recovered could provide 5,600 jobs in the UK, 1,700 of those in Lancashire.

  17. The so-called 'greens' are desperate to stop frakking for gas.
    They have no trouble lying about it and the media, in their cynical ignorance go along with the 'greens' like nice lap dogs.
    The interesting thing is that politicians seem to be perceiving frakking as a way to make lip service to the AGW community without destruction of the economies or huge pushback.
    It will be fascinating to see this play out.

  18. "More fundamentally, where is the focus on innovation in parallel, focused on driving down the costs of fossil alternatives?"

    Roger, it seems to me that you using a fairly narrow concept of innovation here. Isn't a large portion of innovation (and declining costs) in energy technologies occurring as a result of deployment rather than basic research?

  19. -17marlowe Johnson

    Thanks ... though I have not seen anything in UK policy focused on using deployment as a tool to reduce costs (in fact Chris Huhne, energy minister has said that the public needs to accept higher costs). Also I am not aware of any evidence on UK deployment mandates actually driving down costs as a matter of outcome.

    I welcome data/analyses to the contrary, I may just not have seen them.

    Matt Ridley takes on some of this:

  20. -18-Marlowe Johnson

    Here you go:


    The assumptions of the UK government are that deployment will reduce costs by 2040, mainly at the margin, and with very high uncertainties.

    The report says that experience with wind -- variable operations and maintenance -- has not been one of reduced costs.

    If wind is several times more expensive than coal, then such reductions will no be capable of addressing that gap.

    The report does say that we will likely be discussing different energy technologies than those listed by 2040. That is why the innovation is important in parallel to deployment.

  21. Thanks for the link Roger! Looking at figure 4.2 it appears that the uncertainties are actually quite small for onshore wind -- 21 to 27% CAPEX cost reduction by 2040 and that for many of the technologies the cost reduction from deployment is significant (e.g. 60-80% for solar). From the text:

    "This shows the dramatic expected capex reduction for solar PV, strong performance of offshore wind and CCS but limited progress for nuclear. This partly reflects the difference in numbers of doublings but also the much higher learning rates for solar PV"

  22. -20-Marlowe Johnson

    Let's taken the assumptions as given (always a risk;-), does that amount of reduction convince you that deployment won't be enough?

    What price of carbon does the report show?

    If we can also assume that policymakers are not going to substantially then we can figure out how much work we need from innovation-led price reductions (again, to be clear in parallel with whatever level of deployment is done).


  23. insert [raise the costs of energy] after "substantially" in -21-, thx

  24. Raising prices (today's article)

    Why has Ofgem taken so long to act against energy companies?

    The real scandal over the "Big Six" energy companies is why the regulator, Ofgem, has taken so long to wake up and act against an unofficial cartel which has been running roughshod over the needs of consumers for a decade.

    The assault by Ofgem today has been achieved by showing that the power providers are making £125 in profits per customer now compared to £15 just a couple of months ago. There is more to come with an Ofgem investigation into company accounts and initiatives to ensure that smaller independent companies are not kept out of the supply markets.


  25. "At present, “policy costs” add 10 per cent to household energy charges . . ."

    The horror. Oh, the humanity . . .

  26. http://www.dailymail.co.uk/news/article-2050961/Fuel-poverty-caused-3-000-deaths-year-expert-claims-energy-bills-continue-soar.html