Tony Lodge: Energy security and the premature death of coal

Shares in the new major electricity generators, National Power and Powergen, were issued a year later, in 1991, when the old nationalised electricity supplier, the CEGB, was replaced.

This was Margaret Thatcher’s last big privatisation before leaving office in 1990; it was met with huge enthusiasm by a public keen to embrace what had become known as ‘popular capitalism’. The new market-driven electricity model worked well and delivered for Britain some of the lowest electricity prices in the developed world. The power cuts of the 1970s and the coal supply disputes of the mid-80s were quickly forgotten.

Today, the Tory cheer at electricity privatisation is a distant memory. Not since the 1950s has Britain been more at risk of power cuts, shortages and price spikes. For the first time since then, there is a real risk that the available dispatchable electricity generating capacity; these are supplies which are available when they are needed, will fall below likely demand, particularly in the winter of 2016/17.

This makes Energy Secretary Amber Rudd’s call for all coal-fired power stations to be closed by the mid 2020s so important and potentially damaging.

Why? Because there is now a very real risk that the remaining coal-fired power stations will choose to close earlier and without equivalent plant to replace them.

High British carbon taxes have already made them increasingly uneconomic. In March next year, three large coal-fired power plants have already announced they will close early, at Ferrybridge and Eggborough near Pontefract and the huge Longannet plant in Scotland. These plants could have run on into the early 2020s but have chosen to cut their losses.

Consequently, Britain’s average dispatchable electricity capacity available next April is, according to our new research, calculated to be 52,360MW; this contrasts with National Grid’s 2015/2016 Winter Outlook electricity demand forecast of 54,200MW.

In short, we are losing too much vital dispatchable capacity too quickly; such thin or non-existent margins will not only affect electricity availability but also lead to price spikes. This month National Grid used emergency measures for the first time to call on industry to reduce its power usage in order to avoid shortages.

Over the last 10 years, electricity bills have risen by 131 per cent in real terms, up by £705, easily outstripping any other household essential.

High energy prices also burden British industry, jeopardising in particular the jobs of 225,000 workers in manufacturing as businesses consider closure or overseas relocation due to unaffordable production costs. These businesses are highly energy efficient but consume large quantities of energy, which can account for between 20 and 70 per cent of their production costs. High energy costs have particularly hurt the British steel sector in this region.

Importantly this trend of bad policy has been developing over many years as a result of EU imposed rules and interventions from Whitehall. If one takes the last five years, then Britain has lost over 15,400MW (20 per cent) of its dispatchable electricity generating capacity as coal and oil power plants haveclosed with no equivalent replacement.

Following privatisation, the electricity supply industry initially enjoyed reduced Whitehall interference but this was short-lived. The adoption of EU green growth targets which the Government now admits it can’t meet, coupled with self-imposed carbon cuts, led to a dash to decarbonise the sector, without wider considerations being taken to guarantee the long-term resilience of the system.

This has led to a failing policy which is now precariously balanced. If the Government wants to keep the lights on and avoid shortages and price spikes, it must show it is serious about delivering security of energy supply with new policies. It needs to set out how it will encourage plant for plant replacement of power stations without more net loss. It should also drop high carbon taxes which are forcing coal plants to close too early; it is this single policy which has done more to force the closure of the three large plants next spring, with more likely to follow.

The Government should prioritise energy security above its environmental commitments. In the spirit of the Conservative election pledge to enshrine in law not to raise income tax, national insurance or VAT, the Government should also legislate to deliver targets to maintain security of energy supply, diversity and affordability. Also, a new not for profit Security of Supply System Operator (SSSO) with responsibility to maintain the resilience and integrity of the electricity grid is long overdue. This office should report directly to the Prime Minister and the Energy Secretary on a regular basis as well as Parliament. An independent Annual Energy Statement should also be introduced.

It is a sad fact that years of drift and bad policy have left the UK with a tattered energy policy. Only last week the World Energy Council slashed Britain’s energy rating due to failures to deliver secure, affordable and sustainable energy supplies. The Government must now get a grip on this vital area of its responsibility.

The political, economic and social implications of getting this wrong are enormous.

Tony Lodge is a Research Fellow at the Centre for Policy Studies. He is author of The Great Green Hangover – How to cut bills and avoid an energy crisis, which is published this week.