The energy sector is “not in good shape,” and is unable to fulfil the needs of a major industrial economy, “especially for one doing Brexit”.
Growing electricity demand, as heat and energy are electrified, will make the “current capacity margin of roughly zero even more alarming than it is now”, the Oxford economist said in a paper.
Whilst demand side measures are appealing in the short term, “they don’t make a lot of sense for country aspiring to world competitive advantage”. The planned phase-out of coal-fired power stations, the diminishing lifespan of the existing nuclear fleet, and the repeated delays to new nuclear mean the problems faced by the new energy secretary are “all about to get worse – much worse”.
Helm criticized implementation energy policy in recent years, saying politicians had made a series of market inventions which had resulted in unintended consequences: “Onshore wind has had to be capped; offshore wind propped up; nuclear has required a special deal; and now gas needed a capacity market.” He described the present situation as “a lobbyist’s paradise”.
Britain has now “comprehensively re-nationalised its energy policy” according to Helm: “In many respects, Greg Clark as much control as the Central Electricity Generating Board once had.” The current subsidy regime is not, as the government claims, technologically neutral. If it was, there would be “no offshore wind, and no Hinkley.”
If Clark does decide to make do and mend, he will be “dragged into annual doctoring of the capacity auctions, and continuous interventions to choose new ‘winners’”. If not, he will need to make some “big moves”, mostly obviously merging the generation and capacity subsidies into a “single unified auction for firm power, incorporating full locational costs”.
Resetting the system would be no easy task, partly because the “lobbyists for all the ‘winners’ picked for subsidies would scream”. In order to stick to carbon targets, the government would probably need to implement a free-ranging carbon price to confront consumers and businesses with “the cost of their pollution” – something which is “politically hard to do”.
Helm concluded by calling on Clark to develop a comprehensive energy policy, which clearly sets out “the principles, the overarching policies and the direction of travel”.
He urged the energy secretary to move quickly: “The current state of the energy sector is sufficiently serious to merit rapid action. He cannot engage in the luxury of reviews and reports. He needs to act.”
Earlier this week Alex Chisholm was appointed as the sole permanent secretary for the new Department for Business, Energy and Industrial Strategy. Martin Donnelly, who had been joint secretary alongside Chisholm, has stepped down in order to help set up the new Department for International Trade.