Oil and gas slump creating renewable investment ‘bubble’

A “bubble” has developed in renewable investments largely because of underperformance in other assets, according to professor Dieter Helm, the author of a 2017 government review of energy policy.

Speaking on a panel at the Institute for Government’s ‘Delivering Net Zero’ conference on Wednesday (10 February), the professor of energy policy at the University of Oxford said there is “definitely a bubble in renewables”.

He said the reason why ESG (environment, social and governance) funds have been outperforming broader market indices over the past year is that a big chunk of the latter are invested in oil and gas, demand for which has suffered during the pandemic.

Helm said: “If you halve the value of key commodities, you will get differential performance which people are presenting as if it is demonstrating that environmental investment is better than otherwise.”

He also predicted that current estimates of the cost of the transition to net zero are likely to be exceeded.

“The history of energy policy is littered with examples of substantial failure. There is no reason to think that the current government will be any different.

“It is a much more demanding task than any we have seen and it is going to cost more than the baseline estimate unless they believe we have invented perfect government.”

Echoing the analysis outlined in his 2017 energy review, Helm said that the system costs of providing renewable energy will increase.

“If we believe all the stuff told about renewables being cheaper than any other form of generation and costs falling across the board, then we don’t need to encourage anybody to invest and we can abolish the subsidies.

“That is rubbish: renewables need all the support that they can get because the system costs of renewables are not cost-competitive yet and those system costs as people are discovering through their bills are going up and not going down.”

But he warned investors that politicians have limited appetite for confronting the electorate with the higher costs, which will be required to fund the transition to a lower emitting energy system, either through bills or taxes.

Referring to prime minister Boris Johnson’s quip that he believes in having his cake and eating it, he said: “We are living in a world of cakeism. Prices are not allowed to go up: the truth is that if current customers are not going to pay there isn’t going to be any extra taxpayers’ money either.

“The answer will be future customers and taxpayers but I don’t believe that future customers and taxpayers are going to pay.”

He also branded the UK’s government’s decision to opt for a stand-alone UK energy trading system (ETS) as the “worst” position that the UK could have adopted for its post-Brexit carbon pricing regime.

“The obvious thing was the introduction of carbon tax and the Treasury wanted to pursue that.”

And Helm dismissed the government briefing last week that it is considering an economy-wide carbon tax as “kite flying” even though it is the best solution for pricing emissions.

He said the briefing was designed to signal to climate change interests that the government is on their side but that implementation of such a wide-ranging tax would be frustrated by powerful lobby interests.

Paul Johnson, director of the Institute of Fiscal Studies, agreed with Helm that a cross-economy carbon price is the “right way to go” but that he has “no faith in government’s ability to deliver it”.

“They wouldn’t get elected if they went to the electorate with that kind of policy, which is why you end up with piecemeal policy.”

Johnson, who is a member of the Climate Change Committee, also said that aspirations by campaigners to reach net zero emissions within the next 10 to 15 years are “utterly implausible” and give the “incorrect impression” that getting there by 2050 will be a “doddle”, although this target is feasible.