Research Papers

The Cost of Preventing Blackouts: How to Check the Health of the UK Electricity Supply Sector
John Constable

The Economic Research Council has commissioned this report from John Constable (Director of the Renewable Energy Foundation), which highlights the key issues surrounding the UK’s current electricity policy. Although there has been a chronic neglect of base load supply for many years, John’s report rightly points out that talk of blackouts across the UK is misleading. Since 2013, the government has put in place a set of expensive stopgap measures to ensure that this doesn’t happen:

  • To pay power stations that would otherwise close to produce energy only at specified times to help boost supply, and starting in 2018/19, to pay a guaranteed income to any power station (new or old), irrespective of the energy it generates, in return for an obligation to supply capacity on request;
  • To pay large energy users (namely, industry) to reduce demand (in effect, paying factories to stop producing); and
  • Many hundreds of stand-by generators, mostly diesel, are being put in place to keep the national grid loan balanced.
Together, these measures may reduce demand and increase supply in order to plug the gap in the short-term, but at a substantial price. It is cost that is the correct measure of policy success or failure, not a blackout, and the costs are large:
  • The first two measures cost £31.3m in 2014/15 and £34.7m in 2015/16, and these costs are estimated to increase significantly to £1.3bn by 2020. This is in addition to the costs of pre-existing systems that were put in place to cover shortfalls.
  • Combined with subsidies paid for renewables (and the extra grid and system operation costs associated with them), approximately £14bn per year may be added to the UK electricity bill by 2020.
  • The long-term economic effects might be even more costly: by paying industry to reduce their output, we are further limiting our struggling manufacturing sector (despite talk of trying to rebalance our economy).

Although these measures may help to cover the gap in electricity generation in the short-term, they are not only in themselves very expensive and potentially crippling to industrial competitiveness, but they will create yet more problematic distortions in the UK energy market; problems that will require further expensive emergency measures in the future.

The UK’s energy policy over the last two decades has been a disaster, and recent developments have only papered over the cracks. The only long-term solution is to remove market distortions so that private capital is free to supply the sustainable and reliable electricity generation that the country requires.

The Cost of Preventing Blackouts

Energy Policy: Which way for the UK?

The lack of a serious energy policy in the UK is leading to the possibility that the country could be left short of a reliable electricity supply in the next five to ten years. This really is something that must be addressed, and quickly, or we will face potentially disastrous consequences that will have an impact on the whole economy.

We are very pleased that Nigel Hawkins, author of previous ERC Research Papers “New Nuclear Build in the UK” and “Aqua Britannia!”, has revisited the question of the imminent dangers facing the UK energy supply in this latest paper.

Key Points:

• Having wasted over a decade in addressing the UK’s energy supply gap – much of which was predictable as North Sea gas reserves ran down – the Government is now faced with devising a strategy to prevent serious risks to electricity supplies from c2015 onwards.

• Despite the plethora of White Papers – including that published in July 2011 – and Consultation Documents in recent years, the fate of future UK electricity provision lies principally with the six integrated energy companies – EdF, E.On, RWE, Iberdrola, Centrica, and SSE (formerly Scottish and Southern Energy). Importantly, the four international companies have both high net debt as well as formidable investment programmes outside the UK.

• To reduce the security of supply risk substantially, the UK has just one priority – to build new base-load generation plant, whether gas-fired, coal-fired or nuclear. With very few exceptions, renewables generation – to which successive Governments have accorded an undeserved priority and massive funds – cannot generate base-load electricity.

Energy Policy: Which way for the UK