Economic hazards of a forced energy transition: inferences from the UK’s renewable energy and climate strategy

Abstract

The UK government has recently announced a reorientation of its energy and climate policy, scaling back subsidies to renewables, suggesting that uncontrollable generators, such as wind may be required to meet their own system costs, and emphasizing the need for research and development towards an as yet undiscovered, fundamentally economic, low carbon transition. The government also aims to open the way for nuclear power, and the maximization of oil and gas recovery both from the North Sea, and, on-shore, from hydraulic fracking. The present authors argue that although this policy is self-characterised as a re-liberalisation of the markets, the revision is only in part political, and is better understood as a force majeure response to cost and technical problems with the previous renewables-centred policy. Specifically, subsidies have led to an overheated renewables sector with high costs that will exceed Treasury limits and place heavy burdens on consumers. Subsidies to renewables have also weakened investment signals to conventional generation, leading to low capacity margins that necessitate a costly Capacity Mechanism, in effect a subsidy, to guarantee security of supply. Taken together, these costs are significant, and are a matter for particular concern, since there are already signs of a trend towards a de-electrification of the UK economy, a trend which is undesirable for many reasons, including climate policy.