Does decarbonisation make business sense?

Over the past year, environmentalism has entered the political mainstream. In mainland Europe, a green wave has swept electoral politics with parties promising to take bold action on climate change stealing a march on their mainstream rivals. Closer to home the Conservatives – 15 years on from David Cameron’s green makeover – have sought to position Britain as a world-leader in the fight against climate change, committing themselves to the most ambitious decarbonisation goal in the developed world: to make the country entirely carbon neutral by 2050.

But while going green might appeal to environmentally-conscious voters, can it really be done without serious costs to our way of life – and some unfair compromises along the route? In France, Macron’s attempts to incentivise a greener way of life by increasing taxation on diesel cars has led to a year-long protest by the Yellow Vests movement. Closer to home, attempts to introduce renewable energy into the grid have led to fears about rising energy bills. While stories of wind farms having to be supported by fossil fuels (to ensure there’s steady power when weather is bad) have left many wondering whether the whole thing is worth the time.

So is the UK government dazzling us all with its ambitious promises while setting us up for more taxation and higher energy bills later? Whitehall, as you might expect, insists that isn’t the case, citing in its defence a growing number of energy experts and green businesses who are convinced that shifts in technology and scientific advances, alongside innovations in the global energy economy, will make decarbonisation cost-effective. But what about taxes? Won’t going green mean compromising on economic growth and damaging our international competitiveness? Even the Committee on Climate Change estimates that net zero could cost between 1 and 2% of annual GDP. Yet two years ago the government published its Clean Growth Strategy. Not only does it claim that renewable energy will be efficient and affordable, it says that, far from weakening UK plc, net zero will actually help to grow our economy, including a post-Brexit trade boost by turning us into a lead exporter of green technologies. It certainly sounds optimistic, but is it all a load of greenwash?

To try to make sense of it all, The Spectator hosted a dinner at Conservative party conference on net zero and the clean growth opportunity. As well as energy economists, MPs and policy wonks, we were also joined by Scottish Power, the sponsors for the dinner and a company which has gone on its own green journey. Created as a predominantly coal-based energy company in the 90s, it now boasts of being completely wind-powered. As of 1 January 2019, 100% of its energy has been generated from renewables. In line with the Clean Growth Strategy, it’s now looking to export its approach to other countries in Europe and elsewhere, in particular its distribution system which gets green energy into the homes of customers.

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They’ve been helped by a dramatic shift in the price of renewable energy: the price of wind energy is estimated to have fallen to around 30% of its 2010 price, with the latest government auction seeing 6GW of new capacity reaching prices as low as £39.65 per MWh. Whether suppliers can deliver as promised remains to be seen but, even allowing for some leeway, it’s a remarkable shift. Optimists now believe renewables could be cheaper than gas within a decade.

How has it happened? Scottish Power’s chief executive Keith Anderson was quick to ascribe some of the credit to BEIS’s Contracts for Difference (CfD) scheme which sets a guaranteed future price for renewable energy in order to save developers’ the risk of footing large upfront costs for renewable projects in a potentially volatile energy market. ‘I was involved in discussions with the government seven years ago when we set an ambition of getting the cost down to £100 MWh by 2020. We’ve blown that out of the water,’ he said. ‘For us that just goes to show that if you can get industry, government and regulators working together to structure these mechanisms properly, it’s incredible what you can do in terms of growth rates and production.’

But reaching net zero will require much more than innovative contracts. While the UK has made some progress towards its climate change goals, the blunt reality remains that decarbonisation will mean changing the fundamental structure of our energy economy – in particular the way we power and heat our homes, our transport system, and the way we generate energy itself. Some are optimistic than technological innovations will help pave the way. Over the past decade, for example, the government (initially through the Department for Energy and Climate Change and latterly via BEIS) has sought to switch all energy consumers onto digital smart meters. Although the scheme has been beleaguered by delays, energy experts maintain that a digitised energy system will make it much easier and cheaper to incorporate renewable energy and drive down the country’s carbon footprint.

James Heappey, the Prime Minister’s PPS, discussed one trial he’d visited in Wales which sought to use hybrid (i.e. electricity and gas) heating systems in homes to provide surplus capacity in times of high-demand, thus alleviating the need to keep coal-burning power stations on stand-by. ‘When I’ve discussed this with investment funds in the city, they find the idea of green infrastructure very appealing,’ he said. ‘As far as they’re concerned, there is a business model with an interesting rate of return for them, so you can see the commercial route for the installation of these kind of green energy systems.’ Another innovation is smart charging: where a digitised energy system will incentivise energy-users to shift items of heavy load (for example the charging of electric vehicles) to a time when renewable supply is at its highest. ‘There’s more than enough green electricity capacity to integrate electric vehicles into our system,’ said energy economist Anupama Sen. ‘But we need to provide fiscal incentives to do it in the most efficient way,’ she added.

What about the estimate – from the Climate Change Committee – that reaching net zero would cost the UK 1-2% of its overall GDP? Fraser Nelson put the question to the politicians around the table. ‘It’s important to remember there’s a cost of inaction too,’ said James Heappey. ‘I represent a constituency that is half in the Somerset levels and it is likely that local insurance premiums will go up significantly with the increased risk of flooding, and then there’s the additional strain on the NHS to deal with extreme weather patterns,’ he added. Emily Gosden, energy editor for The Times, queried whether 1-2% might even prove an overestimate. ‘Their estimate for offshore wind is likely to be higher than what it actually costs,’ she said.

For Fanny Calder, campaigns director at WWF, the most important point is to make sure that public money is channeled into the right projects. ‘Government needs to make sure it’s spending money in areas which are more difficult for the market to deliver by itself,’ she said. ‘It needs to look at things like energy efficiency in homes – particularly retrofitting them with climate-friendly heat pumps, something we don’t yet have a market-based solution for.’ Would the market then catch up? ‘That was certainly the case with renewables,’ she said. ‘When I first started working on them thirty years ago, they still need a lot of support to get them over the line. Now they’re super-competitive.’

With the UK’s future trade relations with the EU likely to monopolise Whitehall’s energies for the foreseeable future, would the government have the policy bandwidth to deliver on that? ‘Society is moving quicker than Westminster on this,’ said Scottish Power’s Keith Anderson.  ‘My concern is that when I talk to policy makers and regulators they don’t quite see the scale of that ambition.’ Andrew Griffith, Boris Johnson’s newly-appointed business advisor, wasn’t sure that was yet the case. ‘If we’re going to achieve a reduction in carbon in absolute terms, we’ll need to see consumers making different decisions for themselves and their family too ,’ he said. ‘But on the other hand just look at the fact that the growth rate in sales of air conditioning units is faster than heating.’

This rang true for James Kirkup, who heads up the Social Market Foundation. ‘Voters are constantly demanding ends while rejecting means,’ he said. So it’s perfectly likely that voters will support decarbonisation in principle whilst rejecting the kind of policies that will get us there.’ ‘Hence why almost every government in the world is going after electricity and transport first,’ said Keith Anderson. ‘It’s possible to decarbonise those without causing consumers any major cost or disruption. But when it comes to heat – when you’re actually asking people to pay for their homes to be upgraded – it’s going to be a much bigger problem for the average voter.’

Some around the table felt that voters would be prepared to make necessary sacrifices. But is that realistic? Even if voters are convinced of the urgency of climate change aren’t they likely to feel that any changes made in the UK would only be dwarfed by the ongoing demand for fossil fuels elsewhere in the world – particularly China and India? ‘It’s a question of global leadership,’ she said Fanny Calder. ‘If the UK can show it’s leading the world on climate change, we can persuade other countries to take the problem more seriously.’

Either way, said Keith Anderson, now was the time to act. ‘We need to put our foot down on the accelerator,’ he said. ‘There’s never been a greater willingness to invest in this area. If we can create the right frameworks for delivery, we can make real progress towards where we want to be in thirty years’ time.’

IN ASSOCIATION WITH SCOTTISH POWER