No matter what the cost...

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The financial merits or demerits of the tidal lagoon project can be spun either way, depending on the figures selected, as we’ve seen in some of the reactions to the decision not to proceed.  Whether it’s assessed on the basis of the price per unit or the impact on electricity bills is one of the questions; both approaches have a degree of validity, but they lead to very different conclusions.  About the only thing that does seem entirely clear is that the financial arguments have been given considerably more weight than the question of decarbonising the production of energy.

The Tory MP for Maldwyn, Glyn Davies, has unsurprisingly defended the decision. His reasoning struck me as interesting however.  He says that he’s “been really taken aback by the calls for the UK Govt to back the Swansea Bay Tidal Lagoon, no matter what it’s cost. I just cannot think like that. I do not think it’s the way a Conservative does think”.  At first sight, it seems like a fair point – although it isn’t only Conservatives who might baulk at supporting something “no matter what it’s cost”.  But then I thought of the Rees-Moggs of this world and Brexit.  Isn’t that, ultimately, a very good and simple summary of what they want?  A quick, clean Brexit “no matter what it’s cost”?  Some Conservatives, at least, clearly do think that way.

He also quoted part of the report’s conclusions, which said “The inescapable conclusion of an extensive analysis is that however novel and appealing the proposal that has been made is, even with these factors taken into account, the costs which would be incurred by consumers and taxpayers would be so much higher than alternative sources of low carbon power that it would be irresponsible to enter into a contract with the promoter”.  Again, I found myself substituting ‘remaining in the EU’ for ‘alternative sources of low carbon power’.  Clearly, Glyn Davies and other Brexiteers do believe that sometimes, it is worth doing something which is far from being the lowest cost alternative because it achieves other desirable aims.  The real disagreement comes over deciding what other aims might be desirable, and how much we’re prepared to pay to achieve them.  (And, of course, all of us suffer from the problem that our prior beliefs on the desirability of a particular outcome inevitably affect the extent to which we choose to believe a particular set of figures when they are placed in front of us, to say nothing of the method used to derive those figures.)

But that issue of ‘desirability’ is where political debate should take place; costs are part of the argument, but cost should never trump all debate about what is the ‘right’ thing to do.  That applies whether it’s in relation to the lagoon or anything else – including Brexit and, yes, even independence.  Reducing everything to the bottom line – especially when the method of calculation of the bottom line is itself a matter of considerable debate – often looks like a way of avoiding the much more important debate about the sort of world in which we want to live and how we get there.  But of course, reducing everything to the bottom line isn’t really “the way a Conservative does think” at all.  It’s only other people’s ideas about what’s desirable which can be dismissed on cost grounds without further discussion.  And there’s something very Conservative indeed about that approach to debate.

Individual advantage; collective cost

Tweet Last week, it was reported that those customers of the energy companies who switch suppliers regularly can end up paying around £200 a year less than those who remain loyal to one supplier.  The reaction was somewhat predictable, with calls for the non-switchers to joint the tide and switch.  Some of yesterday’s papers even included large adverts, paid for by the Government out of our money, telling us that they’d made it easier to switch and encouraging more of us to do so.

There are, of course, always likely to be some customers who don’t switch, no matter how easy the companies and government make it.  They will tend to be the elderly and the vulnerable.  They are the ones who are most likely to lose out in a market place which pays a premium to those who are willing and able to spend the time and effort shopping around.  The best that fanatical fans of ‘the market’ can hope for is that this number reduces; it is unlikely ever to reach zero.

But I’m not sure that it’s really as simple as encouraging people to switch anyway; it looks to me like one of those situations which appears to make sense individually but is crackers collectively.

In setting their tariffs, and particularly the difference between their tariffs for current customers and their tariffs for new customers, the energy companies are always trying to strike a balance which maintains what they consider to be a reasonable level of profit.  (Whether the profits are reasonable or not is another issue entirely, and not one for today.)  Does anyone really believe that they are going to allow their overall profit to go down if 100% of customers switch annually, so that they’re all on the ‘new’ customer tariff?  Of course not; the effect ultimately would simply be to erode the difference between ‘new’ and ‘existing’ customers’ tariffs, with the ‘average’ tariff close to where it is now in order to maintain current levels of overall profit.  Having a lower tariff to attract new customers only pays off as long as only some customers switch; the greater the proportion who do switch, the lower the premium for doing so would become.

So, if we suppose for a moment that the government were to succeed in its efforts to get everyone to switch regularly, what would the result be?  The answer is that we’d all be paying pretty similar tariffs (so the difference in price would be diminished, even if not entirely eliminated); the average tariffs would be similar to the current average, with smaller deviations from the norm; the energy companies would have a complete infrastructure dedicated to handling a 100% turnover of customers every year (something which is likely to increase their costs); and we as customers would have to spend time every year deciding to whom to switch next.

What exactly is the collective advantage of doing that compared to the simpler expedient of protecting those least able to shop around by outlawing the practice of giving a preferential deal to new customers?

Trenches and trenches

Tweet There are increasing demands for the link from wind farms – both locally in Carmarthenshire and in Powys – to be taken underground.  From the point of view of minimising the impact on the scenery, it makes a lot of sense.

It does however add to the costs (although there is some dispute about the extent of that addition).  Whether it’s a cost worth paying is ultimately a matter of opinion.  Personally I’d like to see the detail of the cost impact before taking a firm view – it might be that the combination of overhead cables in some areas and underground cables in others will offer the best trade-off between cost and scenery.

There are however two major inconsistencies in some of the statements being made by those demanding that the links be underground.

The first is that the same people are also complaining about the high cost of energy, and wind energy in particular.  Yet they are demanding action which will effectively increase the cost.

The second is that some of those who now want to dig a trench across Carmarthenshire to bury electricity cables were implacable opponents of digging a trench across Carmarthenshire to bury gas pipes.  To me one trench looks much the same as another; insofar as it is damaging, it’s the trench which does the damage, not what is buried in it.

There are some hard facts that we cannot easily avoid:

·         We need to move away from carbon-based energy and base our economy on renewables

·         Effective use of renewables – wind, tide, hydro, solar – means siting the generators where the renewable energy is available.  That often means in the countryside.

·         All energy production and use has an environmental impact; the decision we face is either not to use energy, or else to decide which environmental impacts we’re prepared to support.

·         Energy costs may vary from time to time, but over the long term they are headed in only one direction – upwards.

Pretending that one or more of those things are not true, or that the consequences of them being true can somehow be avoided, may help politicians to win votes in elections, but it doesn’t make for a coherent energy policy.

Racing for the bottom

Tweet The Welsh government frequently refers to the extent to which sustainability is seen as being its central principle in everything it does.  The idea is sound and it's a nice sound bite as well.  The problem arises in living the implications of making such a commitment.

Last week for instance, Tata steel, the operators of the Port Talbot plant, raised an issue over the price which they have to pay for energy.  Their European chief executive described high energy prices as an “obstacle" to growth.  Specifically he also complained that his company pays more for energy than competitors in France and pays business rate double those of competitors in Germany.  I have no reason to doubt either of those figures, but it's notable that his company would also be paying considerably less corporation tax on any profits in the UK than it would in either France or Germany.

Keen to support a major employer in South Wales Carwyn Jones, our first Minister, leapt to their support.  He called for what he referred to as a "level playing field" when it comes to energy prices, and urged the UK government to take steps to ensure such a level field.

What exactly he had in mind is unclear, but it seems reasonable to assume that what he was in fact calling for was government action to reduce energy prices.  That is, however, looking at only one factor.  And looking at one factor in particular is not giving proper consideration to the overall economic environment in which companies operate.

There is a question also over the extent to which Jones's call conflicts with his own government’s “central organising principle".  Indeed, he recognised the conflict when he said "Sustainability is important, but one of the main planks must be economic sustainability and sometimes they have to be trade-offs."

That sounds to me as though he is in fact saying that the commitment to sustainability applies only in so far as it does not conflict with the interests of major employers.  And such a commitment is no commitment at all.

There are indeed differences in energy prices between different countries.  And there are differences in tax regimes as well.  There is a danger in trying to be the lowest in order to compete in the interests of economic growth.  And that danger is that economic sustainability leads to environmental unsustainability.

I’m sure that Jones recognises that danger himself.  Indeed, some months ago, he argued that corporation tax should not be devolved to Wales because it would lead to a ‘race to the bottom’ as different parts of the UK sought to compete with each other for economic investment on the basis of a lower tax regime.  Up to a point, I agree with him.  That's part of the reason why I would argue for devolution of a range of taxes rather than considering a single tax in isolation.

Reducing energy prices to large consumers of energy to compete with other countries is another form of a race to the bottom.  But this isn't just an economic race to the bottom; it is also potentially an environmental race to the bottom, given the impact of energy consumption on emissions.

Now steel is going to be made somewhere.  It's an essential product to any developed or developing economy.  And we certainly would not want to create an economic environment which drives such industry elsewhere.  Solving our own emissions problems by moving them elsewhere is no solution at all. 

Creating an environment where companies are both successful economically and have incentives to reduce their environmental impact is a difficult balancing act.  But simply responding to their pressure for reduced energy costs is avoiding any attempt to do any balancing at all.

Not asking the right question

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The meeting between the Prime Minister, the Energy Secretary, and the ‘big six’ energy companies seems to have been a classic case of creating the appearance of action without actually doing anything very much.

That high and rising fuel prices are a problem is indisputable and that they impact disproportionately on the least well-off is equally so.  But exhorting energy companies to make their bills clearer, and to make it easier for consumers to switch supplier, is little more than tinkering on the fringes.  And there’s nothing new in any of it, as one of the more independent suppliers who was present stated after the meeting.

The response of opposition politicians has been little better.  Ed Miliband’s statement that the companies should use their profits to reduce prices is merely the most glaring example of a lack of will to implement real change.

There does seem to be some doubt as to whether the claim that the energy companies are making an average profit of £125 per household per year is true or not.  The companies themselves claim that it’s closer to £15, but I’m not sure how relevant any figure is. 

‘If £125 is too high, what’s the right figure?’ is not a question to which I’m hearing any answers.  And in any event, the percentage figure is more relevant that the absolute figure, and energy companies’ profits do not seem that far out of line with other profit-making businesses.

That goes to the heart of the inadequacy of the political response.  The underlying question – whether we want these services provided by companies whose main aim is profit – is not even being asked.  Suggesting that companies should sacrifice the interests of their shareholders for the benefit of their customers is like criticising the outcomes of the free market without challenging the underlying basis.

Government (or opposition) politicians could propose an alternative ownership model for energy companies, or they could propose legislation to limit profits or enforce lower tariffs, but they do none of those things – because they accept the basic economic model under which the companies operate.

That leaves them nothing to fall back on except pious words and spin, which will do little to alleviate the problems which many will face this winter.