Yesterday David Cameron made a speech on the economy. In it he pointed to two new departures. He has “asked the Treasury to examine what more we can do to boost credit for business, housing and infrastructure”. He also said that more reform was needed in energy: “It means recognising the risks to the recovery from rising and volatile energy prices and working together to ensure energy security”.
We have often discussed how to establish competitive banks with money to lend for good projects. Today perhaps we should consider how we might have a more plentiful supply of attractively priced energy. That would be good for business, and good to tackle what Labour called “fuel poverty”. All too many individuals and businesses have experienced a big squeeze in recent years from the ever rising energy bills they have faced. High inflation, with energy an important part of it, has squeezed family budgets and cut demand for goods and services as a result.
The US industrial recovery is better than the European. There are two magic ingredients.One is more working banks with money to lend. The other is cheap energy. US gas prices are around one third of the European levels. The US has moved quickly to exploit shale gas. It has found a lot of it, and is pressing on with development of the resource. Cheap energy turns more factories. It boosts heavy energy using indistries like steel and chemcials,glass and ceramics.
The UK should recognise that pursuing a single country approach to limiting carbon dioxide emissions may not help the planet as greens intend, but it can certainly hinder UK industry. If we succeed in shutting down or preventing new energy using industries here by charging too much, we will import the products from overseas where the energy will still be burnt.
The UK has good reserves of gas, shale gas, coal, and oil. The government needs to set tax rates and a licensing regime which allows expansion of output at affordable prices. It started to move in this direction with tax changes in the most recent budget. Mr Cameron reflects the mood of the country when he says he wants to cut our dependence on imported hydrocarbons. As more is discovered in the UK, and more produced, so gas prices should come down.
The Energy Department is also well aware of the need to prompt more electricity generation capacity. The cheapest is combined cycle gas production. They have licensed more capacity, but need to investigate the build rate. The current regulatory framework seems to be delaying or deterring the build of these much needed plants. The relative cost analyses suggest that nuclear is much dearer than gas, unless you assume large future increases in the gas price. They also show that many renewables are also expensive. These statements are based on figures prior to putting in penalties for carbon dioxide emissions.
The Energy Department has started to cut the subsidies for some renewable technologies. There is a good argument for doing so. The cost of installations for solar, wind, and others is coming down as the volume of these methods grows. At the very least the subsdies should be cut to avoid super profits as the capital costs fall. The subsidies are paid for by the consumers.
In a very competitive world a country wishing to power an industrial revival needs to keep its power costs down, as they are such an important element in total costs. We also need to do something about domestic fuel prices, as they are one of the main reasons why inflation has stayed high and why real incomes have been falling. Energy is a very managed market. The government needs to provide the licences, the planning permissions and the pricing and subsidy regime that helps the consumer more.