ࡱ> EGD#` $bjbj\.\. .6>D>DW   8$P<:vvgiL($hntgg cccXcccc0 m5Xc 0PcwcclV3c' XP$   The David Hume Institute Dr Dieter Helm (New College Oxford) Energy policy for Scotland keeping the lights on and limiting climate change  HYPERLINK "http://www.davidhumeinstitute.com/DHI%20Website/Events,%20transcripts%20&%20presentations/Events%202006/Dieter%20Helm%20Presentation.pdf" http://www.davidhumeinstitute.com/DHI%20Website/Events,%20transcripts%20&%20presentations/Events%202006/Dieter%20Helm%20Presentation.pdf 31st October 2006 In a masterful presentation, drawing on his expertise in economics, energy technology and the intricacies of international treaty obligations, Dieter Helm dissected UK Energy Policy, leaving it exposed for all to see. It was not a pretty sight. The slides that accompanied the talk provide a detailed outline of the argument, but several key points are worth highlighting. The first is that starting around 2000 there was a profound change in the energy market. The era of relatively cheap fossil fuels ended. Whereas the OPEC-induced price spike of 1973 had been successfully weathered, primarily thanks to a very robust supply side reaction, no such compensation was now in sight. The second key point is that by their very nature power generation facilities tend to be long-lived. Indeed, it appears that, save for gas-fired and wind-powered facilities, most electricity generating plant in the UK is 30 or more years old. This, of course, can be seen as much as an opportunity as a problem given that the required new plant will be able to reflect the new high-price regime in its technology and design. The third and final major consideration is that energy resources have been undergoing a remarkable process of nationalisation. The worlds raw energy resources are increasingly under the control of sovereign states rather than private companies. The prime example is Gazprom. Security of supply is threatened, therefore, not only from aging plant but also from political risk. EU policy measures to confront these challenges (particularly in the form of the Hampton Court agreement) are judged to be sensible and helpful. These comprise activities such as enhancing network connectivity across the EU and the construction of strategic (gas) storage facilities. Such activity is an obvious way to control risk by pooling risks. UK policy, on the other hand, was found to be deeply disappointing. Targets had been set and missed thus undermining credibility. In a world of long-term investment, there was nothing on the post-2012 policy landscape, save for government aspirations. There was absolutely no initiative being taken to ensure that the UK benefit from a degree of excess capacity in energy supplies. The current market-led arrangements provided no incentive to any of the participants to invest in a margin of capacity. Policy makers should wish to see such a measure of excess capacity if price spikes and possible disruptions of supply are to be avoided. But there is a policy vacuum in this area. The talk was being given the day following the publication of the Stern Review on Climate Change:  HYPERLINK "http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm" http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm Dieter Helm welcomed Sir Nick Sterns Report and explained that the UK Government was confronted by a Global Prisoners Dilemma, where the dominant strategy is to do nothing and essentially become a free rider on every elses efforts. One of the major players (the USA) was not engaged, and this made it far less likely that other increasingly significant parties (China and India) would join in. The UK could be interpreted as having embarked on an exercise of attempting to seize moral leadership in the area. By demonstration of its own efforts it (Tony Blair) hoped to exert moral suasion on the other parties, so getting them to come into line. But here again, the issue of credibility arises. Having set and failed to meet pollution targets, the UK Government was increasingly less likely to be able to pull off its ambitious policy. Dieter Helm sees organisational failure as lying at the heart of the problem. A proliferation of government agencies, each with its own agenda and ambitions, all vie with each other in what is a counter-productive exercise. The ever extending influence of the Treasury was singled out here for special comment. One way forward would be to remove this muddle by creating a single coordinating agency. It is here that Helm saw scope for a Scottish initiative. While much of Scotlands energy policy is inextricably bound up with that of the rest of the UK, so rendering ideas such as Scottish climate change objectives pointless, in matters such as local connectivity and in planning regulations there is clearly scope for distinct Scottish solutions. In this Helm found himself in agreement with the recent Royal Society of Edinburgh report on the subject:  HYPERLINK "http://www.royalsoced.org.uk/enquiries/energy/index.htm" http://www.royalsoced.org.uk/enquiries/energy/index.htm In terms of nuclear power (the elephant in the room in many of these discussions) Helm was essentially agnostic. His plea was a simple one and straight form the heart of an economist the government should set a price for carbon (or equivalently set a quota on carbon admissions but not both of course, as all Econ-1 students, if not governments, know). He emphasised that the beauty of such a solution is that it got both sides of the market working on the problem the supply side and the demand side. It also eliminates the ghastly problem of picking winners. But the UK population did not seem to have been prepared for this solution by the government, and in such circumstances press reaction (tax scares) was likely to be hostile. The UK government seems set on its existing energy policy course of snatching at targets (and missing them). At the end of the talk, Professor Roger Crofts, who had served as Secretary on the Royal Society of Edinburghs Inquiry into Issues for Scotland's Energy Supply, offered some insights gained by his committee in the course of their investigation. He highlighted the security of supply issue and emphasised the need to pursue a low-carbon approach. One area he highlighted that had not come up in the body of Helms talk was the impact of energy prices on the competitiveness of the Scottish economy plus a concern regarding equity, in terms of the differential impact of higher energy prices across both consumers and regions. Under the Chairmanship of Professor Jeremy Peat, a lively period of questions and answers followed in which both Dieter Helm and Roger Crofts participated. This David Hume Institute event ended in its customary fashion, with refreshments and further, more informal, discussions. Professor Brian Main 2 November 2006  See the work of James Buchanan for an analysis of such phenomena:  HYPERLINK "http://www.dallasfed.org/research/ei/ei0302.pdf" http://www.dallasfed.org/research/ei/ei0302.pdf     ?% ' ( )  l %&3:iy%HźŨ͛Ő||||||||h hRWhh$hch hCJaJhHh 0JCJaJ#jhHh CJUaJh h CJaJh CJaJjh CJUaJ ho5hhc5hhc5CJaJ hc5hchc50>? w x &'  YZ$a$gdc$a$gdcgd $a$gdcW#$$*  1+,Yfz3LcgtXYBb+/(-29:ɻɷɷɷɷɯhYh;60Jjh;6U h;6h;6jh;6Uh;6jhMV0JUhB5<hMVhHh 0Jj}h U h h h jh Uh{'h h$:;<()"")#*#+#A#Q#R#S#T#U#V#W# $ $$$$$$$gdc$a$gdc:x"'+O[z&?@    8 !!!!"""C"]"^""""""" # ###(#)#*#P#Q#R#S#T#W#X######ĺ hMVhYjhYUhYjhY0JUhch{' h{'hMVhMVh] h;6hpr hprhprhpr h;6h;6h hB5<h;6?### $ $ $ $$$$$$$$$$$hcjh[`Uh[` hMVhYhYhYhY0JjhYUjhYU$$$$$$gdc,1h. 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