The future price of electricity

Round these parts we often have a bit of fun at New Year, predicting prices etc.  We’ve even been known to suggest a few punts that might be taken.  That said, solemnly forecasting commodity prices etc as if it’s a science is a fools’ game.  The track record of “respectable” price forecasters is truly appalling – and that’s not just because we’re waiting for cleverer chaps to come along – it’s because it is impossible.  Of course, they fact that plenty do it anyway is a tremendous boon to liquidity and commercial life generally: you always need to find someone to take the other side of a bet.

Having registered those points, we now turn to electricity.  From the Green corner (and indeed Miliband in the Red corner) there is currently a mighty howl going up: if we want to get the price of electricity down, we must accelerate “investment” in renewables.

Well, no.  This belief in “renewable electricity = cheaper electricity” is based on a couple of things, neither of them worthy of being the basis of policy.  First, there’s the naïve view that because wind and sunlight are “free”, this means the resulting electricity must be pretty cheap, too.  For those arguing in that way we can even helpfully chip in that sometimes, wholesale prices of electricity go negative!  All of this is true, but it has very little bearing on what the long-term, sustained wholesale price will be, when very costly capital equipment is required on a vast scale to intermediate between (e.g.) “free wind” and the consumer who wants power on demand, 24/7, every day of the year – and who finds himself being forced to “invest” in that capital equipment at exactly the same time everyone else in the world is buying the same stuff.

Secondly, and perhaps based on the first point, there’s the entirely religious view that of course it will be cheaper because it’s virtuous and clean and generated locally and that nice Caroline Lucas says so and, errr, well it must be.  To me this bears strong resemblance to those who argued that of course we’d be better off financially after Brexit, because, well, because.  It is of course perfectly fair to espouse the political view that Brexit is the way to vote – I espoused it myself – but please don’t tell us it’ll be cheap.  And exactly the same holds for renewable energy.

The underlying reason is similar in both cases.  Absent a subsidy, any time businesses and individuals are constrained to do something in the economic sphere that runs counter to what they’d do given the freedom to make their own informed economic decisions, that is prima facie gonna wind up costing more.  Of course there are exceptions: once in a blue moon there is genuine market failure (e.g. in energy, the practical inability of tenants and some householders to do the economic thing as regards short-payback insulation etc); and sometimes an economically viable new technology just hasn’t become socialised yet (LEDs). 

Governments make people do more expensive things than they might choose to all the time, for policy reasons sometimes sound, sometimes not (and in any case, political policy is frequently politically contestable).  To me, the key is that politicians shouldn’t lie about these things.

Now governments could choose to manage many of these types of policy intervention via general taxation.   That’s what they do in the case of, e.g., the policy decision “we need nuclear submarines“.  But mostly, they try to offload the cost onto the punter in various ways.  And that’s certainly the case with most aspects of Green policy, in this country and elsewhere.

This being the case, all the evidence is there that wholesale electricity prices will rise, and continue to rise, over the very lengthy period over which it is intended – by almost all political parties -  we will aim towards “net zero”.  This is so glaringly obvious, it barely needs explaining in detail: just sit back, watch and point.  But put on the ear defenders, because the Milibands of this world will continue to bellow that it’ll be cheap …

ND