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Welcome to Merrin Talks Money, the podcast at which people who know the markets explain the markets. I'm merin Thumbstweb. This week we are discussing Britain's energy policies, how important they are to our productivity and to British industry. With me, is said Dita Helm, Professor of Economic Policy and Fellow and Economics at New College, Oxford. Helme is best known for his work on sustainability and the economics of energy.
He's a best selling author. He's an influential public policy advisor and was awarded as knighthood in twenty twenty one for his contributions to the environment and to energy policy. Professor Helm, Welcome to Merin Talks Money.
Thank you very much for inviting me.
Well, I'm we're looking forward to it. There's a lot of stuff going on in UK energy. There's a lot of stories, everyone's taking side, everyone has an explanation, and a lot of stuff doesn't quite make sense. So can we start just with answering the very simple question I suspect has a complicated answer, but the very simple question why is energy electricity in the UK so much more expensive than everywhere else.
Well, the UK has the unenviable position of having about expensive electricity in the developed world, and that takes quite a lot of doing. Okay, so how do you get from being in the mainstream of energy to being at this limit. Well, what we've done is decide to go unilaterally fast track for net zero on the grounds that if we reduce our territorial emissions this will necessarily reduce global warming.
Let's stop right there, because this is something that I also want to just be clear on.
We get a lot of guy from.
Our politicians about the importance of reducing our carbon emissions, etc. And they focus entirely on carbon emissions within the UK, and there's no discussion about the fact that if we don't produce something here but we buy it off it's being produced somewhere else.
It makes no difference whatsoever.
And that seems to be one of the core contradictions at the heart of the UK net zero policy.
I think the framework for measuring emissions for the global targets, which to be fair to the British governments, comes from the UN and through the process, and measuring in terms of carbon territorial emissions makes some pretty fundamental mistakes. The first is, and it's really important, it doesn't matter in the world where a ton of carbon is emitted to its impact on climate change. Carbon's just carbon. Similarly, it doesn't matter where it's secustrated. Now, climate change is about
the concentration of carbon in the atmosphere. That's how many parts per million of carbon there is up there, and that's been going up at two parts per million every single year since nineteen ninety without a blip. We haven't made any progress on this, and last year as three. Now, if you just focus on your territorial carbon emissions, how much emissions take place in the UK, that is only tangentially related to how much carbon we actually consume.
So just as a starting point, we should say that this whole idea of reducing carbon emissions in the UK purely on a territorial basis is meaningless. Guff.
No, it's not meaningless. It's part of what you would do if you unilaterally wanted to stop causing climate change. It's potentially necessary, but it's certainly not sufficient.
Okay, the measurement is meaningless, Guff. When it comes to talking about a carbon footprint unless you include the footprint of absolutely everything that we import.
Now, yeah, let's get's right. A lot of stuff we produce in Britain, we consume it Britain. Now it does matter, okay, but we are very, very prone to import, particularly manufacturing energy intensive stuff from elsewhere. And that's where it's our carbon consumption that counts, and where it happens to be produced is beside the point. And it just so happens that this is a country which is de industrialized since the early eighties at a faster rate than virtually everybody else.
And that means that carbon consumption is more important because we switched to imports from places like China than it would be in a number of other countries.
Yeah, okay, so let's put that bit to one side. Then, with this drive for net zero exists, we don't necessarily approve of the parameters around it, but nonetheless this drive exists. And that you were about to start telling me before I interrupted you, which I'm prone to doing, and I apologize. You're about to start telling me how that impacts on the cost of energy in the UK.
Well, if you want to decarbonize your electricity by two point thirty, which is the ambition of this government and this Secretary of State. I think the Conservatives wanted to do it by about two thirty five. You have to fast track swapping from fossil fuel generation to wind solar. You can't fast track the nuclear and the thing about wind and so they have lots of advantages, but basically they are low density, geographically dispersed, small units and critically
inter emittant. So when the wind doesn't blow and the sun doesn't shine, you need something else. And of course this stuff is not next to the transmission system. So instead of the transmission system that used to meet our sixty cot at what's you now need all these new transmission lines to places like the north coast of Scotland. And this all comes at a price.
So the first thing you said is that we need about double the capacity that we used to and I just wanted to clarify that is because when the sun isn't shining and the wind isn't blowing, bit isn't working, but you still need the same capacity you used to, so the backup system needs to run at the same time, so that's where you get the double from.
And then with the.
Transmission we used to have, you know, coulfied stations and nuclear stations relatively near to where the energy was needed, and a small number of them, so the grid could be much smaller. Right, and now we have many, many, many different areas sending in energy, some of them very far away, so the grid has to be a completely different grid to cope with that. And those the two things.
Just to be clear, The government's advisory planning frame of this says that in two thirty if we're to be netze and electricity, we will also need thirty five gigawatts of gas, which will sit there and only run five percent of the time. So that's half your total number you had before still has to be there. And if you will try to run a gas power station where it's idle most of the time and just works five percent of the time at short notice, you've really got a lot of costs.
Now.
In addition to that, we need about ten gigawatts of interconnectors so we can import the stuff from Europe if we're short in one of those winter periods and we want, we will need ten gigawatts of people voluntarily turning themselves off what's called active demand management, what I call voluntary power cuts. So you need all of that lot to get sort of the same amount of electricity you had before,
because what we want is not intermittent power. We want firm power and you know in the new industry for things like data centers and banks and sell and you don't want the possibility things may turn off. So that's why you got that huge capacity.
Come So one of the things that we keep being told is that, you know, solar energy, wind energy, all renewables are going to make our energy bills come down. But when we talk about that, we're not taking into account all the costs that surround using renewable to it's simply not true. Your bill is not going to come down by three hundred pounds as a result of the UK being a you know, greened global power.
Well, there is one reason why electricity bills could come down. Yes, it requires mister Milliband to be exactly wrong. So he thinks we're gonna have cheaper bills because we're going to get out of high and volatile gas prices. But actually the reality is, in real terms of the gas price, the European gas price is below the five and ten year average, and there's lots of reasons for thinking why
the gas price might fall. Ironically, though, since our contracting structure, what's being done on net zero means that the wholesale price is less and less important going forward. He is actually making sure in two ways that should the gas price fall, we will not get the benefits of that happening. Of course, gas in heating, that's a different story. But that's all about whether, in fact there is much chance that we're all going to switch to heat pumps and
get out of natural gas spoilers and heating. I suppose.
I mean, I take your point that it's entirely possible that the gas price might fall. But with the demand for electricity rising as fast as it is globally, with the incredible demand from the big data centers, et cetera, it's quite hard falling over the medium term, isn't it.
And that's it's got to pick up.
It's got to pick up the marginal the marginal capacity required for all these data centers.
You're absolutely right that the demand for electricity is going to go up. Okay, but you have to look what's actually happening in the fossil fuel world. So fossil fuels provide a four percent of the world's energy. But if you look what's happening in the gas world, for example, take a look at the power of Siberia to pipeline which put In and the Chinese leader are putting together. That takes out the marginal LNG demand in Southeast Asia.
That affects back on the American ellerg. America wasn't exporting gas ten years ago. It was going to be. It was going to be the mass importer for which the Kuwaiti gas was developed to serve the American market. It's now one of the biggest exporters in the world, and by the way, it's also the largest AWE producer in the world. So I don't think it's right to say that the gas price is in ever to be going
to stay where it is or go up. And then remember, in Europe the gas price is below it's five and ten year level on the Dutch market, which is the price that we all use. And that's in a world in which we squeezed out a hell of a lot of Russian gas. Now it's not implausible to imagine the little bit of that Russian gas will creep back in as well. So I'm on a different wicket. I think that the pressures in the international gas market are largely down.
But that's why I think that the politicians are completely wrong to tell us that they're going to get out of high and volatile gas prices. And just because there is a spot shock, as there's been in all markets in the past, to mistake a trend for a spot shark, that I think is just a gross mistake that many any politicians in the past have made.
Okay, I want to ask you about storage in a minute and see if that is genuinely a long term solution to some of these problems. But before that, you've explained everything very clearly. I think everyone listening to the part will then go, yep, now I understand how all this works. But if you understand it, I understand it. Our audience now understand it. Why does Ed Milliband not
understand it? Why does he persist with this view that net zero in the form that it stands is the answer to everything, and why does he persist in telling us that our energy bills are going to come down as a result.
Well, I'm an economist and I said in the university, and he's a politician who has to get elected. I had no idea, whether he believes deeply that all of this is achievable and we can get to net zero by two thirty and it's all going to be cheaper. However, it is true that he persuaded a great deal of the public that this was the case, and where I did a great deal of other people that this was a growth strategy. This is one of the areas where
economic growth was going to come from. Now, in political terms, I respect all politicians who have taken the trouble to understand that climate change is a really big problem, just as I respect politicians from all sorts of parties who understand just how much devastation we're doing to biodiversity. So that's the first kind of tick in the box, and
it's common ground, okay. The second is that there's a great difference of opinion about whether the technologies that we have at the moment can do on a fast track what is necessary to decarbonize them. Supposing we wanted to decarbonize properly and we wanted to do carbon consumption. This
is an enormous task. This is a complete transformation. And some academics thing you can do this stuff, and some academics things are costs of solar and wind are going to fall so quickly, and battery technology is going to advance so quickly. This is all going to be fixed. I don't agree. There's no evidence I think to support that proposition, but he obviously listens to that too, and there are different opinions on that. But the politics are
really straightforward. If you tell the British public you know that you are causing climate change, and you and I are doing so, we are polluters. It's us, not industry. We ultimately buy the stuff, whether it's made in China or it's made here. If you tell us that we're the polluters, and you say you should stop polluting, and you ask me, do I want to not cause pollution? Because I don't want to cousse pollution. Now you tell me it's going to cost you a lot of money
and your energy bill is going to go up. And this is a huge resource cost, which means that the British have to stop having zero savings nessive capital appreciation, but they have to set aside the kind of sums that say Chinese citizens sit aside for investment, your standard living might fall. You're not going to do it. It's like telling people that you know, the cost of COVID ought to be paid for, better off at the end of it than you were at the beginning. Well, people don't
want to hear it. So what better to tell people is a win win win. You're going to get clean energy, it's going to cause economic growth. Oh and it's all going to be cheaper right now until you really get going, you're not being found out. But now he is being found out. Now the government is being found out. Now we have the highest electricity industrial prices and nearly the same for domestic in the developed world, and we are
hemorrhaging industry. We've lost the fertilizer industry. We've lost our fiber glass industry. You know, these costs are real. Now there are things you can do which can protect your industrial frame by charging them the marginal costs and not the full costs of the system, as most other countries do. We choose not to do that. Now I think we hit the kind of reality wall. It isn't going to be three hundred pound cheaper unless the gas price falls very sharply, and again not for h the reasons that
similar bound things. And now we have to rebase and the problem for the government is I think half the government understand that and half the government don't. And that's the political sort of dividing line. I'm glad I'm not a politician.
Now. If all economic activity is energy transformed one way or another. If we really do want to properly see the UK economy grow and not just grow, but do you know see GDP per capitalize, improve living standards etc. And have a hope of financial survival, and the fiscal environment that we're in, we do have to find a way to make UK energy cheaper. So what is the
answer to your mind? What is the answer to finding a way through this maze of wanting to humor the idea of net zero but also wanting to at least maintain people's living standards.
So what we have to do is to say what matters in that energy space for the success of the British economy as an open economy in a tradeable world, even with the tariffs and all those kinds of things around it. So what really matters is what industry pays for energy. If you and I pay too much for energy, it's just like I have being highly taxed. If you really want this high cost route that we're going down to switch the cost heavily from industry to the domestic consumer.
And from an industry's point of view, I mean in economics, right, you don't say these are my costs, therefore this is my price. Say what's the market price? Can I get my costs in line to meet that market price? Okay? Urs market price actually very high too. It's got an energy problem. So out there in the world when it comes to the energy intensive bit us costs are enormously lower. So are China's. Actually, China's burned half the world's coal.
It's got fantastic amount of cheap coal coming its way. America's just the from a purely energy point of view, the energy utopia pastily cheap gas, largest or producer in the world. Now, lots of wide open spaces for developing renewables. It's a win win win in almost all of these Moneys.
And very very and very very open to nuclear now the US very open ms and putting up new stations all over the place, etcetera, in a way that we are not.
Well, let's come to newcle a second. But so the point is we should charge a price to industry which enables it to compete in markets, and that means separating out who pays the marginal costs of generating power, and everyone should pay their marginal costs. And the reality is we should switch quite a lot of those costs from large industry to us, the consumers. And politically that is extremely difficult, but that's the thing to do immediately, because
there is an industrial crisis out there. You know, who in the Labor Party thought they'd be nationalizing the steel industry within twelve months. Who thought the car industry would collapse quite as fast as it has, even though Brexit did it. Who thought that there'll be another refinery to join Grangemouth on the way out by the way, to turn them into import terminals for what they were exports. Who thought that the fertilized industry would collapse. Who thought
the buyer fuels industry collapsed. This is what real large electricity prices do. It's a crisis and it has an obvious answer. Charge the competitive price, not the full costs, and then recover the full cost. You can choose. You can make the taxpayer pay for it, you can make us the consumer pay for it. But face that and tell people the truth behind that proposition. That's the first
and most important and urgent thing to do. And to be fair, the government has begun to act on this territory and has set this data two twenty seven to come up with something more general. But their mistake is to think that our only problem is really large intensive producers like steel. Whereas you know, if you make boots
or shoes or widgets, you know you're competing too. It's not you're using a lot of energy for your factory, but someone else is producing them over at China at lower cost because their energy costs are that So it's not just a bit of industry, it's affected. It's the whole of the industrial sector. And that's got to be faced up to. And that's the crisis and that's the urgency, and that's where mister miller Band will have to tell you and me, you know what you're going to have to pay more.
Is there also a case for pulling back on building renewable energy infrastructure in that there's a lot of wind up in and around the UK now and you know, on good days when the wind is blowing, almost all UK electricity has provided by renewables. And so if that is the case, can you get to a point where you say, well, that's kind of enough.
On a good day, it's already.
Doing nearly all the electricity we need, so maybe we should pull back.
First of all, we're never going to build it as fast as that the government thinks we're going to.
Right.
The supply chain just isn't there. It's all Chinese or heavily, and in the supply chain, the idea that we're going to be able to say, you know what, just give it the stuff now now we want it because we've only got fifty months or so to go, because we've got to meet this arbitrary target of two thirty it's just not going to happen.
Now.
You have to look at the energy system as a whole and say what's the balance you want. So in the UK, would you want to basically end up running your electricity system on wind and solar in the hope that you're eventually going to build a bit of nuclear and that's it. No, So personally, I wouldn't do fifty gigawatts of wind, And I'd look at the prices that emerge and what's happened, because these are capital goods, is that the cost of capital's doubled, and the cost of
capital is the most important number. For a nuclear power station, for a solar or for wind, they're just capital. And you know, the real interest rate is high. The nominal interest rate on a thirty year bond is five point seven. You know, not long ago, it was naught, right, So people assume the costs were all going to come tumbling down. This is the most important cost and it's going up. And that says non balance. Do you want to do it quite as fast? Do you want to do quite
so much? So pragmatism. Is it going to make any difference to climate change if it built a little bit less wind a little bit more? No, Would it be better to spend that money on encouraging some SMR nuclear actors? You know, there are choices, But when you impose an arbitrary, short term political target on edge system, you're bound to create a higher costs and you're bound to create yourself lots of problems.
It has a smaller side. Are we absolutely certain that these giant giant wind turbines are at least cover neutral? Are we sure that these giant turbines are positive in the end?
First of all, that is a very unpopular thing to say, but it's true. There is no such thing as clean energy. That's the real climate crisis ahead of us. There is no way you can produce energy in volume which is genuinely zero emission, except at the point of generation. So if you dig back into the supply chain of solar or wind or indeed nuclear, any of these technologies, First of all, the starting point of this process is a
huge amount of mining. You need copper, you need nickel, you need aluminium, you need iron ore, et cetera, et cetera. And for ev is an electric cars you need a lot of cobalt too, and other minerals. So you do a lot of environmental damage and to the secrustration of carbon which would otherwise take place. Then you get to refining. Refining is one of the most energy intensive things in the world you can do, and most refining minerals in
China and especially Indonesia is coal steel coal. Ye. Right, So if you work out the carbon embedded in the thing that you bought, your ev your wooden turbine or your solar panel, that is not clean. The difference comes that once the turbine's turning around, it's not using anything that's carbon intended to turn around it's using the wind, whereas when the gas power station's going it is producing emissions.
So life cycle, it's probably true in most cases that the renewables have less carbon emissions associated with them than the fossil fuels like gas generators and coal, but they're not zero.
Yeah, So again it depends. It depends on the life cycle of a turbine. If your turbine goes for the full twenty five years, sure ever goes for fifteen, maybe not so much, And so a lot of marginal fudge in this stuff.
That there is a lot. But of course end of life is very interesting. End of life of a fossil fuel bar station is quite complicated, right, end of life of a wind turbine, Well, most of it's recyclle. That doesn't mean you don't use energy and recycling you do. It's not free, it's not zero emissions. And we haven't really worked out what we're going to do with solar panels extract some of the minerals from at the end. I mean, the real answer is it's complicated.
Okay, Now, let's say them that what we really want, what we really want, if we want to grow. We want to improve our living standards, is we want to be able to use more and more and more energy. And one of the difficulties we've got ourselves into is this idea of thinking that we can survive by trying to use less energy, that we should become increasingly efficient. We should, as you say, gover, voluntary power cards, etcetera,
try and reduce the amount of energy we use. But of course progress comes in using more energy, not less. So the answer that the simple answer of the of course is you say, everything is complicated is more nuclear is SMRs all over the place, replace the old or replace the old call stations, etc. With big nuclear plants, but an SMR outside every small town and off we go. How realistic is the nuclear future in the UK?
Okay? So the first thing to say, which is really important, Until very recently, people thought that you solve climate change by reducing the demand for energy. You're absolutely right, that doesn't solve the problem. In fact, energy efficiency increases the demand for energy. This is Jevan's law, because if you improve the efficiency of energy delivery, you make it effectively cheaper, and if the price goes down, the demand goes up.
That's what we've been doing for two hundred years, and there's no doubt whatsoever that the mindset that's finally changed to recognize the demand for energy, and the demand for electricity in particular, it's going to rise. So how do we meet that much greater demand for energy into the future Given where we are now, It is in my mind pretty much practically inconceivable that you can run an economy in ten or twenty or thirty years time primarily
on wind and solar. You would have to solve the storage problem, and that would require you to solve the intermittency problem, and you'd have to do that with a certainty that data and anything else requires, and do it at reasonable costs. No doubt. Batteries are coming on, but they're very expensive. But we've never found a battery yet that can solve the long duration problems in winter. So in that frame, is there anything else? Of course, the answer that everyone absolutely goes to is nuclear.
Right.
Nuclear is dense energy, very high density energy. It is firm power, it's not intermittent, it comes in really big lumps, even small modular reactors, and it can be placed near the sources of demand. So it's the absolute opposite of a wind turbine offshore lovely so great. Now here's the problem. It's fantastically expensive in this country. How can it be that for three point two gigawatts in the Somerset coast it's going to cost forty something billion? How can size
world cost forty billion? But then how can a railway line from London to Birmiham cost three quarters of a billion a mile? So this country has an extraordinary problem with the costs of any construction, and nuclear is a construction problem, par excellens. Now people say, oh, well, let's make it more in factories, let's do SMRs. Well, first of all, small Roger reactors are not small. They're like
five hundred megawatts or two hundred megawats. These are quite big, right, and at the moment they're basically mini versions at PWR nuclear pass stations like Hinkley size well, making the factories a hell of a lot of hink clearers made in a factory, right, it's not And you know, you say, well, batch production. Really, we're going to order twenty or thirty of these things and roll them off at a rated knot so you can do that. France was once buildings
fifty two nuclear reactors big ones. It was once building six big nuclear reactors simultaneously, right, But to do this you need an a national effort to do it like the French did and the Japanese did it. Nobody else has pulled this off. Now, once you take a one look at the economic decision making in Britain and the absence of savings and the dwardling over building, you know, this is a huge sort of problem. The Brits aren't
good at. This is one where you have to commit, and you have to commit to a lot of them, and you have to set the contracts, the training, the skill set, the manufacturing bas et cetera to achieve that outcome, and that it's like suddenly eure a peach time economy. You need a wartime economy. You know, that is one of the big structural changes. Do you think that this government is going to do that? You know, we took this years to get to Hinkley and that was going
to produce turkeys by for Christmas in two seventeen. It won't be finished to what twoint thirty how long size were going to take? And when's the one after size will come? Should we make up my mind about that in two forty that's our problem. In the meantime, we've closed down uclear industry at roughly the same pace as the Germans.
Who have replaced it with coal. In the last part, doesn't they I'm optimistic. You sound very pessimistic. We can't do any of these things. But what you're actually saying is it nearly all these things are policy decisions and they can be changed. So when you talk about how expensive nuclear is, you say, in this country, So all we need to do is be a bit more like career and we're all good.
So one of the things I find, with respect extremely irritating in the energy world is that if you criticize what's currently done and you point out the problems, ah, you're a pessimist, etc. You tell me something optimistic, etc. As if this is some sort of dare I say, a childish game between whether you're pessimisting or opera or an ideology. Even oh ideology is worse, right. But so I'm not a pessimist, I'm not an optimist. I'm a realist, and I talk about climate realism and energy realism. Are
these problems solvable? Both the climate problem and the enderwerk. Of course they are. Humans are remarkably ingenious. What isn't solvable is the desire of in a country like Britain, for us to live massively beyond our means, not to pay for the pollution we're causing, not to save, to rely on the comfort of strangers, to do savings, to provide our financial investment. All this stuff is foreign financed.
We rely on all of this because we aren't prepared to save and sacrifice consumption, and we're not prepared to allow a chunk of national income to go from what we want to do consuming as it would in say China, into investment via the financial systems. And when I wrote my book on legacy, setting out what as the saying of economy, looks like it's perfectly possible, but you have to start by the really hard bit, which is it's not that we can't grow our standard living in the future.
It's just right now we're living beyond our means.
Okay, I think that all very hopeful, because when something isn't sustainable, it usually comes to an end. So change may well be ahead of us. Fans, Adam, thank you so much for joining us today.
I hugely appreciate it. It's been very very interesting. Well, thank you very much for inviting me. Thank you.
Thanks for listening to this week's maryn Talks Money. If you like us, you rate, review, and subscribe wherever you listen to podcasts. Also keep sending questions or comments to Merrorn Money at Bloomberg dot net. You can also follow me and John on Twitter or x. I'm at marinas w and John is John Underscore Step. This episode was hosted by Me Maren Sumset Web. It was produced by some Asadi and Moses and sound designed by Blake Maples and Kelly Gary. Special thanks to Ciddy to Helm