Net zero - looking for the right path

27 Jan 2021

Harold Hutchinson

Head of Research

Net zero is the ultimate goal in the climate change debate. But what is the cost? Head of Research, Harold Hutchinson unpacks some of the issues relating to technology choice and market signals in his latest blog entry.

A challenge all energy systems face is that we have incomplete knowledge on future cost developments of core technologies – these can throw up negative and positive surprises over time. Further, the information on costs is often non-public and distributed unevenly. Furthermore, energy assets are embedded within vast networks, complicating the assessment of full system costs, which is ultimately what matters. Perhaps unsurprisingly then, lobbying is a core industry activity, which may lead to innovative ideas being drowned out by incumbent vested interests.
 
Consider the nuclear fission versus renewables debate. At the original public enquiry into Sizewell B in 1982, the UK’s last nuclear reactor to be commissioned, the Central Electricity Generating Board (CEGB) proffered the view that “none of the renewable technologies can at present offer with any assurance an economic, reliable, and sufficient source of energy to be compatible with nuclear power”. A year earlier, the same body had asserted rather boldly that ”solar power is never likely to be supplying electricity to the grid in this country”. Intriguingly, the CEGB did see long-term potential for off-shore wind, even back then. However, with its eyes set firmly on the immediate present, the CEGB dedicated itself to ensuring government investment should be directed to large new nuclear power plants.
 
The rest, as they say, is history. Sizewell B was commissioned 13 years later in 1995. Against a backdrop of escalating construction costs, it was the only one of ten proposed new reactors at the time in the UK to make it off the drawing board. Today, proposed new nuclear reactors, including those earmarked for Hinkley Point C (HPC), have suffered material cost overruns and commissioning delays elsewhere in Europe, including France. The original vision of HPC cooking our turkeys for Christmas by 2017 looks likely to arrive a decade late, and even that may be optimistic. With nuclear-fission power plants, alas, there is little evidence of learning by doing, despite decades of R&D and promises to the contrary.  
"Renewables now represent over 40% of annual UK electricity generation. Looking ahead, the UK government estimates the cost of large-scale PV solar at £44/MWh, on-shore wind at £46/MWh, and off-shore wind at £57/MWh." 
 
Meanwhile, solar power has grown exponentially across the globe, and costs have fallen dramatically. Wind (on- and off-shore) costs have also shown important positive learning-curve effects. Overall, renewables now represent over 40% of annual UK electricity generation. Looking ahead, the UK government estimates the cost of large-scale PV solar at £44/MWh, on-shore wind at £46/MWh, and off-shore wind at £57/MWh (real 2018 prices and 2025 forecasts). By way of comparison, the power purchase agreement between EDF and the British government for HPC is £92.5/MWh (2012 indexed – or nearly £110/MWh in today’s money).
 
Now, this is neither an anti-nuclear rant nor a pro-solar tract, per se. It is true that a naïve comparison of costs does not tell the full story. To paraphrase Orwell, some MWh are born more equal than others. For a full comparison of technologies, we need to be aware, inter alia, of their reliability and flexibility characteristics, together with their environmental footprints and system impacts.
 
However, permit me three propositions. Firstly, the present is not the future when it comes to projecting costs. What matters is a dispassionate assessment of the accumulating evidence over time as a guide to what lies ahead. Secondly, be careful of what you are told by industry lobbying groups – in the end, society pays the bill for “fake news”. Thirdly, in the energy sector, allocating capital on the basis of governments “picking winners” is foolhardy – the price of risk is borne by taxpayers ill-equipped to diversify it.
 
Allowing markets to guide investment decisions in electricity generation does not seem so bad a policy when compared to the alternatives. In the context of Net Zero, the power market can operate efficiently, if the government signals clearly the implicit cost of carbon estimate embedded in that objective – perhaps most easily achieved through a credible carbon tax policy. A commitment to do that might help to expose sham lobbying, with positive ramifications for the environment, society, governance, and, last but not least, the costs of achieving Net Zero itself. 

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Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.