Hervey Gibson: Energy white paper generates a lot of hot air but little heat

TUESDAY'S electricity reform white paper brought out the blame culture, to the right and to the left. In 380 pages of text - and even more again by way of appendices, renewables roadmaps and the like - Energy Secretary Chris Huhne outlined power plans for the next nine years …and beyond.

He will impose a floor price on carbon emissions, guaranteeing a minimum penalty for fossil fuel generating plants, and set up complex financial arrangements guaranteeing a fixed price to power plant investors.

The Department of Energy & Climate Change (Decc) argued that, without this reform, electricity bills will rise by 200 per household in real terms, whereas with it they will rise by 160. On the right, one broadsheet subedited the story in order to blame the (Liberal) minister for the 160. It then thundered against the "sheer irresponsibility of Labour's refusal to take the hard decisions necessary to guarantee security of supply". A bit rich from a newspaper that strongly supported the Conservative government's premature termination of Britain's most secure energy resource ever, our coal, and its plundering of the second most secure, North Sea oil and gas. In Margaret Thatcher's years the Department of Energy was scrapped, and energy policy abdicated, other than that implied by the rampant privatising that has turned out so well for French, Spanish, German and US investors, as well as some in the UK.

Knowing the white paper was coming, former Labour energy minister Brian Wilson wrote lucidly and persuasively in these pages of the huge nuclear gap in Scotland's energy policy. But he seemed to think we need political union to have a unified electricity market (tell that to the Irish - the republic and Northern Ireland share a market) and he grumbled unreasonably that renewables are slow in getting their costs down.

Any engineer will tell you technology costs fall with experience - the more you invest in a technology, and the more you produce with it, the more you learn how to cut costs and increase efficiency.

The only part of Decc's paperwork you can't download from the internet is the glossary, which is unfortunate when the pages of everything else are peppered with abbreviations, acronyms, and innovative use of words like "liquidity" and "grandfather" (as a verb?). The financial arrangements above go under the unpronounceable sobriquet of "FiT CfD": feed-in-tariff contract-for-difference.

Under FiT CfD, the UK government will offer potential generators a forward contract to buy power at a fixed price - it will top up their revenues if the market price falls short, but claw back money if the price goes too high.Initially, the fixed prices will be "administratively" set - which means the market has been killed by engineers, analysts and politicians - but around the end of this decade the contracts for a specific technology will be auctioned and eventually all contracts will be on open auction, so that technologies compete against each other.

The UK government talks of a "contract counter party" paying the price top-ups, and of "consumers" receiving any clawbacks - but in reality it's thinking of itself in both roles. I wouldn't be at all surprised if, in due course, these liabilities get moved off the public sector balance sheet by being securitised and traded. Then, oh joy, they become just another financial derivative.

The European Union's attempt to establish markets in carbon-emission rights is not working to everyone's satisfaction. The short-term market is not as concerned about greenhouse gases as are governments, and much less so than intergovernmental organisations, so prices are too low. As policies and investment plans switch on and off, prices are also erratic. That's why Huhne needs his carbon floor price. When the longest foresight is needed, markets are myopic.

Let's be thankful the coalition may now be realising how desperate Britain's energy situation is. As a result, it is going to take billion-pound bets (and bigger) on future energy prices.

To keep Huhne's promise not to favour nuclear, it is going to penalise nearly every non-nuclear technology of any size. But it's still only addressing the electricity part of the problem - only 18 per cent of Britain's energy consumption. The other 82 per cent is crying out for attention and threatens to become even more expensive than the power.

• Hervey Gibson is chairman of Cogent Strategies International and former head of economics at Scottish Enterprise