Alf Young: Renewable energy comes at a cost

IT’S a curious industry indeed that can be hailed by one leading politician as being on the brink of delivering a “quantum leap in human history”, comparable only to the discovery of the New World or man’s move from hunter-gatherer to farmer, while being accused by another party leader, that very same day, of running a “rigged market”.

But that is the current fate of the businesses that keep our lights on and heat our homes. While the UK’s big six energy companies are supposedly leading us all to a more low-carbon future, they are also in the dock of public opinion, accused of bamboozling their customers with far too many complex tariffs while profiteering from rising oil and gas prices.

Last month, Ian Marchant, chief executive of SSE (what we used to call Scottish & Southern Energy) sat in an Edinburgh conference centre and heard Alex Salmond eulogise a future based on the power of our wind, waves and tides. By 2020, our First Minister wants Scotland to produce twice as much electricity as it needs. Half will come from renewables. The rest from fossil fuel plants and nuclear.

SSE has a foot in both camps. It has a historic role in hydropower and is a big player in wind. It also has a large gas-fired station near Peterhead and two big coal-fired plants in the north of England. But Salmond’s ultra-green vision has a purely Scottish focus.

“Some half of that electricity – 100 per cent equivalent of our demand – will come from renewables,” he told his Edinburgh audience. “The other half will be exported.”

Like many in the industry, SSE’s Marchant doesn’t want to appear churlish about the opportunity being offered, especially when governments in both London and Edinburgh have been putting some new money where their green ambitions lie. But he clearly has concerns about whether, given the sheer scale of the investment required and the relative immaturity of some of the technologies involved, that 2020 deadline is actually deliverable. After all, Europe only expects to be generating 20 per cent of its electricity from renewables by then.

While Marchant was sharing a platform with Salmond in Edinburgh, he must have been keeping an ear on what Ed Miliband was telling his party conference in Liverpool. The Labour leader lambasted the latest price rises from the big six. He pledged to abolish their “rigged market” and open it up to new players. Marchant’s response was instant. He asked his energy trading people to come up with a response. This week it was announced.

SSE, the second biggest generator of electricity in the UK, is going to auction every megawatt-hour of electricity it produces and purchase most of the power it needs to supply its own customers in the wholesale day-ahead market.

Until now that spot market has been tiny in the UK compared with how much power is traded that way on the continent. If the other five members of the big six follow SSE’s example, wholesale prices in the UK and the real margins they are all making from their supply businesses should become more transparent.

When the Tories privatised the industry 20 years ago, only the two Scottish utilities were left as vertically integrated businesses. South of the Border it was broken up into generators and regional distribution and supply companies. But, over time that structure morphed back into six big vertically integrated players, four of them owned by German, French and Spanish parents. In recent years, as the price of oil has soared, household energy bills have rocketed too. These big six utilities have lost the confidence of their customers. They have come close to representing that “predator” wing of business that Miliband was attacking in his much-criticised Liverpool speech.

Marchant certainly seems to think the Labour leader is on to something. Like all its rivals in the sector, SSE was having a go at the regulator, Ofgem, yesterday, when it suggested that the net margin the companies will make from a typical standard-tariff dual-fuel customer’s bill of £1,345 in the next year is around £125 compared with the £15 margin Ofgem was suggesting in June. All six players cried foul.

“Entirely theoretical,” suggested SSE. But it clearly knows the sector has a big problem.

As Marchant himself put it on Wednesday when revealing the company’s new transparent trading plans and pledging that, in future, all its customers will get bills that itemise each cost element and the profit too, the industry has to change.

“The reality is, however, that too many customers have little or no trust in their supplier or the sector,” he said. “I want to change that and, at SSE, we have a starter for ten – ten early steps we want to take to build trust in us and what we do.”

Ofgem is, at long last, pushing for a simpler, more competitive market and promises, over the next few months, further reforms, including its own plans “to break the stranglehold of the big six in the wholesale electricity market”. And in the background there’s that little-noticed warning from George Osborne, at his party conference, about the costs a decade of environmental laws and regulations have piled on the energy bills of households and companies.

“Yes we must have investment in greener energy,” said the Chancellor. “And that’s why I gave the go ahead to the world’s first green investment bank. But Britain makes up less than 2 per cent of the world’s carbon emissions to China and America’s 40 per cent. We’re not going to save the planet by putting our country out of business. So let’s at the very least resolve that we’re going to cut our carbon emissions no slower but also no faster than our fellow countries in Europe.”

How comfortably will all these developments sit with Alex Salmond’s dream of “a great leap forward for mankind”, a Scotland that, by 2020, will meet all its own electricity needs from renewables, while exporting as much again, presumably from our residual nuclear and fossil capacity, to the rest of the world?

If Ian Marchant’s SSE puts all the power it produces up for sale on the next-day wholesale market how will any of us know how the electricity it buys back to meet its own customer needs was generated or indeed where? If those more transparent bills, promised by SSE and demanded from the whole sector by Ofgem, make clear how much it is costing to produce the new generation of offshore wind-generated power will consumers be happy to pay multiples of the unit cost of alternatives?

If George Osborne persuades the coalition to back a carbon emissions reduction target for these islands no faster than Europe as a whole is delivering, how can Scotland sustain the First Minister’s dramatically more ambitious plans when the big players in this sector are active south of the Border too? It will take more than eulogies, that’s for sure.