Michael Kelly: Expensive energy is here to stay. Let's warm to it

Parties opposed to growth as well as those who wish to reduce our dependence on fossil-fuel generated power will welcome the fact their goal of reducing energy consumption is being brought nearer by the energy utilities they normally enjoy criticising.

For the rest of us who want to see two cars in our driveway, a television set in most rooms, access to the latest electronic gadgets and a couple of foreign holidays a year, it is a warning not to be fooled into thinking that the current determination of the Scottish Government to move away from traditional sources of power to complete dependence on untried and unproven technologies will alleviate this price pressure.

The unprecedented scale of this latest price increase from ScottishPower - "cheap gas and electricity" supplier as it still defines itself - will confirm, by its effect on customers' behaviour, that the price mechanism is still the most effective way of forcing people to buy less. This is the piece of the logic that the Greens and other climate change do-gooders tend to miss out from their analysis - that there is a significant cost associated with their objectives and that, one way or another, it will be borne by consumers.

Strangely no-one from the Greens has rushed out a press release welcoming the price increases. And yet they should. Increasing these prices will make consumers more careful with how much gas and electricity they burn. It will lead to an increase in the adoption of energy efficiency measures - double glazing, cavity wall insulation, smart meters. And it will improve the chances of alternative forms of energy generation from renewables to make a contribution to supply. For there is no doubt that these new energy sources in the short run will be even more expensive than traditional ones. Vast investments are required in, for example, wave power if it is ever to generate energy in sufficient quantities. Many of the other technologies have yet to be demonstrated to work at industrial levels. There will be many costly setbacks. Hence the need for subsidies and incentives. And for prices to rise.

Of course, it would have been more socially desirable if the current price increases had been introduced by government as part of an overall energy plan.That way the increased revenues could have been diverted into other parts of the energy programme, funding technological development, increasing subsidies or tackling fuel poverty among the poorest in our society.

There still may be the opportunity to do this. As The Scotsman's editorial yesterday pointed out, there is also a competition issue here. Energy supply in Scotland is effectively a duopoly between ScottishPower and Southern Electric. Elsewhere in the UK market there is undoubtedly a cartel. Whether the current prices rises are solely due to increases in wholesale prices, as ScottishPower claims, is for regulator Ofgem to establish. If it finds against them, then rather than enforcing a price reduction the government would be advised to tax the companies on their excess profits and use the proceeds to bring more coherence to a national fuel policy.

However, in the short run the government is likely to be more concerned about the impact of these prices rises on its macroeconomic polices. One wonders if the International Monetary Fund took them into account when reporting this week on the state of the UK economy. Because there is no doubt these increases will force up inflation. Not just because they are well above targeted rates but because, by their impact on family expenditure, they will fuel demands for compensatory wages increases. Vince Cable was fortunate his controversial speech to the GMB union preceded rather than followed ScottishPower's announcement. And expensive energy will make the sluggish recovery all the slower.

British governments have consistently pursued cheap fuel policies. This dates back to the 1950s when fuel policy chose to favour cheap imported oil at the expense of domestic coal on the grounds that cheap fuel was essential for growth. Now that world demand, particularly from emerging economies, has heralded an end to cheap energy, probably forever, the overriding policy goal must be the security of energy supplies rather than the price. So it must resist the inevitable calls to mitigate the effect of these prices rises on consumers.

Because, even if we are to discount the need for policies to counteract climate change - and we should because Scotland's contribution to the world's carbon footprint is insignificant - securing our energy supplies requires energy prices to rise and remain high. That way consumption can be controlled and new forms of energy developed. But the most important lesson to be learned from the turbulence in world energy markets is that these new forms of power generation are not "alternative". Rather they are complementary. They must not be developed with a view to replacing nuclear or coal. These are reliable and consistent production processes unlike the uncertain generation from wind even in stormy Scotland.And better to rely on domestic atomic energy than imported gas.

The desire for growth is invariably projected by environmentalists as a demand for bigger and better consumer toys. There's nothing wrong with that. But it is also necessary to feed our demand for better health services, better care of the elderly, the elimination of poverty and all the other quality of life social goals considered more noble. For that we will need all of our energy sources. And none of them will be cheap.