The Helm review of the cost of energy published today was conceived before the last election in the days of Nick Timothy in No.10. This was to be the tool to implement the Conservative 2017 manifesto pledge to deliver the cheapest energy costs in Europe – the logical conclusion of the ‘Green Crap’ school of thought.

In the changed world of no majority and a set of ministers in BEIS who ‘get’ climate change and see low carbon as part of a modern industrial strategy, the role of the report is less clear. The sheer length of over 200 pages and 67 recommendations means its hard to pick out key messages, and there is a risk that the report could be dismissed as a platform for an academic to set out their personal bugbears. 

However, Helm’s report is much more balanced than many expected. Helm backs a strong carbon price and accepts the shift to decentralised energy. Few would have expected this champion of gas to come out with sentences like: “As the costs of renewables continue to fall, it is only the carbon price that is needed to ensure a level playing field as renewables become the new conventionals.”

The BBC story on the report picked out Helm's comments about past renewables subsidies driving up bills - but given subsidy cuts this is essentially yesterday's argument. There are also a few odd comments such as “the UK has flirted with dangerously low capacity margins” that seem to fly in the face of the evidence of recent healthy capacity margins.

Recommendations

It will take us all sometime to pick through the 67 recommendations. However, an area of particular interest are the proposals on electricity generation. Helm is on strong ground in his identification of the complexity of energy policy “The detailed mass of [policy] interventions is beyond the capacity of officials, regulators and companies to comprehend”. This leads to proposals for these interventions to be swept away and replaced with:

  • the development of a carbon price;
  • the creation of a single unified capacity auction on an equivalent firm power capacity basis.

This would be combined with greater competition in the wholesale and balancing market.

It may be that Helm thinks this framework will support a new golden age for gas. However, the renewables sector would be up for a new policy regime based on these principles. The sector is now confident in its ability to compete on a level playing field and the current mechanisms are offering little support beyond the CfD regime subsidy for offshore wind. The current Capacity Market is closed to renewables.

A clearer carbon price is not a new idea. Treasury economists have hankered after getting rid of the myriad policies to tackle climate change and replacing them with a single carbon price for decades, however, the practical challenges of this have proved insurmountable. The fact Helm mentions of ‘carbon price’ 126 times indicates the importance he attaches to it. The key, of course, is the level the carbon price is set at. Helm avoids suggesting at what level this should be, calling for a Treasury review instead.

Overall, this report seems unlikely to dramatically change the current direction of energy policy. There is not enough clarity or focus in the recommendations and little sign of a government with the drive to rethink the whole Electricity Market Reform edifice. Ministers will be able to pick the bits they like that support current policy initiatives.

However, there are some important ideas that may shape future thinking on energy - it will be interesting to hear what Laura Sandys, one of the advisors on the report, has to say when speaking at our Renewable Futures conference in a few weeks.

Author: Merlin Hyman

For further information, please find a link to the Cost of Energy Review document below: