Energy is a worthy target for state funding

Features editor

It’s time that we stopped pretending that the energy industry has ever operated as a free market. All parts of it, including coal, oil and gas, enjoy public subsidy and always have — and they should continue to do so.

How far should the state subsidise the energy sector? It’s an increasingly vexed question, bringing in as it does matters of fiscal, environmental, business and social policy — subsidy directly affects the amount that we all pay for electricity and gas.

It’s a highly relevant argument as well. Just this week Centrica, the owner of British Gas, threatened to pull out of a £2bn project to build a 580MW wind farm 16 miles off the Norfolk coast unless the government guaranteed that it would receive a power price reportedly three times higher than the current market value. Similarly, EdF is haggling over the guaranteed price it will receive for electricity from its planned new nuclear power stations at Hinkley Point and Sizewell, and Horizon Nuclear Energy, owned by Hitachi, will doubtless also be coming to the negotiating table with similar demands to guarantee a return on its planned investment in reactors at Wylfa and Oldbury. A recent survey, as we reported, suggests that subsidy for nuclear is not something which overly concerns the public.

Meanwhile, other energy sectors are also looking for public money: the marine sector, to fund development of wave and tidal technologies and to take forward proposed schemes for tidal barrages in Wales; solar, hoping for support for companies and homes to install photovoltaic and water-heating panels. We’re told we live in a free market economy — what are all these commercial interests doing with their hands out?

Well, what they’re doing is what they’ve always done. Even the most cursory look at the history of the energy industry shows that it’s never operated as anything like a free market: it’s always been propped up by a complex web of incentives, tax breaks, and out-and-out handouts from the government, for a variety of reasons including the setting-up of infrastructure, maintenance of competitive edge and keeping down the cost to consumers.

The last of these is the main mechanism for the still-existing subsidy to the oil and gas sector: reduced rates of VAT on gas bills, which is intended to help the vulnerable keep their household costs in check, but which benefits people at all income levels. And it also directly benefits the hydrocarbons industry, to an extent which shouldn’t be underestimated: according to OECD figures, gas benefitted from tax breaks worth £3bn in 2010, dwarfing any subsidies for wind, solar and marine power. Corporation tax advantages, subsidy for oil facility decommissioning and proposed shale gas exploration tax breaks also play their part.

Moreover, the North Sea oil and gas industries were established with the help of subsidy and legislation: the UK’s leading position in offshore technologies, which the renewables sector hopes to utilise in establishing offshore wind and marine energy farms, depended hugely on public money. Any argument that renewables are receiving overly-generous payouts is ignoring this history, not to mention the current situation.

The one area where government money perhaps hasn’t been utilised well by the energy sector is technology development. Most energy companies scaled back R&D dramatically in the 1980s, which has been blamed for the shrinking of the UK skills base, particularly in nuclear. In writing about new nuclear technologies recently, it’s striking how many people have talked about the importance of rebuilding capability in this area; meanwhile, the renewables sector talks about using expertise from aerospace and materials science to establish its own skills base.

When it comes to developing new technologies, the argument always springs up that if you’re spending on one thing, you’re taking money away from something else. Why develop nuclear, when you could be developing renewables? Why spend on speculative fusion projects, when there’s shale gas in the ground? But surely these arguments are bogus. Why should we not be investing in all of them? Why should we not be taking energy research as seriously as we take defence, for example? Maybe it’s time to stop pretending that energy is solely a matter for business and accept that, as it always has been, it’s something that concerns the whole of society – and that includes a claim on public money.