The real challenge over energy

This article first appeared in this week’s Fund Strategy magazine.

Even by the standards of a world of confused debates the discussion of energy is spectacularly muddled. While politicians and campaigners bluster about greedy energy companies the central issue, how to bolster supply, receives little attention.

Politicians of all stripes are guilty of posturing on this question. They rail against rapidly rising prices and suggest that, at the very least, there might be insufficient competition in the energy sector. Next come the banal suggestions about how consumers can soften the impact of higher prices.

The leaders of both the main political parties have made pronouncements on the issue. David Cameron, the prime minister, has tentatively suggested that green taxes could be reduced – a move that would be welcome – but plans are not due to be announced till the Autumn Statement in December. He has also suggested that the energy market should be more competitive.

Ed Miliband, the Labour leader, pledged that if Labour wins the 2015 election it will freeze gas and electricity prices until the start of 2017. If nothing else this proposal virtually guarantees that energy prices are likely to continue to rise steeply in the run-up to the election.

Ed Davey, the energy secretary and a Liberal Democrat, has promised that the energy companies will have to undergo an annual competition assessment. Another initiative is to make the process of switching between energy suppliers more rapid. He has also made the patronising suggestion that consumers should wear a jumper in winter so they can keep their heating bills down – as if he was offering a great insight.

But perhaps the centre of this whole charade is the Energy and Climate Change Committee of the House of Commons. Like other parliamentary committees this has become a way for MPs to grandstand in front of the media rather than to seek the truth. True to form it invited the heads of several of the Big Six energy companies to a session for an on camera roasting.

The energy companies for their part reject the charge that they are making super profits. They marshal several arguments including rising wholesale prices, the fact their profits margins are only about 5% and the middling level of British energy prices by EU standards.

Little has come out of these discussions in practical terms. For politicians they certainly have the advantage of allowing them to distance themselves from any culpability for rising prices. For the rest of us we are bombarded with banal practical tips that are essentially an extension of Ed Davey’s advice to wear a jumper.

Sources of advice are legion for those who want it. Energy UK, the trade association for the energy industry, is promoting a Home Heat Helpline. Which?, a consumer organisation, is offering 10 ways to save cash on energy including get an energy monitor and cut draughts. The personal finance media has obediently followed with numerous articles along similar lines.

Tragically this whole discussion misses the key point. The key challenge in relation to energy is not to restrict demand but to bolster supply. Making energy more plentiful is the only way to bring prices down over the long-term. The ultimate goal should be to make energy so cheap that it is not even worth metering.

James Woudhuysen, a professor of forecasting at De Montfort University in Leicester, has pointed out that in relation to becoming more productive the energy industry is like any other. Investing in new technologies and production methods can make it more efficient. Just as computer-processing power has become much cheaper in recent years it would be possible to make energy cheaper too.

The recent surge in producing natural gas and oil from fracking provides a tentative view of what could be done. Using this technology is it possible to squeeze hydrocarbons out of shale rock in a way that was not possible earlier. As a result natural gas prices in particular have come down sharply in America in recent years. If the technique is applied in other countries it is likely that global prices will also slump.

This is not to suggest that fracking on its own is the answer. As Woudhuysen has argued before at Centaur Investment Summits and elsewhere the challenge is to invest in a range of technologies. This is likely to include nuclear power, hydrocarbons and various forms of renewables. There may also be other forms of technology that have not been anticipated yet.

It is true that the government has made some moves towards increasing power generation. The deal to build a new nuclear power station at Hinkley Point in Somerset, with the help of Chinese expertise and finance, is the most high profile example. But it is likely to take many years to come on line and will no doubt face determined opposition from environmentalist groups.

The fundamental challenge is to invest and innovate in energy supply on a grand scale. That way it will be possible to ensure that energy is both plentiful and cheap. Haranguing energy companies and obsessing over energy conservation are dangerous diversions from the real task ahead.