Helm Review: 'Show your working, please'
By Richard Black, ECIU Director
The 242 pages of the Helm Review contain a plethora of ideas on a multitude of issues – regulatory models, profit margins, policy complexity, and much much more.
One thing they don't contain much of, curiously, is evidence.
There is evidence of a kind, to be sure, such as the three pages listing and describing all the various low-carbon policies currently in operation in the UK – which has the intended effect of making you throw up your hands and, echoing the report’s author, proclaim ‘it’s all mad!’
But the key claims have a surprising lack of evidence to support them.
That’s true even of the very first finding – ‘the cost of energy is too high’.
Is it? To begin with, it’s an ill-defined problem. Which form of energy, and to which customers? Are we talking about unit prices or bills? And over what time period?
For gas, the UK is one of the cheapest nations in Europe; for electricity, especially for businesses, among the most expensive.
But that’s for unit prices. Bills, by contrast, are heavily influenced by energy efficiency; you can have low prices but high bills, or vice versa.
And given that today’s energy bills pay both for the energy units of today and the energy infrastructure of tomorrow, bills that are somewhat higher now than they might be can be a wise investment over time, if the extra levies are funding better kit.
What's the problem?
Part of the problem lies with government. Its manifesto commitment to have ‘the cheapest energy in Europe’, which is the starting point for the Helm Review, is already unsatisfyingly vague, failing to address any of the specificities mentioned above. Not to mention that it’s a fairly idiotic commitment anyway – why should Britain’s energy come cheaper than that in Spain, for example, where the solar energy resource is better than ours and need for heating much less – or in Norway with its abundant hydropower, or France whose nuclear reactor fleet is already bought and paid for?
But having laid that vaguery at the government’s door – more specifically, one would think, at the door of Nick Timothy, Theresa May's now departed advisor – one comes back to the point that the Helm Review doesn’t provide any real evidence that bills or prices are ‘too’ high. It provides case studies where higher prices were paid than might have been necessary, such as the FIDeR set of contracts awarded under the coalition government essentially without competition.
But there’s a counter-argument: getting those contracts agreed early gave investors confidence (= cheaper financing) and helped establish a UK supply chain, so ultimately the extra upfront cost more than paid for itself.
Now, I don’t know which of those is right. And neither does anyone else. But without analysis, the claim that FIDeR led to higher costs is just that – a claim.
Similarly, the argument for simplifying policies by internalising hidden costs is logically a good idea. Fossil fuel burning should incur a carbon tax, the Professor argues; wind and solar power companies should pay for the extra costs deriving from their variable output.
It works in economic theory. But the real world is not formed of ink and paper. It’s messy; there’s lobbying and horse-trading, and sometimes policies have unforeseen side-effects.
There are real-world examples of countries with carbon taxes where Dieter Helm could have looked for evidence and presented it in his Review. Sweden has had a carbon tax since 1991. British Columbia introduced one in 2008. Have they helped decarbonise more cheaply than a raft of UK-style policies would have done? Again, without analysis, it's just a theory.
And on the idea that renewable energy projects should pay for their own system balancing costs – it’s interesting, but as another distinguished energy academic, Prof Michael Grubb, has pointed out, it might well push bills up by making balancing more costly.
Where there is evidence in the Helm Review, it doesn’t always stand up to scrutiny.
Yes, energy costs have gone up – but starting the story in 2004, when prices were at an historic low, makes the situation appear more alarming than it is.
It’s exactly the same cherry-pick trick that climate sceptics used when they started their ‘global warming hiatus’ argument, by picking an abnormally warm El Nino-powered year (1998) as the baseline. And as it’s a trick that’s been called out already once this year regarding a previous publication with which Prof Helm was involved, the lamentable House of Lords Economic Affairs Committee report on energy policy, it’s doubly disappointing to see it used here again.
Ditto the review’s oft-used argument that the UK is at near-term risk of power cuts – a claim that’s been debunked by many experts including former National Grid CEO Steve Holliday, by studies, and indeed by real-world evidence, such as this winter’s capacity margin of more than 10%.
'It's time for the headline of Blackout Britain to end - it's simply wrong'Steve Holliday, National Grid CEO 2007-16
On renewable energy economics, the review is simply out of date – projecting that solar and wind may be cost-competitive with gas generation within a few years, or maybe not, when onshore wind is already the cheapest form of generation available to the UK.
There is much to like in Dieter Helm’s review.
Philosophically, the calls for greater simplicity in policymaking and for greater use of competition are appealing. The argument for putting all of the legacy costs of decarbonisation in a basket marked ‘sunk costs, they are what they are’ is also sensible, helping us all to concentrate on policymaking for the future rather than worrying about the past.
Given that we highlighted earlier in the year the large, arguably excessive profits made by electricity supply companies, I’m clearly going to welcome inclusion of the same message here – as, one suspects, will energy bill campaigners such as John Penrose MP who believes that the regulator Ofgem is unable or unwilling to do its job.
There are other failings too, though. The Professor nods to the importance of energy efficiency – but beyond the presumed effects of a carbon tax, he gives no proposals for accelerating its uptake.
His advocacy of a carbon tax for mature technologies and R&D for new ones leaves a yawning gap in the middle for technologies that need deployment support for a period of time – the sort of thing that has brought onshore wind and solar power prices down so quickly.
But overall, the main thing lacking in a document that its author presumably hopes will reshape policymaking is, simply, evidence. As every maths teacher says: ‘Show your working”. Otherwise…