A NEW FILM in America, EV Confidential: Who Killed the Electric Car?, claims that there was a corporate conspiracy in the 1990s to kill off General Motors’ EV1 electric car in favour of traditional gas guzzlers. It is a claim that GM, needless to say, vigorously denies.
Conspiracy theorists, it seems to me, could have a field day in another area. Three or four years ago the nuclear industry was nowhere, widely regarded as expensive and dangerous. And most alternative-energy sources were regarded as gimmicky and barely relevant.
Now things have changed beyond recognition, thanks to geopolitical tensions that have pushed oil prices up to $78 a barrel (another record last week), worries about energy security, and the acceptance in the political mainstream of global-warming predictions previously regarded as extreme.
The Department of Trade and Industry’s energy review said: “Under likely scenarios for gas and carbon prices, new nuclear power stations would yield economic benefits in terms of carbon reduction and security of supply.” Nuclear and alternative energy are each intended to supply 20% of electricity generation by 2020.
If you were a conspiracy theorist you might wonder at the miraculous change between the last energy white paper, in 2003, which was lukewarm on nuclear, and last week. You might wonder about circumstances that could not have been more beneficial to integrated energy companies; high oil and gas prices now, followed by lots of demand for alternatives and nuclear later.
Leaving aside conspiracy theories, which are almost always wrong, there is a fundamental question to be asked. If things can change so dramatically in the past three years, what will they look like in three, five or ten years? Will the case for nuclear, or for wind farms, be stronger or weaker than it is now? There are three arguments in favour of nuclear power stations, and greater use of alternative energy. Easily the weakest, though ministers tend to present it as the strongest, is global warming. I say this at the risk of further alienating Lord Rees, president of the Royal Society, who last week accused economic commentators of downplaying global-warming risks and ignoring “compelling” scientific evidence.
As I have written before, I don’t doubt global warming is occurring but do dispute the extent this is man-made rather than part of the earth’s natural cooling and warming cycle.
I am also sceptical about whether greenhouse-gas emissions mean the world will heat up by six degrees Centigrade over the next 100 years, ten times the warming over the past century. While I’m at it, Rees should look at the contributions of his fellow scientists. My mind boggled when I heard Professor James Lovelock say on radio recently that the reason he favoured nuclear over alternative energy was that he didn’t want a wind farm in his backyard.
The real point about British nuclear power and global warming, however, is that we are too small to make a difference — we account for 2% of global greenhouse emissions. Every little helps, but it is a little. Britain intends to cut emissions, by shifting the balance of energy supply and by greater energy efficiency, but other countries will keep pumping them out. The review envisages a 50% rise in global carbon emissions by 2030. Britain’s efforts look like gesture politics or, as Tony Blair puts it, so we can “give a lead internationally”. We may lead, but there is no guarantee others will follow.
So the nuclear case rests mainly on two things — the future cost of energy and security of supply. The cost argument is both simple and complex. The simple point is that if oil and gas prices and “the carbon price” (used for the EU emissions trading scheme) stay high, nuclear becomes viable. The complex point is the cost of nuclear-waste disposal.
Last week’s renewed Middle East tensions, a spooky echo of the conditions that gave us the first oil crisis three decades ago, made it hard to envisage lower oil prices — ever. A calmer perspective was offered by the Paris-based International Energy Agency in its first medium-term oil market report. Supply and demand will become more balanced over the next couple of years, it says, with the implication that prices should fall. But from 2011 onwards, oil demand will grow faster than supply.
That probably means expensive energy. Whether oil drops to $40 a barrel, as I still (perhaps heroically) expect, it is hard to envisage another era of cheap oil. The energy review’s central scenario is oil at $40 a barrel — in today’s prices — in 2010, $45 in 2020. But it also has a high scenario, $67 and $72 respectively, and a low one, where the price falls to, and stays at, $20. Leaving the latter aside, nuclear looks economically viable on the others.
A bigger point, which barely featured three years ago, is energy security. Over the next 25 years, North Sea oil and gas production, equivalent to 4.5m barrels a day as recently as 1999, will wither away, possibly to just 500,000 barrels a day.
Without replacing existing nuclear stations, the proportion of electricity generated from gas will rise from 37% now to 55% by 2020. By then we will be importing between 80% and 90% of our gas, much of it from less-than-reliable Russia, this weekend’s G8 host. We will also be importing most of our oil and, with 75% of reserves located in the Organisation of Petroleum Exporting Countries and medium-term supply-demand prospects tight, the ball will be firmly in its court. Whether lights stay on will depend on supplies outside our control.
So there is a strong case for energy diversification, into both alternatives and nuclear. The government’s targets for increasing alternative-energy supplies probably go as far as the sector will bear. Its targets for nuclear, which so far amount to merely replacing existing stations, do not go far enough.
PS: What should we make of the Bank of England’s dire warnings last week about the vulnerability of the financial system? It identified six areas of risk, including high levels of corporate debt, UK household indebtedness, global economic imbalances, unusually low risk premiums, the growing importance of large cross-border financial institutions and the dependence of British banks on infrastructure such as the clearing and payments systems.
Among the scenarios the Bank “stress-tested” in its Financial Stability Report were a 30% fall in the dollar, a recession in Britain with house prices falling by 25% and commercial property by 35%, a four-percentage-point rise in commercial bond spreads and a two-week shutdown in the Swift payments system. It then spoilt the effect by saying all these things were highly unlikely.
Why do they do it? The Bank’s warnings reminded me of Chicken Licken telling everybody that the sky was about to fall in (the report also mentions avian flu). Or, more aptly, there was a touch of Yes Minister about it. When politicians complain they were not warned about something, canny civil servants always have a file to hand to show they were. Appropriately, Sir John Gieve, Bank deputy governor responsible for the report, used to be permanent secretary at the Home Office.
Having said that, there are some signs of strain. Shares in Kensington, which lends in the “sub-prime” mortgage market, fell last week when it revealed a rise in arrears and bad debts. It insists these were in line with expectations. But trouble has spread from such small beginnings before and unemployment is at a six-year high.
The Bank’s monetary policy committee will, from the autumn, have two new members, British Airways’ chief economist Andrew Sentance and Professor Tim Besley of the London School of Economics. They are joining at an interesting time.
