Atlantic Array: Victim of Chaotic EU and UK Energy Policies

Atlantic Array: Victim of Chaotic EU and UK Energy Policies

The German energy giant RWE just pulled the plug on one of the world’s largest wind parks, the £4 billion Atlantic Array in the Bristol Channel.  RWE did so for the stark reason that “the economics do not stack up”. It’s a mantra that well reflects the entire chaotic, incoherent and frankly competing elements at the heart of Europe’s energy policies.

The Atlantic Array scheme is a victim – and there will be a host of others – of a cornerstone economic tension. It’s the tension between renewable energy projects which will always require state intervention and public cash in pursuit of the illusory aims of decarbonisation on the one hand. And, on the other, the free market’s ability to generate all the power we need via cheaper and economically viable ‘dirty’ hydrocarbon resources. Put another way, idealism v realism. More specifically, how a democratic electorate views its key priorities when it comes to this tension.  How many times does a democratic electorate need to say that it does not like what politicians think is good for it?

Being of distinctly sober and sound mind wherever private investment and business venture capital is concerned, neither the power companies nor private investors are, however, prepared to take the high risks associated with largest scale renewable energy projects without the safety net of concrete government guarantees and on-going public subsidies.

RWE’s decision came just weeks after it complained that the government was treating environmental subsidies as a “political football” – the result of ideological differences at the heart of the coalition.  While the Liberal Democrat energy secretariat is philosophically committed to paying for renewable energy, seemingly whatever the cost to the end energy user, George Osborne’s Conservative Treasury (with David Cameron a belated convert) are, however, only too aware of the political cost. In short, not only has the issue of green levies on energy bills risen to the top of the political agenda, energy per se has potentially become the key issue that may finally break the UK government coalition’s back. Inevitably, as regards the political climate for investment, Ed Milliband’s ill-considered plan to freeze energy prices if Labour are re-elected in 2015 has only muddied the waters further.

In truth, the problems for Germany’s RWE actually began at home. They began with Germany’s ridiculous knee-jerk reaction to abandon nuclear power in the wake of Fukishima. That has led to the early closure of perfectly operational power stations, many owned by RWE. That, coupled with the EU- supported favourable renewable sector subsidies regime (that now threatens Germany with a serious power shortage) is severely squeezing the power companies.  RWE has embarked on a fast-track program of divestment of its assets. It has closed one-fifth of its natural gas-fired power capacity in Germany and divested itself of part of its UK gas and electricity supply wing in November. RWE is currently seeking a buyer for its North Sea Oil business and was forced to cut its share dividend in the face of shrinking profits.  The company has also just announced it is outsourcing 1,400 jobs from Europe to India. RWE knew only too well that the Atlantic Array project needed more not less government subsidy guarantees. In the current climate of tension within the coalition there is no prospect of that happening. It was one high-risk venture too many.

The Atlantic Array has become the latest high-profile failure of Europe’s ambitious wind and decarbonisation program. But it is now likely to prove to be an iconic example of the high volatility within the pioneering UK wind sector generally, and with large scale offshore wind projects specifically. It is a stark warning to the rest of the world that renewable projects generally require expensive long-term guarantees to protect power companies from the volatile costs involved. As RWE knows only too well, it’s the kind of ‘insurance’ that they and prospective private investors could never expect in the real business world.  And, let’s face it, it is the only kind of risk-free economic deal likely to attract any energy company. Now, as the UK energy secretariat has found out, the economic commitment in supporting large-scale decarbonisation power projects has itself become high-risk, not least at the polls as the electorate begins to bulk at the price of ‘green’.

Nor is the UK alone among democratic governments fearful of an electoral backlash over the heavy tax burden green energy commitments carry. The German Chancellor is facing pressure from its energy sector to review energy subsidies. Poland is proposing a switch from green certificates to competitive bidding. And, most famously, Australia is drafting legislation to abolish the country’s carbon pricing mechanism in 2014 in a bid to assuage the palpable anger over soaring energy prices.

It is going to be extremely interesting to see how UK Chancellor George Osborne squares this particular circle in his upcoming autumn budget statement. Especially as it is already known that Osborne is looking to transfer the £1.6 billion cost of the energy companies renewable energy obligation away from household energy bills.  Yet Osborne, if not energy secretary Ed Davey, is only too aware how green energy subsidy has become a destructive “political football” for those parties in denial over public anger at the ‘unnecessary’ and unaffordable green levy on energy prices.

But then democracy is all about the people, not government, ultimately making the big choices. And if the people have had enough of green levies hyping their energy bills and tax burden while producing renewable energy assets with an erratic and, ultimately, poor investment-to-energy-return-ratio – and the polls and the cold feet of governments suggest that they have – then Mark Twain’s famous post-election dictum is already on the wall for green levies, “The people have spoken … the bastards”.

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