Hinkley decision is a disaster for UK
The decision to go ahead with Hinkley C is I think pretty disastrous. It ties us, probably for the next 40 years, to a nasty, poisonous, highly centralised and potentially vulnerable system of energy production, it lumbers us with a hugely expensive long term contract to pay very high prices per unit for the electricity produced.
All the media coverage of the Hinkley decision is about the so-called ‘gap’ we are facing between the demand for energy and the available supply. Completely missing though is any consideration of the savings that could be made by improving energy efficiency. This is a failure of imagination but it also masks a lot of vested interests. Improved energy efficiency and a move away from centralised generation of energy would damage the profits of the generation companies and their partners the big construction companies. The financial backers also have a lot of money at stake. China in particular has undisclosed political objectives in securing a stake in UK energy and their potential later involvement in design and construction of nuclear plant raises worrying questions of security.
Government failures on energy efficiency
The government has abandoned its commitment to require all new homes from 2016 to be carbon neutral. That commitment would have ensured that all new dwellings from 2016 would generate as much energy on-site – through renewable sources, such as wind or solar power – as they would use in heating, hot water, lighting and ventilation. This was to be supported by tighter energy efficiency standards that would come into force in 2016, and a scheme which would allow housebuilders to deliver equivalent carbon savings off site. This back step was done on the back of a claim (pdf file) to be reducing “net regulations on housebuilders.”
CO2 emissions make up about a third of all greenhouse gas emissions and these are projected to rise to 50% by 2050. The UK’s building stock is among the most inefficient in Europe, has the highest levels of fuel poverty of a dozen comparable EU nations, as well as one of the worst proportions of homes in a poor state of repair. Over 10m British families live in a home with a leaking roof, damp walls or rotting windows. The Coalition’s cut to the Energy Company Obligation will by 2017 have led to 400,000 fewer households getting help to reduce energy bills by improved efficiency. This is despite our treaty obligation to reduce emissions by 80% and the new obligations that will come from the Paris Treaty on Climate Change.
The cheapest energy of all is that which isn’t used.
In practice though, arguments about sustainability, CO2 emissions etc are not required. The cheapest energy of all to the consumer is that which they don’t have to use. The requirement for zero carbon homes would have had a huge impact across the board, by reducing fuel bills for those in the houses built to that standard and in the knock on reduction in demand.
The cost benefit of abandoning the requirement is small. According to a report (pdf) produced in 2014:
- At 2014 prices, the typical additional cost of building a semi-detached house to the zero carbon standard could be less than £5,000.
- Since 2011, costs have roughly halved. There are a number of reasons for this including the falling cost of solar PV, changes in the zero carbon definition, and greater efficiency in meeting air tightness standards.
- By 2020, the cost of building a new zero carbon semi-detached home could be less than £3,500.
In response to a Government consultation in 2014 on exempting small sites from the zero carbon requirement (before they ditched it entirely) the RIBA (Royal Institute of British Architects) argued:
There is a range of evidence-based examples that demonstrate that highly fabric energy efficient homes do not cost more than conventional construction if cost strategies, program management and environmental strategies are built into project plans at the procurement stage.
What can we get for the cost of Hinkley?
Hinkley C is estimated to cost around £19bn to build. Inevitably this will be be higher and on past experience of major capital schemes in the UK it could be as high as £45bn. I'm going to assume a figure for the moment however of £30bn and a 15 year construction period. This equates to £2bn pa. Subsidies on generating costs are estimated at £32bn over 35 years. Rounding that up gives us another £1bn pa. So, ignoring financing costs the annual cost of Hinkley C over the first 15 years is going to be of the order of £3bn pa. The total over the 15 years would be £45bn. What can we get for that money?
Research conducted for the Town and Country Planning Association suggests that we need something like 220,000 new houses in England every year for the next 15 years. This is apparently lower than previous estimates but the research also shows that this is because many people now can’t afford their own home – either to rent or buy - and are living with parents or other people longer than they would like to. Other sources suggest a more realistic figure is around 250 – 300,000. For the ball-park estimates I’m going to make I will assume 250,000.
From the studies cited earlier the additional cost of building these new homes to zero carbon standards will be around £3500 per house. For the purposes of these figures I’m going to assume that this remains at this level, rather than reducing further. So, for 250,000 houses the additional expenditure over current standards would be £8.75m per annum. Over 15 years this adds up to £13.125bn.
The average electricity bill was around £600 pa in 2015 and for gas about £750. Assuming 80% savings in gas and 40% for electricity (very conservative assumptions) reduces these to an annual total of £840 per household which would be released for other spending. At 250k houses per year that is a total of approximately £200m for each tranche of houses built. After 15 years this equates to a continuing annual saving for consumers of £3.3bn and cumulatively over the 15 year period of just over £28bn. This money would be spent elsewhere in the economy so having a further impact.
Bringing existing houses up to the same standard is more of a problem of course. As far as I can see the number of houses in England is around 21m. Retrofitting these to zero carbon standards will be difficult for many and impossible for some. Doing so may well also involve accepting significant changes in external appearance. Accepting the need to do so, may also shift the balance of what it is economic to refurbish and thus require additional new houses over and above the figure of 250k pa quoted above.
Again for the ball park figures I am aiming to produce, I’m going to assume that something like 20m houses can be brought up to zero carbon standard at an average cost of £10,000 per property. That equates to a total of £200bn. Assuming this work is carried out over a 25 year period, it would require 800,000 houses to be retrofitted every year, with an annual cost of £8bn. The cost over 15 years would be £120bn This is a substantial sum, but needs to be put into the context of major infrastructure projects such as Crossrail - c£15bn, Crossrail 2 – estimated at £27-32bn, HS2 – estimated at c£50bn including rolling stock, and of course Hinkley itself.
There would also be significant savings in energy use, further reducing demand and energy costs, so releasing money into the economy. Assuming the same levels of reduction in energy costs as with new build, the savings to consumers would be approximately £670m for each annual tranche of improvements, a continuing annual saving after 15 years of almost £11bn, cumulatively over the 15 year period I’m using this adds up to about £90bn and over the full 25 years to an astonishing £235bn.
Other impacts of the programme will be significant.
I have so far ignored the multiplier effects of the increased spending power released by the savings on energy. This depends on household’s marginal propensity to consume (mpc) or its marginal propensity to save (mps).
The following general formula to calculate the multiplier uses marginal propensities, as follows:
1/1-mpc
Hence, if consumers spend 0.8 and save 0.2 of every £1 of extra income, the multiplier will be:
1/1-0.8
= 1/0.2
= 5
Hence, the multiplier is 5, which means that every £1 of new income generates £5 of extra income.
Using that 80/20 split, which seems close to the current figure for lower income households, and applying it to the total annual savings in year 15 of £118bn, would mean the generation of some £600bn of extra income in that year alone. This is probably an overestimate, since this is a transfer of expenditure from energy bills. However the impact of that money dispersed through the economy is likely to be greater than when spent on energy, particularly since so much of the energy sector is foreign owned, so transferring money out of the UK.
Even assuming a figure of only 25% of that, the impact would be significant.
Summary
To summarise therefore:
- Cost of Hinkley estimated at £30bn.
- Subsidies on generating costs £32bn
- Construction period 15 years
This should be set against:
- Additional cost of new build to zero carbon standard over 15 years estimated at £13.125bn
- Cost of retrofitting existing stock to zero carbon standard over 15 years estimated at £120bn
Estimated reduction in household energy costs over 15 years.
- New Build estimated at £28bn
- Existing stock estimated at £90bn
Multiplier effect of expenditure transferred from energy bills
-
in year 15 - £13bn
-
over full 15 year period - £113bn.
Conclusion.
All these figures are very crude, but show two things:
-
The approval of Hinkley was a bad decision and poor value for money.
-
The substantial gains to be made by investing in energy efficiency on a scale comparable to the major infrastructure projects like Crossrail, HS2 and Hinkley. These have been ignored by successive governments. We cannot afford to continue to do so.
