Labour’s energy promises – vision and reality

On Friday May 31st Sir Keir Starmer promised that a new Labour government would decarbonise the UK’s electricity system by 2030 and would, at the same time, reduce average energy bills by up to £300 or roughly 20% of their current level. We know that senior politicians and lawyers see visions that not granted to mere mortals. Is there any connection between this vision and reality?

Accelerating the current decarbonisation strategy would imply building about 35 GW of new offshore wind plants, 10 GW of new onshore wind plants, and 55 GW of new solar capacity in 6 years [1]. As context, between 2009 and 2023 the UK built 14 GW of offshore wind, 12 GW of onshore wind, and 16 GW of solar plants [2]. The vision implies building new plants at rates between 2 and 6 times what was achieved in the last 15 years. Where would the skills, other resources and finance come from?

Many claims made about the costs of building solar and wind plants are based on extremely optimistic assumptions which reflect either special circumstances or developer bias. In 2020 I published a detailed analysis of trends in the actual costs of building wind plants based on data for plants completed from 2005 to 2019 extracted from company accounts [3], and in 2023 I extended the analysis to solar plants [4]. The key results of these studies were that the actual construction and operating costs of solar and wind plants are usually much higher than the estimates used by official bodies and lobbyists, while their performance tends to decline significantly as they age.

Updating the analysis in these papers to allow for price and other changes between 2018 and 2024 suggests that the base capital costs of building new plants in the UK per MW of capacity will fall in the following ranges: offshore wind - £4.0-£4.5 million, onshore wind £1.6-£1.8 million, and solar £1.2-1.4 million.

On top of those figures, recent experience in the Britain tells us that crash programmes of this kind incur costs that are anything from 50% to 100% higher than “base” costs. Since Britain is not alone is trying to build lots of new wind and solar plants in next five years, it is a certainty that the costs will be much higher than claimed. Even at base costs, such a program is likely to require investment of £220-£250 billion. Adjusting for probable cost inflation, actual costs are likely to be not less than £330-£400 billion. The sum of £8 billion promised for GB Energy is a rounding error in such a program.

This is only the start. Huge investments are required in both transmission and distribution to deliver the large increase in electricity generation. The Electricity System Operator’s Beyond 2030 report [5] stated that £60 billion was needed to enable the transmission grid to accommodate 21 GW of additional offshore wind. More recently, National Grid announced a plan to spend £50-60 billion in England and Wales in the next 5 years to meet decarbonisation targets [6]. Scaling that up to cover the rest of the UK and allowing again for cost inflation yields an estimate of investment in transmission at least £150 billion by 2030. Roughly the same amount will be required to expand the distribution network.

Financing such investments will only be possible with government guarantees for revenues which means that, setting aside accounting fictions, real public debt will increase by 20-25% of GDP for the decarbonisation programme. The cost of servicing that debt under current arrangements plus the costs of operating and maintaining the assets will amount to about £40 billion per year for generation and about £25 billion per year for transmission & distribution [7][8].

Households account for a little more than one-third (36%) of final electricity consumption [9]. The same share of the cost of decarbonising the electricity system would be about £23 billion per year. To put that sum in context, in mid-2024 there are about 28.7 million households in the UK with an average electricity bill of £850 per year giving a total cost of electricity for households of about £24 billion per year [10].

In broad terms, electricity bills would have to double by 2030 if Labour’s goal of decarbonising the electricity system by 2030 were achieved with the costs incurred being passed on to electricity customers. The extra costs could be met in other ways, but these are variants of robbing Peter to pay Paul – using taxes or deferring payments.

In addition, it is very unlikely that manufacturing and other industries would be willing to pay a 100% increase in their electricity bills. Either such businesses must be protected in some way, or they will simply close down. The result will be larger increases in bills for households.

No-one should believe that decarbonisation of the electricity system means literally that. Solar and wind power are highly intermittent sources of generation. Detailed modelling of the electricity system using many years of weather data suggests that some gas generation would be required for 50% to 60% of hours in the year even after the heavy investments outlined above and allowing for potential imports from other countries. The amount of backup capacity required would be at least 30 GW and up to 45 GW [11][12].

Achieving a fully decarbonised electricity system in the early 2030s without frequent power outages would require large investments in either storage – mostly batteries – or in building new gas plants fitted with carbon capture and storage (CCS). Relying upon battery storage would be extremely expensive. It is only economic for load shifting from the middle of the day to the evening, so that gas generation would still be required for 40% to 50% of hours in the year. Building new gas plants without CCS would cost £0.8-1.0 million per MW of capacity.

CCS is still an experimental technology, which up to now has failed everywhere it has been deployed on a commercial scale [13]. The addition of carbon capture to gas CCGTs would probably increase the cost of new plants to at least £2 million per MW, so that the cost of providing low carbon backup to renewable generation would be a minimum of £80 billion. Based on current experience, it is unlikely that the carbon capture rate will exceed 60% on average. The combined cost of operating a carbon capture facility plus transporting and storing CO₂ will add £25 to £30 per MWh to the cost of operating gas backup plants. This is much less expensive than producing and burning hydrogen in gas plants which is the (equally experimental) option often proposed.

In reality, it is very unlikely that any option to fully decarbonise the electricity system will be viable before 2040 or later. There is an element of counting angels on a pinhead about attempts to estimates the costs involved. They are based on assumptions about how rapidly new technologies can move from experimental development to large scale deployment. Everything always takes far longer than optimists like to believe, or politicians want to claim. Solar and wind generation are mature options, but there are major constraints on the speed at which new generating capacity can be built and the rest of the electricity system adapted to manage the intermittency of their output.

Whatever route is chosen, the costs of partial – and later full - decarbonisation will be very large. The notion that this strategy will bring down electricity bills is completely absurd. It is based on assumptions about costs that have been repeatedly falsified over the last 5 years together with claims that the electricity system can be transformed in less than a decade. This is the land of fantasies, not of practical engineers or even economists.  

Stepping back, there is an important trend that few appreciate. When we discuss energy prices most assume that the major component of what we pay is the market cost of energy – electricity or gas. That is wrong. In the period 2005-10 the wholesale price of electricity was an average of 38% of the retail price paid by households [14]. The figure for 2024 is 21%, which reflects the typical value since 2019 excluding the 2021-22 when prices were subsidised. The share of the wholesale price of gas in the retail price paid by households is currently 36% but has also been falling.

Over nearly two decades governments have used levies on energy prices as a form of taxation, both to subsidise investments in renewable energy and to fund a variety of programmes. A Labour government is likely to go further down this road. It could reduce energy bills by removing levies on energy consumption. That is about as likely as any of us being struck by lightning, because it would have to raise taxes to fund the change.

Instead, the prospect is for a very large increase in energy levies and bills to pay for the very high costs of pursuing the vision of rapid decarbonisation.

To avoid any political bias, I should emphasise that other parties have made similar statements about decarbonising the UK’s electricity system, though over different time periods. None have them have been notably honest about the costs involved or about how those costs will be recovered. Only the Labour Party has adopted the Red Queen’s practice, as stated in Lewis Carroll’s Through the Looking Glass, of believing several impossible things before breakfast.

Notes:

[1] These figures represent the differences between the goals stated in the current governments British Energy Security Strategy (published in April 2022) as necessary to decarbonise the UK’s electricity system by 2035 and the reported capacities at the end of 2023 in Energy Trends.

[2] Data from Energy Trends Table ET 6.1.

[3] Gordon Hughes – Wind Power Economics: Rhetoric and Reality, London: Renewable Energy Foundation, November 2020, https://www.ref.org.uk/Files/performance-wind-power-uk.pdf.

[4] Gordon Hughes – The Economics of Utility-Scale Solar Generation, London: Renewable Energy Foundation, March 2023, https://www.ref.org.uk/attachments/article/374/Economic-Solar-Generation.pdf .

[5] https://www.nationalgrideso.com/future-energy/beyond-2030

[6] https://www.nationalgrid.com/gridforgrowth

[7] These figures assume an average cost of capital of 6% for generation assets and 4% for network assets. Such rates of return are substantially higher than used by regulators and analysts in the past. This increase is unavoidable because of the scale and speed of the investments required. In addition, regulators had clearly squeezed the cost of capital for network assets below what investors are willing to accept given the financial demands for new investment in infrastructure. I have assumed an asset life of 15 years (the length of CfD contracts) for generation and 30 years for network assets.

[8] Based on my analysis of actual costs for wind and solar plants I have assumed average annual operating expenditures of £200,000 per year per MW for offshore wind, £80,000 for onshore wind, and £50,000 for solar. The average opex cost for offshore is quite low and might reasonably be closer to £300,000 per year per MW, which would increase the annual cost by £3.5 billion per year.

[9] Digest of UK Energy Statistics {DUKES) 2023, Table 5.1 - https://www.gov.uk/government/collections/digest-of-uk-energy-statistics-dukes .

[10] The average of Ofgem’s electricity price caps for 2024 Q2 and Q3 - see https://www.ofgem.gov.uk/energy-price-cap. The capped bills include the daily standing charge and the price per kilowatt-hour for Ofgem’s standard annual electricity consumption.

[11] The detailed results will be presented in a forthcoming paper: Gordon Hughes – Is a NetZero power system viable? Managing intermittent renewable generation.

[12] This assessment is accepted by the current government. A letter written by an official at the Department of Energy Security and Net Zero in response to a question from a constituent of the Secretary of State states that 30-50 GW of flexible generating capacity will be required as backup - https://notalotofpeopleknowthat.wordpress.com/2024/06/07/desnz-admit-we-will-need-50gw-of-ccgt-in-2035/.

[13] See Gordon Hughes – The Bottomless Pit: The Economics of Carbon Capture and Storage, London: Global Warming Policy Foundation, 2017, https://www.thegwpf.org/content/uploads/2017/06/CCS-Report.pdf. Though this report was written 7 years ago, all of the plants discussed in the report have subsequently been shut down and no new plants are yet operating on a commercial scale. Further, as a result of more recent experience the prospects for the costs of building and operating carbon capture, transport and storage infrastructure have become significantly worse since the late 2010s.

[14]  Based on data extracted from (a) the ONS Quarterly Energy Prices, and (b) Elexon’s Market Index Data, which is a series of market electricity prices used by the system operator in calculating the system buy/sell prices and from that the balancing cost in each period. The market index prices are reference prices for the spot power market but on average they are close to day-ahead prices for the same period. They are used because they go back on a consistent basis for a longer period than is available for day-ahead prices.