Reversing scorched earth policies in the electricity sector: Part 1

Advocates of political and economic reform often talk about the need to make “irreversible” changes to the ways in which institutions or sectors function. Occasionally, they acquire sufficient political power to be able to make fundamental changes. But what if they are wrong about the effects of such changes? There is, for example, a large amount of buyer’s remorse about the long-term consequences of reforms to legal and bureaucratic systems adopted during the Blair-Brown administrations. At the very least, the reformers did not think through how the changes would alter legal, bureaucratic and corporate behaviour, resulting in a system that is, for practical purposes, incapable of doing anything competently or expeditiously.

In a crucial sense, the reforms adopted during this period can be seen as equivalent to what military planners think of as a scorched earth strategy. They destroyed almost everything that existed before the changes without the reformers having any serious idea of what the consequence might be. In effect, knock down everything that was there before the changes, try to eliminate any possibility of recovery, and then hope that things will turn out for the better – whatever that might be!

Based on the lessons of history and individual experience, there can be little surprise that what follows the implementation of a scorched earth strategy is often not better than what preceded it. That, in effect, is the essence of the difference between the caution of the conservative view of political and economic and the optimism of those who are convinced they know the route to the Holy City or Shangri La. What is less clear is how we should deal with the consequences of actual or likely failure when scorched earth policies have been implemented for an extended period.

This is important because anyone, other than the most ideologically committed, can see that the current approach to achieving the Net Zero goal is an example of following a scorched earth strategy. I will focus on the electricity sector but the approach for transport, housing and other sectors is similar. The key elements are: (a) destroy or undermine the pillars on which the existing – and reasonably effective – system relies; (b) enter into long-term commitments for alternative sources of supply, even though it is known they cannot ensure the level of service and reliability provided in the past; and (c) wave hands furiously while making repeated claims that other – as yet undeveloped and very expensive - technologies will save the day when the consequences of the lack of reliable supplies begin to emerge.

In the case of the electricity sector, the operation of the electricity market has been undermined by awarding what are equivalent to take or pay contracts to renewable generators that can be exercised at the convenience of the supplier. An electricity system that was developed to meet the need of electricity consumers wherever they are based is being transformed into a system designed to meet the requirements of a specific class of generators wherever they wish to operate.

Instead of the needs of customers being dominant in system design and operation, priority is increasingly given to the needs of intermittent renewable generators. Despite this shift it is customers who are expected to pick up the costs of an increasingly unreliable and inefficient system. It is, thus, not surprising that the response of customers has been to leave or reduce their consumption. Final demand for electricity in the UK fell by about 22% from 2005 to 2024. Over the same period the UK’s population grew by about 15% while real GDP per person increased by about 8%. This is as clear an indication of the slow-moving but inexorable consequences of a scorched earth strategy.

Nor do these policies guarantee consumers “cheaper” supplies of electricity. Total subsidies for renewable generation have increased from £2.9 billion in 2010 to £24.4 billion in 2024, both at 2024 prices. That is equivalent to £850 per household in 2024. Much of the cost is invisible because households account for about 35% of electricity consumption. The rest of the cost is borne by businesses, the public sector, and other organisations, who pass on the costs to households through prices, other charges and taxes.[1]

These subsidies are also extremely inefficient. The annual average subsidy at 2024 prices per MWh of renewable generation the period 2010 to 2024 varied from £137 per MWh in 2011 to £203 per MWh in 2024. As a reference, the average wholesale market price was £77 per MWh at 2024 prices, even including the spike that occurred in 2021-22. The median value of the subsidy for renewable generation divided by the wholesale market price over 2010-24 was 2.7.

Apart from the argument that policies to promote renewable generation reduce our electricity bills, they are supposed to reduce our emissions of carbon dioxide. True in part, but at an extraordinary cost. The average subsidy cost at 2024 prices per tonne of CO2 (tCO2) saved has varied from £374 per tCO2 in 2011 to £546 per tCO2 in 2024. In no world is such support for renewable generation either efficient or sensible as a strategy to reduce CO2 emissions.

Of course, nothing is likely to persuade the current group of politicians and bureaucrats that their beliefs are just fantasies. The question that we need to consider is what to do when the fantasy ends and reality reasserts itself. This is where the issue of “irreversible change” becomes important. The UK government is awarding 20-year contracts to renewable generators, much of whose output will be close to valueless in the decade after the current administration leaves office. It is creating huge liabilities that it expects us or our children and grandchildren to pay between 2030 and 2050. This is on top of the liabilities simultaneously created by its inept management of the public finances.

There is a self-interested argument made by financiers and politicians that the UK must maintain its reputation for honouring its promises – or, at least, its financial obligations. That is convenient nonsense. Governments change their minds and repudiate promises made by their predecessors all the time. The fact that the promises (supply contracts) are dressed up in legal language designed to offer as little leeway for revision as possible is immaterial when those promises are potentially disastrous.

As any competent lawyer should know, there is an extensive literature on what is called “unjust debt”. The idea of “unfair contracts” provides much of the basis of consumer protection. Electricity customers might argue that the developers of renewable generation plants have been unjustly enriched as they have taken advantage of the naivete and incompetence of politicians and bureaucrats who failed to recognise that much of the output will have little or no value.

The point is not to argue that there might be legal grounds for overturning these contracts. Rather, even the most obtuse of renewable operators must recognise that the “sanctity” of commercial contracts is heavily qualified by social and political views of whether they are reasonable or not. Further, once a wind farm or solar plant has been built there is little or nothing that the developer can do if a government gives a clear instruction to the system operator to cut the plant off from the grid. It can claim damages for loss of the connection, but if the government is willing to legislate to deny such damages, the operator would have great difficulty in enforcing any external judgement in its favour.

A determined successor to the current government could, though at some political and economic cost, abrogate or change the contracts currently offered to renewable generators. Any sensible operator or investor should know this and would take account of it in making its investment decisions. Further, developers of solar and wind plants are rarely popular, however much they may dress up their websites with gauzy images of beautiful landscapes. Many are controlled by EU governments or private equity funds, neither of which attract much public sympathy. The political cost of strong-arming them is likely to be low, especially for a government that is sceptical of both the EU and the financial sector. Finally, some major developers have other interests that can easily be squeezed – EDF, Scottish Power and SSE are obvious cases.

Rather than accept the pearl-clutching view that it is “unthinkable … unthinkable” to insist on changes to existing contracts, we should ask a simple pragmatic question. How dependent are we on supplies of electricity from intermittent solar and wind power? That defines the scope of potential options to reverse existing policies and establish a more reasonable regime for the GB electricity system.

To answer that question, I have used generation data for the calendar year 2025 together with the capacity market commitments for 2025-26. Specifically, I have examined whether the GB electricity system could have operated in 2025 without using solar and wind generation.[2]

The result is that the GB system did not require any contribution from solar and wind generation in any 30-min settlement period in 2025. The minimum of the surplus dispatchable generation capacity was 3.5 GW and the average surplus capacity was 21 GW. The minimum value of the reserve margin was 7 GW or a little over 15% of total generation. The average reserve margin over the year was 25 GW.

So, to emphasize the point. In 2025 the GB electricity system could have operated without any contribution from solar and wind generation plants. It would have had a sufficient margin of dispatchable generation capacity over the amount of generation capacity used in each period. The minimum reserve margin including battery storage and demand-side response would have been greater than 15% in all periods.

Since the GB system does not rely, in any way, on existing solar and wind generation, how we utilise such capacity is a choice that can be made either now or in the future. Preserving that option depends on ensuring that existing dispatchable generation capacity is either maintained or replaced if it is retired.

Since demand for electricity has been falling, the capacity market contracts already in place up to 2028-29 should mean that the GB electricity system can operate without any contribution for solar and wind generation plants up to 2028-29. After that, there are concerns that a significant portion of gas capacity will be retired. To preserve the option of operating without solar and wind generation, it would be advisable to ensure that older gas plants are replaced more than one-for-one by newer and more efficient gas CCGTs and turbines.

There is one critical feature of the current GB electricity which is highlighted by this analysis. This is the role of the capacity market in ensuring that there is sufficient capacity to meet variations in electricity demand, even without supplies from solar and wind plants.

As I will explain in the next article in this series, the capacity market together with Contracts for Differences have converted the GB system into something close to what economists call a Single Buyer Market. Recognising that reality offers a potential path to reversing current scorched earth policies.

[1] The figures quoted here are taken from a paper by Lee Moroney of the Renewable Energy Foundation and me that will be published shortly. I will post a summary of the paper as an article on Cloud Wisdom as part of this series.

[2] The calculation is as follows. For each settlement period, calculate the amount of available dispatchable capacity as the sum of (i) capacity market contracts for gas, and pumped hydro; (ii) maximum generation over 2025 for biomass and nuclear generation, since dispatchable capacity must exceed this maximum; and (iii) the greater of actual generation and capacity market contracts for non-pumped hydro and other generation, since generators are required to ensure that they have available capacity at least equal to their capacity market contracts. The dispatchable surplus is the difference between available dispatchable capacity and total generation in the period. This is adjusted for imports by adding whichever is the greater of actual imports in the period and capacity market contracts for imports. The total reserve margin is the sum of the dispatchable surplus plus capacity market contracts for demand-side response and battery storage. This is expressed as a percentage of total generation in the period.