Richard Green is the Alan and Sabine Howard Professor of Sustainable Energy Business. An economist, he is Head of the Department of Management. He was previously Professor of Energy Economics and Director of the Institute for Energy Research and Policy at the University of Birmingham, and Professor of Economics at the University of Hull. He has held visiting appointments at the World Bank, the University of California Energy Institute and the Massachusetts Institute of Technology.
Richard has been studying the economics and regulation of the electricity industry for 25 years. He has written extensively on market power in wholesale electricity markets and has also worked on transmission pricing. More recently, the main focus of his work has been on the impact of low-carbon generation (nuclear and renewables) on the electricity market, and the business and policy implications of this.
1. How has the recent volatility of energy prices impacted developments in the sustainable energy landscape?
High or rising fossil prices can make some sustainable energy technologies look competitive in terms of cost. In the right places, installing these technologies makes both economic and environmental sense. On the flip side, while low fossil fuel prices make sustainable energy look more expensive, this does not undermine the environmental imperative to change the way we meet our energy needs. We have to take a long term approach in our energy choices.
2. Based on current global energy consumption patterns and its environmental implications, how much of our energy will need to come from sustainable sources and by when?
The science is clear – unless world-wide emissions of greenhouse gases start falling in the next few years and reach very low levels by 2050, temperatures are likely to rise by more than 2 degrees above pre-industrial levels.
There is no single point at which the costs of a changing climate suddenly become “unacceptable”, but beyond 2 degrees, the risk of setting off a feedback (such as melting permafrost containing high levels of methane, which is a greenhouse gas) and accelerating the process of climate change increases to levels that should be avoided.
Unless we can be very sure that the science is wrong – which probably implies knowing why the fairly straightforward physics of the greenhouse effect should suddenly stop working now – the answer is that we will need almost all of our energy to be sustainable before 2050. We can still use coal, gas and oil in the future, but only if we have carbon capture and storage capabilities in the places that we are using them.
3. Rising energy costs in the UK have raised concerns about renewable energy subsidies. What are your views on keeping energy affordable without compromising renewable energy targets?
The key thing is to make the renewable energy as cheap as possible. Don’t try to develop solar power where the sun is weak or wind farms where it is rarely windy. These ventures should also be supported in ways that minimize the cost of capital that investors require, which means not exposing them to avoidable risks.
For example, if renewable generators have to sell at an electricity market price that goes up and down with the cost of fossil fuels, this will expose them to risk and raise their cost of capital. If they have a long-term contract at a fixed price (awarded after competitive bidding), their cost of capital will be lower. Also, part of consumers’ bills would also be fixed, reducing the volatility that they face.
4. Economic development is increasing Southeast Asia’s energy demand with coal expected to remain the dominant fuel. In your opinion, how can a balance between developing sustainable energy and driving economic growth be struck?
Access to enough energy is essential for growth, but is it also essential to buy that energy for the lowest possible price? The cost of energy is a fairly small part of most firms’ budgets, which suggests that paying a bit more for sustainable energy as countries develop would be affordable.
Making sure that new buildings and factories are energy-efficient will quickly pay for itself. A number of countries that have chosen to develop with non-sustainable energy are now paying a heavy price in terms of local air pollution, and it is possible that some people in those countries may now be regretting the choices they made.
5. What lessons can be learned from the liberalisation of the UK’s energy sector that can be applied to Asia?
Liberalisation can bring greater efficiency to the energy sector, but it also brings greater risks – investors must be prepared to accept these risks and be properly compensated for bearing them. That means being allowed to make enough profit, but also having enough competition to make sure that they don’t earn excessive rents. It is much harder to develop this competition in a spot market if you don’t have enough generating capacity to start with. As such, it is better to have competitive tendering for long-term contracts to provide new capacity.
Liberalisation is a much better term than de-regulation because you still need rules. Without rules, there’s a risk that companies will exploit their customers or that politicians will intervene whenever they see something they dislike. It’s much better to have rules and at the same time, ensure these rules have enough flexibility to respond to events.
A good example of a fixed rule with flexibility, as pointed out by Dieter Helm, is the British energy regulator linking the amount network companies could charge to the actual cost of their debt rather than to a prediction made several years earlier. Linking to a fixed prediction could lead the company to run out of money if interest rates rise or to make such high profits (if rates fall) that the politicians will want to tear up the system. This creates uncertainty and deters investment. Hence, the key thing to note is that liberalisation should be seen as the injection of flexibility within rules rather than the absence of rules entirely.