State intervention vital if Britain is to meet its green energy targets, says former BP boss

• Browne says markets need new strategic direction • Consumers will have to pay more for renewables

Alan Rusbridger and David Adam
The Guardian, Wednesday 25 March 2009

Britain must revert to greater state control of energy markets to hit ambitious targets on renewable energy and climate change, according to the former head of BP.
Lord Browne of Madingley warns that market mechanisms are failing to deliver the necessary growth in clean energy. Crucial offshore wind projects could be cancelled unless there is an urgent rethink of energy policy, he says.
In a speech tonight at Cardiff University, Browne will say: "Competition has been the guiding star of UK energy policy since the 1980s and it worked well while there was a surplus of energy infrastructure capacity. But price competition is now failing to deliver the new, more diversified infrastructure that we urgently need to bolster energy security and meet our climate change targets.
"I remain convinced that the market is the most effective delivery unit available to society. But the market will need a new strategic direction and a new framework of rules, laid down by government."
Under EU efforts to combat global warming, Britain must generate 15% of its energy from renewable sources by 2020. The bulk of this is expected to be met by the electricity sector, and ministers have announced plans to build thousands of offshore wind turbines off the UK coast.
In an interview with the Guardian in advance of the speech, Browne, president of the Royal Academy of Engineering, said there was a real risk that many of these windfarms would not be built, because of high costs, falling power prices and more expensive credit. His words echo the concerns of others in the industry.
"We must fundamentally rethink the objective of energy policy in this country," Browne said. He compared the current need for urgent investment and new infrastructure with efforts to develop North Sea oil and gas fields in the 1970s and 1980s. "High oil prices provided a strong market pull. But governments also gave industry a helping hand, creating generous tax incentives and regulations, and helping to build strategic infrastructure," he said. "There's even more cause for government intervention today. That's because energy security and climate change mitigation are public goods. They would not otherwise be recognised by the free market."
One option, he suggested, would be for the government to direct state-controlled banks to lend money for green infrastructure projects, as is being done in Ireland. "Policymakers must be frank - the cost of supporting renewable energy will be borne by consumers who pay a little more for their delivered energy."
Browne said the UK risked being left behind in the global race to develop a low-carbon industry if ministers relied on market mechanisms such as carbon trading to drive change. "A lot of people say carbon trading, the European emissions trading scheme, will take care of this. In theory it can, but in practice it won't."
The scheme is supposed to encourage companies to trade the rights to emit carbon dioxide, with cleaner firms selling pollution permits to dirtier rivals - thereby setting a price on the emission of carbon. It has been dogged by a surplus of permits, the price of which has fallen to near €10 from €30 last summer.
Analysts say the price drop reflects a slowing demand for permits as recession-hit companies scale back production and cut their carbon emissions. But it could also indicate companies have sold large amounts of surplus permits to raise cash.
Browne said of the scheme: "Eventually I'm sure it will be terrific. Right now it needs to work side by side with simple regulations and simple incentives to get investors to invest in the right way."
He said the recent decision by Shell to stop investments in wind, solar and hydro-electric power reflected a move "back to basics" for oil and gas companies. "I read it as a pure business decision," he said. "Oil companies have a tremendous number of things they've got to do in developing oil and gas. That's where their expertise is and that's probably where they're focused."
He said the large utility companies and independent firms might be better placed to develop renewables. "It's about focus. When telephones went from landlines to mobiles, the people who did the best in mobile telephones were not the people who did best in landlines. A new breed of people came up and dominated that industry. It may be the case with renewables too."
On the controversial plans by E.ON to build a new coal-fired power station at Kingsnorth in Kent, Browne said that the pragmatic need for a diverse energy supply should triumph over environmental concerns. "I think there's a practical reality here. From everything I've seen it looks like it does need to be done."
He said the price of carbon would need to be much higher than today to realise carbon capture and storage, where pollution could be trapped and piped to underneath the North Sea. "It is expensive, it is very expensive. In the long term we may find a way of capturing the carbon and putting it back in the ground. Right now that looks like a really big challenge with no solution. But it may have a solution."
He said it was vital that environmental policy was at the heart of government. "It's essential that we do not compartmentalise climate change as an issue. Environmental integrity should be made a tangible part of other social priorities, such as economic prosperity and national security. This will require a new approach to policy across all levels of government and all government departments."
Risky investment
The financial crisis has hit numerous firms in the renewable power sector:
Shell pulled out of the British wind sector last year. It believes only biofuels, and carbon capture and storage make sense, alongside oil and gas.
E.ON The economics of the world's biggest offshore wind farm project are "on a knife edge", warned the chief executive of one of the companies behind it.
Centrica planned to invest in 1,500MW of offshore wind capacity but is now reviewing its investment plans.
BT is trying to develop renewable energy projects to generate its own green power, but it says government rules for on-site renewables are threatening its schemes and it may not go ahead without a change in regulation.