18 Aug 2015
Clean Energy – ‘Moore’s Law’ for Renewables, By Nigel Wilson, Group CEO, Legal & General
An increased focus on renewable sources could give us energy independence.
A fifth of the UK's existing power stations are scheduled to close by 2020. Yet investment into new energy projects fell over the last five years as investors saw the returns as too low and political risk too high. The election result is resolving some political uncertainty and Amber Rudd is bringing deliberately disruptive but innovative ideas to the Department of Energy and Climate Change. We still have a potential supply shortfall, but clean energy technology is moving at a fast pace and should become our mainstream energy source, even without subsidies.
The UK is currently a net importer of gas and coal. An increased focus on renewable sources will not only help the trade balance, but also could give us energy independence, as well as ensuring energy security.
"Moore's law" for Renewables
Solar is experiencing the energy equivalent of Moore's Law in computing… exponential increases in capacity with accompanying falls in price. The costs of clean generation have fallen sharply, and renewables are a more economic proposition even without the same levels of subsidies that were required to install the technology.
The subsidy regimes for renewables, gas, coal and nuclear are expensive for government and consumers, and can sometimes have distorting effects. The wrong types of subsidy can discourage innovation, reducing downward pressure on prices. Amber Rudd is clarifying the government's position on changing market support mechanisms for solar and wind energy. We now need to allocate money previously spent on these subsidies for renewables on R&D, as well as ending subsidies for nuclear, gas and coal energy.
The new Apollo
The Global Apollo programme looks promising. It's being promoted by Sir David King and six lords: John Browne, Richard Layard, Gus O'Donnell, Martin Rees, Nicolas Stern and Adair Turner and calls for a programme of publicly funded research and development to put the UK at the forefront of renewable energy generation. Like most great ideas it is conceptually straightforward: the sun provides 5,000 times more energy to the earth's surface than our total human demand for energy. We need to understand it, harness it and deliver it in a technically and economically effective way.
The 'Trilemma' of energy policy
The government still has to reconcile three policy goals:
- Security of energy supply for the foreseeable future: some of us remember the blackouts of the 1970s – this can't be repeated.
- Carbon reduction, including meeting international obligations under UN agreements and the EU target of cutting emissions by 40% between 1990 and 2030. We have written to global finance ministers urging them to support a further global agreement to reduce carbon levels at UN talks in Paris this December.
- Energy costs: still higher than 10 years ago, and the switch to greater low carbon energy supplies shouldn't mean price hikes for consumers, especially as fossil fuels also receive subsidies from taxpayers. Cost savings can be gained from efficiency measures, with greater use of insulation and much more building of green, energy-efficient housing. We always aim to put Environmental and Social Governance at the heart of our property investments.
The lights can't go out
Reconciling these goals isn't easy, and we certainly can't afford a 'brownout'. We are closing old and polluting coal-fired power plants, but gas it is still a tempting backup, where electricity can be generated simply, day or night, rain, wind or shine. But the transitional role of carbon technologies shouldn't put us off the low-carbon, renewable-focused endgame, especially as we continue to develop better storage and transmission for electricity generated at the "wrong" times or in distant places.
Hinkley, a nuclear error?
Nuclear energy is low carbon, but the costs are too high. The £25bn estimates for a new nuclear power station at Hinkley Point in Somerset make it look like an expensive white elephant – another potential chapter in the Crewe and King book of government blunders. It will be slow to build, produce prohibitively expensive power at over £100 per MWH to be subsidised over 30 years – plus nuclear fuel decommissioning costs which, according to the Whole of Government Accounts, cost the taxpayer £80bn.
Building a low carbon future
We must ensure that global temperatures don't rise by two degrees Celsius over historic 1880 levels. So it's essential that the UK moves towards renewable energy sources in the next five years. Last year,renewables accounted for only 6% of UK energy generation.
Legal & General can help. Firstly, as the UK's largest investor we believe that the companies we invest in can be more successful if they adopt low carbon policies, and we are engaging with them actively on this topic.
Secondly, we've already invested over £6.5 billion of our £15 billion target in UK infrastructure.
And now we want to make direct investments into renewable energy sources. The UK has some of the best environmental conditions for renewable energy in the world, with strong wind, solar, tidal and wave resources. We intend to continue investing in renewable energy despite government announcements that they are considering ending subsidies to wind and solar energy.
- Wind power. Due to technological improvements, onshore wind can be one of the lowest cost sources of energy. We will look to increase our investments in this area. As falling costs lead to reducing reliance on subsidies, our capital can help stimulate further growth in this sector.
- Solar power. We're already investors in UK solar, but it still accounts for only 2% of total UK energy. Prices of solar panels have been falling by 17% for every doubling of capacity, and this 'Moore's Law' of sunshine could herald decades of growth and cheap electricity. It costs significantly less than nuclear energy, it enjoys 80% public support and better battery technology could triple solar generation in the near future. Solar power has the potential for several billion pounds of new financing in the coming years.
- Tidal and wave. We believe that developing tidal and wave energy in our estuaries and coastal areas could significantly add to the mix of renewable energy. These are relatively unproven types of energy creation where government can take a lead in R&D and early-stage investment.
Taking a balanced approach to energy generation, and prioritising research and development, would give us greater flexibility in moving towards renewable energy sources. The cost of renewable energy has fallen considerably in the last few years and now is the time for investors and governments to get things moving.
We owe this to the next generation: we have already saddled them with over-priced housing and too much debt: let's not add further environmental damage, excessive energy costs and £100 billion nuclear decommissioning, to the toxic mix.