In this Climate Genn episode I am speaking with Ed Matthew, Director of the UK programme at independent think tank, E3G. Ed clearly unpicks the myths and false arguments being repeated in the media and in our politics, around the need to issue new fossil fuel licences in the North Sea. These policy decisions have consequences including making us all much poorer, damaging the economy and leading to much more suffering around the world, beyond what we are already committed to.
Transcript of interview:
[Nick Breeze – Genn Podcast Host]
Ed, thank you very much for taking the time to speak to me. I really appreciate it. In your response to Ed Miliband’s speech, you said that fossil fuel dependence is killing the economy and the planet.
What’s the economic cost to Britain of remaining dependent on gas and oil imports, particularly given recent Middle East conflict?
[Ed Matthew – E3G Director Of UK Programme]
The economic impact of continued fossil fuel dependency is potentially catastrophic. I can give you a very tangible idea of what the impact has been and then an indication of what it could be in the future. So if you look at the Russian invasion of Ukraine and what that did to the economics here in the UK, well, it’s been calculated and we calculated it by looking at the economic data from the government.
And it cost the UK economy £183 billion. That spike in fossil fuel prices as a result of that invasion transferred through to business, to industry and to households and the government had to bail everyone out. The current cost of that is £183 billion, but it’s going to cost more than that because we have to borrow a lot of money to deal with it.
And that adds an additional £4 billion of borrowing on every year. So not over yet. That specific crisis is going on and on.
The second thing is you look at the Iranian war, the Israeli and American attacks on Iran and what that is doing. Clearly, fossil fuel prices have gone up again. Everyone’s panicking about the impact and the UK hassles, at least most of them, but not all of them are insulated from that impact for a few months while the price guarantee stays in place through to the end of June.
But then it will filter through to households and the impact is a little bit hard to say at the moment because it depends what happens in the next few weeks and the next few months. But it doesn’t look as though this crisis is over by a long shot and there definitely will be an impact. So energy bills are expected to go up once again.
So it’s going to be a multi-billion pound impact on the UK economy. So this is what happens if we depend on fossil fuels. We do not control the price of oil and gas in this country and it doesn’t matter how much oil and gas we extract from the North Sea.
We are beholden to the market price on the world stage, whatever that is. So when it goes through the roof, we suffer as a result.
[Nick Breeze – Genn Podcast Host]
That sort of ties in with the E3G, your organisation’s research that shows that more fossil fuel production does not increase energy security. Can you just quickly touch on that? Because a lot of the focus is on Jack Door and Rosebank.
Why is the knee-jerk reaction to go and open up those fields not the right answer?
[Ed Matthew – E3G Director Of UK Programme]
Well, there is, of course, a huge number of people coming out saying, drill, baby, drill. Let’s extract every last drop of all the thermal gas from the North Sea, making the case that that’s going to have good economic benefits for the UK. There’s a number of things that I think need to be thought about.
We need to sort of set the record straight on this. And the first thing is that you need to understand that a lot of the people saying this are influenced by the oil and gas industry. So they’re either being paid by the oil and gas industry, they’re receiving funds from the oil and gas industry, they have some interests in investments in the oil and gas industry, or they’re trying to exploit a political opportunity by trying to use this as a way to say that the cost of living is going to be affected by the net zero transition.
So they have a political interest in killing clean energy. So the facts of the matter are, first of all, in the North Sea, we have drilled out about 90% of what’s in there in terms of oil and gas. The production levels are about 75% below what they were in 2000.
This is an oil and gas basin which is in terminal decline. So we are running out. So if you try to, we’ve already got sort of lots of licences operating, the government’s got a new policy of tiebacks, which is sort of more drilling in fields adjacent to where the current licences are operating.
They are drilling still almost every last drop, but they’re drilling a lot in the North Sea. If you add on new licences onto that, it makes very, very little difference in terms of the amount of oil and gas, the additional amount of oil and gas you can extract. Maybe sort of an additional one or 2% of what you could get out.
So that definitely can’t be construed in any way as a solution to energy security. You know, we already import over 50% of our gas into the UK, that will be over 65% by 2030. It will be over 90%, you know, by 2050.
We’re dependent on fossil fuel imports at the moment. And that doesn’t matter, you know, whether you have a policy of drilling every last, you know, drop and firm or not. So we have to solve that fundamental problem.
So that’s the first thing. And obviously the best way of doing that is doing what the government is proposing, which is to max out on the clean energy opportunities we have in the UK, where we have much more control over the resource, it’s much more energy secure, because we want to import shiploads of oil and gas every single day to keep the system running. And we wouldn’t be so affected, you know, by these huge surges in the market price of fossil fuels on the international marketplace.
So that’s the first thing to say. I also want to really emphasise the fact that climate change is a huge threat to the UK. And this just isn’t taken into account by many of the conversations that we’re having at the moment in the media.
Everyone’s talking about the kind of the immediate benefits of a little bit more oil and gas drilling. But what they’re not thinking about is if you go down that path, what that means for the global economy in the long term. So just to illustrate this, Nick, I’m just going to give one example.
The Institute and Faculty of Actuaries a year ago, made a calculation of what the impact would be on the global economy if we drill out all the fossil fuel reserves that have been identified globally so far. And they estimate that we would be heading through to three degrees plus of global heating and that it would reduce global GDP by 50% between 2017 and 2019. That is an economic impact which goes beyond any recession that there’s ever been.
It would be absolutely economically catastrophic. The UK economy would collapse. It is therefore beholden on leaders globally to ensure they do not go down this path and they do not drill out every single drop of oil, every single thermogas, that they have a transition which is going to ensure that we move to clean energy just as fast as we possibly can.
And that potential economic cataclysmic impact just isn’t being taken into account in the current sort of media debate that’s happening on the airwaves at the moment. It seems to me extraordinary that those future serious catastrophic future risks are just not being debated and not being talked about. And that has to be surely at the centre of our energy policy in the UK trying to find ways to mitigate that risk.
[Nick Breeze – Genn Podcast Host]
I totally agree. And I mean, I’ve had recent episodes of this podcast discussing some of the impacts that Britain is facing today and how they’re accelerating really fast. And we’re just not acknowledging them.
But I mean, you just talked about the timeline. There’s two timelines. There is one for the impact of climate change, which is accelerating against us.
And then there’s the timeline of the transition to renewables, which is where we’ve got to be. And critics do say that clean energy transition takes too long, that renewables can’t fill the gap in time. What’s your assessment of this timeline risk?
[Ed Matthew – E3G Director Of UK Programme]
The first thing is to say that the world should have moved much faster over the last decades. We can’t go back in time and change that. So we have to think about, well, what can we do now?
How fast is it appropriate for us to move now? And really, the fact is that there’s a huge opportunity to actually move very fast and to accelerate action at this point in time. And the reason isn’t just because of the scale of the economic and social impacts that are headed our way through unconstrained climate change, but it’s because of the economics of action have actually become much more compelling.
There’s been some systemic shifts in the energy markets in recent years, which means that we can accelerate much faster than we consider possible in recent times. So just to illustrate this, we now know that the vast majority of power which is being commissioned each year now is renewables. It’s something like 90% of all new power generation is coming from renewables.
Electric cars, I mean, this is a great example in the UK. New electric cars this month, for the first time, are cheaper than their fossil fuel equivalent to buy the upfront costs of an electric car. Last year, the price of second-hand electric cars went below petrol cars in terms of cost.
Before this Iran crisis hit, it was possible for a driver, an average driver doing average mileage, to save about £800 a year in fuel and servicing costs if they had an electric vehicle instead of a petrol car. But now, given the Iran crisis that’s unfolded in recent months, we estimate those savings are more like £1,000 a year you’re going to be making. The cost of solar panels has come down significantly in recent years.
The amount of solar panels being commissioned is accelerating globally in ways which were never predicted by energy experts. It’s essentially the cheapest way to produce power now is through wind and solar. And the cost of batteries, I should add as well, is coming down significantly, which is making the storage of renewable energy much more cost effective.
So the economic fundamentals of clean energy have shifted markedly in the last five years, which means that it’s not as though making this shift is, you know, we have to do it because of the long-term risk. It’s the right thing to do, but there’s this huge cost we have to take on now to do it. It’s actually right now, today, is the economically rational thing to do.
[Nick Breeze – Genn Podcast Host]
Building on that, you’ve stressed the need to remove hidden taxes of electricity bills. Can you just tell us what those taxes are and how did they end up there? And what is the scale of the saving for households if we do remove them?
[Ed Matthew – E3G Director Of UK Programme]
Yes, so this is really interesting because, I mean, fundamentally, you know, there’s two things that you need to think about if you want to really accelerate the transition and make it affordable for people. So the first part is the upfront costs of the kit. So that might be an electric car, it might be a sort of a heat pump, it might be solar panels or a battery.
You want this stuff to be as cheap as it possibly can be, cheap enough so that people feel it’s affordable, you know, for the majority of people that it’s possible for even sort of low-income households to sort of get hold of this stuff. The second thing is the running costs, you know, we need to make sure that essentially if you’re going to electrify your transport, your heating, you know, you are going to be paying less than you would if you were kind of operating a petrol car or a gas boiler. So those are the two dynamics that, you know, you need to be aware of.
The problem is that in the past, when they were working out, you know, how to bond and subsidise the transition to clean energy, the previous governments, in their wisdom, decided to load a huge number of these costs onto electricity bills rather than onto gas bills. Probably the right thing to have done actually was not to put it on any bills at all, but to actually paid for it through the exchequer. That would have been the sensible thing to do, but of course that was resisted at the time by various chancellors who didn’t want the, you know, the treasury to have to pick up the tab, because it might have constrained them spending money on other things, and they thought maybe perhaps quite reasonably at the time, you know, that consumers, businesses, industries should pick up that tab through their energy bills. But inadvertently what they did is they made it more expensive to electrify than it otherwise would have been if they had actually paid for this, you know, a different way. So the situation we’re in now is that, well, in some cases it already makes sense in terms of running costs, you know, to make the switch.
So I talked about electric cars, and it’s much cheaper already to do that, that’s great. But if you look at heating, and we’ve got to remember that, you know, about at least a sort of a quarter of our emissions, you know, in the UK can go towards, you know, heating, we do need to make it affordable for people to make the switch to heat pumps. And at the moment, I think households are struggling to make that switch, they feel like it’s going to be cheaper for them.
It is in some cases, but in some cases, it’s not. So the government needs to take action. And the way to do that is to tackle these levies on bills.
So these are levies like the renewables obligation, which was used to subsidise the early stages of offshore wind, feed-in tariffs, which was used to subsidise early stage development of solar power in the UK. And they’ve had it on bills as well until well, last week, really, the carbon price support, which is like a carbon tax. And of course, the other thing is that, you know, they’re expanding the network of electricity network at the moment, which you have to do as part of the clean energy transition.
But you also need a lot of investment anyway, because it’s been under-invested in for many, many years. And that’s adding on network costs onto bills. So yeah, these are all things which need to be tackled, basically, in order to make electricity more affordable.
So ideally, what we want is them removed from bills, paid for through the Exchequer. And that would help business, industry and households to electrify and make it much more affordable for them to do so. It would reduce that household bill by at least 100, another 150 to 200 pounds.
[Nick Breeze – Genn Podcast Host]
Is the Chancellor resistance you mentioned a minute ago, still there today? Because obviously, the finances of the country are in a dire state. Should he, Rachel Reeves, say no, keep them on the bills for the moment?
[Ed Matthew – E3G Director Of UK Programme]
Well, the first thing to say is that she did move on this last autumn, where she took off, I mean, oddly, she decides to take away 75% of the cost of the renewables obligation, which was a renewable subsidy scheme in the early days, but not the full 100%. So she went some of the way there last autumn. So she’s already reduced the cost of these levies a bit on bills for households, although she didn’t do the same for our industry and business.
So we’re saying that she needs to go the whole way and remove the rest of them. Now, with this cost of money, it absolutely would do. And the current economic circumstances for the UK, the government is limited in terms of its fiscal room for manoeuvre, in terms of how much additional money it can spend each year.
Our argument is that, of course, the Chancellor has to take these costs into account and balance the books. But making electrification more affordable is absolutely essential to our economic and energy and social security in this country. You know, by making electricity cheaper, what she’s doing is she’s going to be promoting electrification.
That’s going to be ensuring that we’re not going to be so impacted by fossil fuel dependence in the future. That has a clear economic benefit. It will save people money, it will save business and industry money, that means that they will invest more, although they will spend more in the economy, that will have a cost issue for the Chancellor.
It’s about doing two things, which is making it more affordable to invest and giving a short-term boost to the economy, but also as a resilience move by making the UK economy more resilient to fossil fuel price spikes in the future. We won’t be so hit by that. And I was talking about that £183bn cost of the last fossil fuel crisis we had when the Russian invaded Ukraine.
And that gives you an indication that, you know, not doing this also, you know, creates a cost. And that cost could be greater than the subsidy of putting money on the table, like right now, to kind of make electricity more affordable.
[Nick Breeze – Genn Podcast Host]
Well, just to summarise really, what are the main policy levers, if you like, that the government should be looking at over the course of the next 12 months to give us energy security going forward, in your view?
[Ed Matthew – E3G Director Of UK Programme]
The first thing is that we need to use as much clean energy as possible. We need to accelerate that, because the more clean energy we use, the more our bills will come down. So we already know that the wholesale price of electricity is about a third less than it otherwise would be if we didn’t have the renewables that we’ve got on the system at the moment.
So it’s already having an impact. I guess what I’m saying is that, you know, our electricity would be so much more expensive now if it wasn’t for the clean energy that we’ve got right now. So the government has got to continue to accelerate that trend to get as much, you know, renewables on the system as they possibly can.
That will reduce costs in the short and medium term for households. And for the long term, it will have a much bigger impact. A second thing is that the government has to act to remove levies off of bills and to remove some of the network costs off bills as well.
We need to make electrification the cheapest option always. If they do that and they act decisively now to do that, that will, you know, give a real short term sort of boost to electrification in this country. The third thing that they need to do is that they need to support the most vulnerable.
Now, clearly, there is going to be an impact from this crisis on households across the UK, but it does take time to do this system change to the energy system. And there’s a risk that, you know, once again, it’s the poorest in the country who suffer the most. And they do need to be protected from that.
And probably the best way to do that is to increase the warm home discount, which is a subsidy that low income households already get. But it’s only about £150 a year. It’s not enough.
And I think they need more support from that scheme, you know, over the course of this winter.
[Nick Breeze – Genn Podcast Host]
Ed, it’s been great to speak to you. Thank you very much. Well, it’s been great to catch up, Nick.
[Ed Matthew – E3G Director Of UK Programme]
So thanks for having me on.