The UK is “running out of money to pay for clean energy“, so the Guardian informs us today. There are supposedly a number of reasons for this. Installations of heavily subsidised solar panels on houses in sun drenched Hampshire are far ahead of where the government wants them to be, and the government might have screwed up by assuming new offshore wind farms would be less productive than they actually are. I’m still skeptical of the latter claim.
But the other reason, and an indisputable one, is that the government and everyone else was wrong about fossil fuel prices.
The basic problem is this. Government funds basically pay the difference between the price of renewables and the wholesale price of electricity. But if fossil fuels get cheaper the wholesale price also gets cheaper, and this results in more money having to be spent on renewables.
Bien pensant wisdom over the last few years was simple: the price of fossil fuels will just keep rising. Anyone who follows British energy debates is familiar with the following trope, “Renewables will protect us from rising gas prices”.
The thought that fossil fuel prices might end up falling didn’t appear to enter the heads of many politicians. It certainly didn’t enter the head of Ed Milliband. Milliband decided that a freeze on energy bills after 2015 would be a massive vote winner. It was, until energy prices stopped rising. Last week, British Gas announced a 5% reduction in gas bills. If Milliband had been elected British Gas may have had good business reasons to not make the reduction. After all, why should they pass on the reduction in wholesale gas prices to consumers if they would not be allowed to pass on the costs of a future increase in the wholesale prices? This ostensible vote winner for Labour turned into nothing in the end. And I don’t recall it appearing once in the election debates. (Declaration: I always vote Labour.)
Then of course we have oil prices. These were destined to keep rising. Here are official projections of future oil prices from the UK government’s Department of Energy and Climate Change. This forecast was published in October 2014, and they are Brent crude prices.
As they do, DECC publishes three scenarios: Low, Central, and High. The truth is expected to lie between Low and High.
But it clearly did not. Oil prices are above $75/bbl throughout the next 20 years in all projections. Yet two days ago the Brent crude price was $56.70 a barrel. Anyone basing energy policy on the above forecasts will be in for disappointment. And you must ask why the Low prices are so high. Aren’t the civil servants at DECC aware that the recent fall in oil prices are something we should expect to happen, but not be able to predict when it will happen?
We are, as Vaclav Smil has rigorously documented, fairly hopeless at forecasting the future of energy.
This sadly does not stop us from listening to confident soothsaying. Experts and their computer models can tell us all kinds of nonsense. Take this random one I came across on Twitter:
Why should we take these things seriously? We barely understand the costs of things today. How much does a solar panel really cost given the bewildering array of subsidies, both overt and covert, that go towards their production and consumption? What is the real cost of fossil fuels given our species appears too incompetent to carry out a simple act of taxing them using the sky as a dump for carbon dioxide? What is the oil price given that OPEC can in the eyes of many rig the market?
We don’t understand prices today and we have a woeful understanding of what they will be in the future. Be wary of those who tell you otherwise.
Future Babble by Dan Gardner is an excellent history of bad forecasting and the unwillingness of many experts to admit their forecasts were wrong.