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Taking the long view

Dr Michael PollittDr Michael Pollitt defends the energy industry in the wake of criticism over their rising profits by their regulator Ofgem

Defence of the energy industry in the wake of criticism over their rising profits by their regulator, Ofgem, has come from Cambridge Judge Business School’s Dr Michael Pollitt, Reader in Business Economics. He recommends looking at average profitability over a run of years because some of underlying investments the energy companies’ make pay off over a 15 year, even 40-year period.

The EU, he says, needs to revisit its approach to future energy provision which continues to be characterised by confusion over its industrial policy towards renewables and its decarbonisation policy.

Dr Pollitt feels that the EU’s current aims are unbalanced. The ambitions clearly reflect an emphasis on the industrial policy and the idea that renewables are going to be this great green industry of the future.

“We probably have got the balance wrong. The emphasis could fall on decarbonisation which it may now be possible to do quite cheaply with gas if the shale gas potential is realised in Europe.”

Dr Pollitt, Assistant Director of the Electricity Policy Research Group, says there could be a very significant decarbonisation simply by converting from coal to gas and higher carbon prices could be used to incentivise demand production.

“Back of the envelope numbers are quite revealing. The current price of a ton of carbon dioxide in the European Emissions Trading System is about £10 a ton. The government envisages that rising to £70 a ton by 2030. If that were to happen it would raise the current price of electricity from a gas-powered power plant by about 40 per cent.

“If you were to include all wholesale gas which is burned for heating in the European Emissions Trading system and apply the £70 per ton carbon dioxide price to that, it would raise the wholesale price of gas in the UK by about 70 per cent.

“So having significant prices of carbon might do things like facilitate the building of new nuclear power plants and have an impact on reducing the demand for energy. Those things will raise the price of domestic electricity and gas significantly.”

Dr Pollitt says that if the EU is serious about meeting its energy objectives, the unit price of household gas and electricity must rise over the longer term. This does not necessarily mean higher average energy bills as households will invest in energy efficiency improvements but it will mean significantly higher bills for those who are unable or unwilling to adjust to the higher energy costs.