The British government has just given the green light to the Hinkley Point C nuclear power station in Somerset. The £16 billion project will be undertaken by a consortium led by the French company EDF. In order to reduce the risk for the investors, the government has provided a number of guarantees. In particular, a ‘strike price’ of £92.50 per MWh of energy produced will be imposed, so that the plant operator will be able to offset the risk of average, long-term prices not being high enough for its fixed costs to be fully recovered. The strike price is roughly double the current price of electricity on the British wholesale market, and well above expected prices in the foreseeable future under virtually any scenario. The rationale behind this policy - which will, in effect, raise the average cost of generating electricity and, therefore, the average price of power to consumers - is the idea that the government has to ‘take action’ to cut carbon emissions and that such action must be some sort of old-style ‘command and control’.
There are two paradoxes associated with this policy, and one inconvenient truth.
The first paradox is about the unintended effects of ideological environmentalism. While green activists tend to be anti-nuclear, once the alleged ‘truth’ is accepted that climate change is ‘the greatest threat’, as David Miliband claimed, then any means is acceptable to tackle it. That includes nuclear energy, which is a more competitive, low-carbon source of energy than most renewables, unless one is ready to argue that nuclear is a ‘greater greatest threat’. Environmentalism saved nuclear energy from the graveyard of Fukushima - which is ironic enough.
The second paradox is that, if one takes the large view, then it becomes clear that climate policies have so far created unnecessary costs in the European Union as well as structural problems for power networks. While intermittent renewable sources of energy tend to increase network security problems due to their unpredictable nature, and require large, conventional back-up plants to be kept at hand, nuclear power is likely to impose hidden costs because of its rigidity, its large sunk costs, and the explicit as well as implicit guarantees that the government has granted at the expense of consumers.
The inconvenient truth is that a liberalised market, like the British power market used to be before recent interventions, tends to deliver what consumers ask for: cheap, flexible energy. It is the interaction of millions of consumers - not a centralised committee - that picks winners and losers, both among generating technologies and among power companies. True enough, there may be externalities (and climate change may well be one of them) that need to be internalised into market prices. But there are ways of doing so with a technology-neutral, market-friendly approach.
Unfortunately, planners do not like policies where they themselves are not the decision makers of last resort. They prefer to decide which company should operate what technology at what price. So, no matter what the best way to cut emissions may be, global warming appears to be less the rationale underlying effective schemes to fight externalities than an all-purpose ploy to expand the powers of government. Whatever the dangers it may pose to the welfare of mankind, climate change has so far proved to be a far greater threat to competitive markets and consumer freedom.