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- [00:01]
Emma Pinchbeck
Energy is really misunderstood.
- [00:03]
Robert Bastow
Costing households and it's costing businesses and it's making the economy uncompetitive.
- [00:07]
Emma Pinchbeck
Completely agree that the electricity price is a problem. I think the next sentence though often in the political debate is and that's because of net zero or because of the renewables, which is rubbish. Which is rubbish. Investors, as you know Robert, aren't fans of change and change to markets in 25 year infrastructure projects. Investor certainty to get the stuff built or consumer benefit pre2030 clean energy is
- [00:28]
Robert Bastow
a very attractive destination. Why is it so apparently politically unpopular? And what does any government do about it?
- [00:37]
Podcast Host/Announcer
We're delighted to say that this year the rest is money is being powered by octopus energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six?
- [00:50]
Robert Bastow
You know what, we've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation, you know, we thought the market was stable then Aldi and little turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.
- [01:18]
Podcast Host/Announcer
Well, cheers Greg and thank you for powering this episode of the Rest Is Money.
- [01:22]
Robert Bastow
Trading at Schwab is now powered by Ameritrade, bringing you an expanding library of education with even more ways to sharpen your trading skills.
- [01:30]
Emma Pinchbeck
Access new online courses, insightful webcasts, articles,
- [01:34]
Robert Bastow
engaging videos and more, all curated just for traders.
- [01:38]
Emma Pinchbeck
Plus guided learning paths with content designed to fit your unique interests. No sifting to find exactly what you need so you can spend your time learning to trade brilliantly. Learn more@schwab.com trading.
- [02:02]
Robert Bastow
Hello and welcome to the Rest is Money with me, Robert Bastow and steps away doing exciting stuff. But I'm delighted to be joined by Emma Pinchbeck, who is the chief executive of the Government's Climate Change committee. That's the body that advises it on whether it's meeting its climate targets, whether the government is protecting us enough from heat waves and floods and even droughts in some circumstances that are the result of climate change change. Before that, she actually represented the energy industry. She was on the other side of the fence running a body, a trade body called Energy uk. And what I really want to talk to her about are really two big questions. One is how do you get the cost of energy down now without knocking us off course? When it comes to meeting climate targets, if indeed, you know, some of you may not think climate targets are important. And again, one of the things I'm going to talk about with her is whether in a Trump world we should be so fixated on hitting those climate targets. But then there's another big thing which is actually the big prize. If we make this climate transition to a UK that no longer has to import oil and gas is we're going to be self sufficient and actually the marginal cost of renewables is pretty low. So why this route that we're on to self sufficiency in low cost energy, seemingly so politically unpopular. A lot to chew over with Emma Pinchbeck. And here's our conversation. Emma, very good to see you. I suppose what I wanted to start by asking you is a very big question, which is, you know, at a time when we've now seen these two major conflicts, Putin's illegal invasion of Ukraine, Trump's war against Iran, which have led to these energy shocks, there are quite a lot of politicians, and not just at the fringes, who say this is not the moment when we should be spending money on climate transition. I mean, I know the arguments why that may not be wholly credible, but take us through your thinking.
- [04:38]
Emma Pinchbeck
Okay, that is a big question. Both 2022, which I worked on really closely with the energy sector because I was leading the energy trade body at the time and responsible for the response to that crisis, and then now have been caused by a spike in the price of fossil fuels and underneath that, a global market that the UK has little influence on, but is in the receipt of the unpredictability of that market and of the prices that come out of it. And so I think at common sense level, most people would understand the idea that reducing your exposure to that volatility means getting off the fuel that's causing or separating yourself somehow from that global market.
- [05:25]
Robert Bastow
If it's costing them money on their bills now they're going to say, I don't want to pay that.
- [05:29]
Emma Pinchbeck
Now, two things. Firstly, the renewables that we've got in the system now are already helping a bit to insulate us from some of that shock, because in having renewables on the system, they're displacing the fossil fuels that you would otherwise be buying in. And we know that from the last crisis, having renewables on the system having insulated homes, that in itself helped reduce some of the exposure to the gas price shock in particular, it's a slightly different shock this time, of course, being oil, not gas, but the principle holds. And then if you think about how you fund the transition, one of the things the Climate Change Committee has said is we would like to see those levies move into taxation or elsewhere. And the reason for that is underneath this, cheap electricity coming from renewables, coming through, from clean sources of power, flowing through to electric technologies in people's homes will already be saving some households money. But if electricity were cheap, we'd be saving many, many more households money, particularly for things like driving costs. Some of the reason that people are paying more on their bills as a political choice rather than the cost of trans. But the thing that I want to say is that we've done some analysis on the exposure to a price spike. The entire cost of the net zero transition from 2025 to 2050 is less than the cost of a spike in fossil fuel prices of the kind we saw in 2022. So we've just done a piece of additional analysis that shows that really clearly. So we save, I think, about £30 billion worth of wasted energy through a net zero energy system, rather than the one that we have today, because it's just more efficient to move energy around the system. If you say to people, we are throwing 30 billion quids worth of energy at the wall at the moment, in the middle of an energy crisis, that in itself is, I think, a common sense reason for moving to something more efficient. So just reducing our dependency on volatile markets really does help. Now, I'm not. But I'm not. I'm not trying to escape the idea that you have to pay for the infrastructure, but I think the advice of the committee is you have to pay, what, £6.9 billion, £6.9 trillion over the next 25 years to invest in the economy, in infrastructure, in new gas, in
- [07:37]
Robert Bastow
new cars, just so people understand that that's more than twice UK national income. It's a lot of money.
- [07:43]
Emma Pinchbeck
And that's business as usual, though. That's just to run as we are. Because cars get old, power stations get old, grid gets old. The cost of net zero on top of that is about 110 billion over 25 years. It's about 4 billion pounds a year, 0.2% of GDP. But for that you get benefits at household level, you get benefits we don't even cost in that analysis, like improved air quality, improved health outcomes. You avoid 40 to 130 billion pounds worth of climate risk and climate impacts, and then on top of that, you avoid these risks of volatile international fossil fuel price spikes.
- [08:20]
Robert Bastow
And can I just ask you. So there's two things, obviously, I think people do understand, because it is just straightforward common sense, that if home energy system was 100% or, and business energy system was, you know, 100%, wind, solar, nuclear, what happens to gas prices in the rest of the world wouldn't matter to us anymore. And, you know, that would be an enormous advantage. And since the marginal cost of output from a solar farm or a wind farm is basically zero, you know, that looks like a tremendously exciting place to end up. I can't remember what it is. What are we now? About 50% renewables in the UK?
- [09:04]
Emma Pinchbeck
More.
- [09:05]
Robert Bastow
What is it now?
- [09:06]
Emma Pinchbeck
It's about. I think we're about 70% clean overall, including nuclear.
- [09:11]
Robert Bastow
All right, so 70% clean, including nuclear. Something like that.
- [09:15]
Emma Pinchbeck
Yeah. Like top end. And then, of course, renewables are variable.
- [09:18]
Robert Bastow
Yeah, yeah, yeah. What people don't, I think, understand is why we nonetheless are so vulnerable to the gas price. And, you know, because all the international comparisons show that we are probably more vulnerable to the global price of gas than any comparable economy. It's one of the reasons why the IMF is forecasting that our economy will slow more than anybody else because the costs of Trump's war for us are higher than anybody else. And the bit. I know that you are a. You know, somebody who is in the past said that the pricing system should be changed, but it's probably worth my just explaining to listeners the slightly surreal nature of our pricing system.
- [10:05]
Emma Pinchbeck
We're going to do marginal pricing.
- [10:06]
Robert Bastow
We're going to do marginal pricing because it actually, you know, it massively matters to people's lives, marginal pricing, you know, and we have this ridiculous system where people bid into. What is it called? The elect. What's the ESO stand for? The.
- [10:25]
Emma Pinchbeck
So it's the National Energy System Operator now, but markets,
- [10:30]
Robert Bastow
basically the way the market works is everybody bids their energy into the system and then it is the marginal price that clears the system, that sets the price for everybody. And the marginal price is usually the world price of gas. And that means that. I mean. I mean. And there are so many madnesses about the way that we price power, which I do want to talk to you about. You know, you are a wind farm and your marginal cost of production is basically nil, and yet you are being remunerated at the cost of a gas plant, of a really expensive gas plant. And that is just. I mean, you know, what do you just describe it in that way? And I understand the economics of why they've done it in that way, but it's when you just say it out loud. You just think this is insane.
- [11:21]
Emma Pinchbeck
Yeah, there's, I mean I'm an energy specialist of nearly two decades standing now and there are some things about the energy market where if you're just trying to explain them in the pub, people are like rational, their reaction is rational. We should do the good faith. Why do we have marginal pricing and what are the advantages of it? Before you trap me into talking about alternatives. But it's common in most commodity markets first thing and it is common across most major economies and power systems. Critically. It's also common in Europe who we trade energy with across the interconnectors as well as gas.
- [11:59]
Robert Bastow
And common doesn't always mean optimal of course.
- [12:02]
Emma Pinchbeck
No, but the logic for it is this. We have half hourly markets. So every half hour power plant bid in to provide power to the system and the system operator stacks them in order of cost and they procure everything they possibly can as cheaply as they can down the bid stack and then whatever, where there is a gap. So the last plant available to meet need is the one that sets the price for the whole market. Now I'm explaining economic reason, but the economic reason for that making sense even if it doesn't intuitively is it prevents people from gaming the market. The idea is they will force a bid in the most efficient price they can to try and get higher up the merit order. And also that you're mostly procuring the cheap stuff in the stack and then you're, and so you're getting, that is more cost effective overall.
- [12:52]
Robert Bastow
But you could have a situation, a system where the purchaser of, on behalf of all of us simply paid the marginal cost of each producer. So you know, you can basically say with a wind farm, all right, you've got some sunk capital costs, we will remunerate you for some of those sunk capital costs. People again should, should probably need to understand that some of our energy, this, and you know, this is true of wind, I think solar, it's, it's certainly true of the new nuclear that's being built.
- [13:28]
Emma Pinchbeck
They're on fixed price contracts.
- [13:30]
Robert Bastow
Is, is, you know what happens is you, the price that they receive will be fixed and if they receive more than that because of marginal pricing, they have to pay that back into the system, don't they?
- [13:42]
Emma Pinchbeck
Yeah.
- [13:43]
Robert Bastow
So, and if they, and if, and if actually the price plummets below what they get, then we pay them back. So they get their fixed price. So that is a way of shielding. But there are also all these older power stations and you know that are on that basically just get the market price those on.
- [14:01]
Emma Pinchbeck
So there are a few, as you say, the older scheme. So we've done, we've done much of the logic of it is it kind of from a security supply point of view across the whole system allows you to procure the stuff you need most cost effectively overall, I think.
- [14:16]
Robert Bastow
Do you believe that? I think because that is the point. Do you think that that is the most cost effective system?
- [14:22]
Emma Pinchbeck
I think market design. There are like 10 people who are really nerdy about market design in the uk. I have occasionally been one of them in this job. I should say the Climate Change committee doesn't work on policy design. And the reason is it's because in every, and this is to a point, good or bad, in every decision you make about the energy market and its structures and policies, there's normally a winner and a loser. And that takes us quite into political
- [14:43]
Robert Bastow
territory that we wouldn't argue that if you could demonstrate that renewables were rewarding people directly in their pocket support for the kind of things you think as the Climate Change committee need to take place in the UK to get us to net zero would be much greater.
- [15:01]
Emma Pinchbeck
So we'd agree with that bit in that our recommendation was move the levies. So you get the cheap electricity signal through early and pre the2030s when we're expecting it to come through the markets. As older renewables projects roll off the contracts you're talking about on CFDs and elsewhere. And the merit order starts to change in this period where the merit order, this is the thing where gas is still setting the price in that stack, that will change over time. When we were looking, when I was spending a lot of time looking at market design, most of the alternatives have drawbacks as well. So if you look at. We do if you look at pay as bid or pay as clear auctions, which is different ways of doing the auction stack, you get competitive behaviors that are less, less good from a different kind of auction system because they're not incentivized to bid their literal costs. In other systems where that's the case, they start to gain the system. After the 2022 crisis, Spain implemented a system where they started to separate off the gas and electricity price by subsidizing the cost of gas to make it cheaper. Italy did something similar. Wherever there were interventions in the market, there turned out to be unexpected trade offs. Like in the Spanish example, it reversed the interconnector flow between France and Spain and then basically Spanish consumers ended up sending their Cheap gas over to France.
- [16:19]
Robert Bastow
Nonetheless, the big fact is we pay more for energy in this country than any other complementary economy. And it's costing households and it's costing businesses and it's making the economy uncompetitive.
- [16:31]
Emma Pinchbeck
Completely agree that the electricity price is a problem. I think the next sentence though often in the political debate is and that's because of net zero or because of the renewables, which is rubbish. Which is rubbish.
- [16:40]
Robert Bastow
Let's just be clear, it's about agreeing it's rubbish. But then why won't they reform the pricing system?
- [16:47]
Emma Pinchbeck
I think and this was like well outside of my current job but when we were looking at the review of electricity markets in my last job, the trade off between do something pre 2000s when we're expecting that low price to start coming through in the merit order to naturally change taking that decision. In the period they were in, this government had a Clean Power 2030 target. There's a huge amount of infrastructure bill to do building the kits, networks and power plants. Investors as you know Robert, aren't fans of change and change to markets in 25 year infrastructure projects mid flight. And I think there was a judgment call between investor certainty to get the stuff built or consumer benefit pre2030.
- [17:29]
Robert Bastow
Let me therefore do some of the work that you don't want to do as a club. So if you look at something like zonal pricing, it is so obviously the case that from basic economics, right, we should not be paying wind farms in Scotland to switch their power off because you know, they can't get it through the interconnector down to London and the southeast where they need it. That's obviously an unbelievable waste. And it's also really bad for the climate as well. And so what they really, I mean, you know what a brave government would have done would have been towards to go to a system of zonal pricing. And then frankly if there were investors in big infrastructure projects who said we only invested on the basis of national pricing, then you have a conversation with them about how you compensate them for the change in the contract. But what you don't do is basically have a situation where you're throwing away cheap clean power at enormous cost both to the environment and to British people. And you don't have the incentives to basically create whether it's battery storage in London and the southeast or new cheaper renewable power.
- [18:42]
Emma Pinchbeck
Yeah, although this very much like the very strong view in favor of zonal. So like my job, I should just say this is giving me post traumatic stress from my last Job, my last job was another thing we should get across to people is how diverse and vast the energy market is and the companies operating within it. And you've got folks who specialize in what we might call, what nerds call the demand side, but like the consumer and kind of services, products, technologies which are smaller and sit this side of the grid. And then you've got the folks who build like big stuff on the other end of the grid. You've got the network companies in the middle. You've now got lots of companies joining those things up. There are very few energy companies that do end to end. And then oil and gas companies are a separate thing entirely. One of the challenges about my last job for sure is that no one could really agree on the right way forward, but there were very strong views depending on which bit of the market you represented, because you had the incentive, depending on which bit of the market you sat in. Fundamentally what that comes down to is a political choice between an immediate consumer benefit in the short term, but maybe risking your long term investment and the infrastructure that you need for 2030, 2040 and beyond.
- [19:57]
Robert Bastow
Or government always has the ability, if the incentives are going to be changed, government always has the ability to change the incentives.
- [20:05]
Emma Pinchbeck
Apart from it took us like five to 10 years to do electricity market reform the last time around. It was slow and complicated because of complexity in the market. So again, I studiously avoided having a dog in the fight in the last.
- [20:16]
Robert Bastow
All right, well, let's put it a different way. How is it therefore, because this is. Must be central to the kind of thing you've got to think about, right? How is it that we are. That you can actually build, you know, wind in Scotland and then not have in place the network that allows it to be shipped to the rest of the uk? How does that, how does that mismatch? I mean that is like the stupidest mismatch of decision making.
- [20:41]
Emma Pinchbeck
Now we're going to do like post 1980s market liberalization.
- [20:46]
Robert Bastow
How does that happen?
- [20:46]
Emma Pinchbeck
Because they're set through two different bits of the market and those two sets of companies are different too. So I think until 2022, this is a, you know, honest assessment. I think from the 1980s in the UK, one of our fundamental problems is post 1980s we've been used to an economy with lots of cheap and available gas. Gas. And over the last, like in my lifetime, over 25, 30 years, we've watched cheap gas become less available. There's more competition from it from Asia and new technologies have come forward and we are in what I always described as the crunchy bit of the energy transition, where you're putting on new technologies and services into an old grid set of policies and set of politics which are entirely geared around the idea that you have like cheap and available gas. And so I think if you think about the network costs or the wind farms, there was an idea that it would be we had more time than we did to get the renewables on and then to get the power phone. So the example you gave of Scotland. Scotland is not going to be a problem post the early2030s because they're building the connection that moves that power. They had the time. What's changed is we've had two now fossil fuel price shocks which have put that pressure quite rightly on the cost of living and the need to do something about bills immediately. You know, if you think about what that's done to the world, to my world and kind of energy conversations over the last 10 years, I think it is entirely welcome that there has been a rebalancing away from we just need to build loads of stuff as fast as possible to how can we get the benefits of that new infrastructure to people?
- [22:28]
Robert Bastow
So Greg Jackson, who is the chief executive of the energy giant Octopus Energy and is also a partner of this podcast, he says, ludicrously, gold plated. There's way too much being built.
- [22:41]
Emma Pinchbeck
I would have done in my last job where I didn't represent the network companies either, I should add, but I would have done in my last job. Honestly, one of the great gifts of this job for me is that it is a different way of looking at things. I spend my time thinking about 12 years ahead.
- [22:55]
Robert Bastow
Okay, so let's then focus more on the climate side of things. One of the things that people would say is we are now gold plating the journey to net zero in the way that no other economy in the world is doing. We are the holiest of the holy for no benefit either to us or to the world because we're a tiny economy. How do you respond to that?
- [23:31]
Emma Pinchbeck
I was just struck by that language, which I haven't heard before, though I have heard the argument, look, the UK is not the leading nation on a move to net zero. We should get that right. Firstly, we're in a group of, say 10 or so big economies that are moving in that direction.
- [23:45]
Robert Bastow
And so we're not.
- [23:46]
Emma Pinchbeck
But we're not streets ahead of everyone.
- [23:48]
Robert Bastow
Because the political rhetoric of, I don't know, the reform or the Tories would be that we're Somehow ahead of, of comparable nations. But you don't think we are.
- [23:56]
Emma Pinchbeck
I think we can be rightly proud of the track record in this country and that emissions are very measurably, tangibly, factually down over half now from 1990 levels.
- [24:06]
Robert Bastow
What stately or you know, hair shirt or.
- [24:10]
Emma Pinchbeck
No, I wouldn't describe us in that way. And a lot of those emissions have been reduced through the investment in renewables over the last 15 years.
- [24:19]
Robert Bastow
So who's further ahead than us?
- [24:20]
Emma Pinchbeck
I mean, it depends on how you look at the question. I would argue that that China and a lot of the Asian economies that are electrifying very quickly are leaders.
- [24:30]
Robert Bastow
So you're saying they're catching up really fast.
- [24:32]
Emma Pinchbeck
I think over the last few years we've started to see data points, for example from China that show that their electric vehicle rollout is starting to eat into their oil demand. They've been building coal fired power stations, but many of them will be mothballed. They're not getting money for them through their equivalent of our capacity market which procures power plant out for security supply reasons in the future because that market's being eaten into by their renewables fleet. Now there is a fascinating economic model coming from China where they are building energy resilience through electrification as well as in all of the above strategy. But they're going for electrification because they think they can own that bit of the economy. And the thing I was going to say is what's the argument for us doing it in the uk? Well, it's.
- [25:20]
Robert Bastow
So it's more to do with security of supply.
- [25:22]
Emma Pinchbeck
I can give you the climate answer, which is 40 to 130 billion of avoided impacts.
- [25:29]
Robert Bastow
But is that really true, that simply through our we will still in the UK get to 130 or 140 billion of savings of climate related costs just through our own.
- [25:46]
Emma Pinchbeck
That's just climate damages. So the savings are bigger because even
- [25:50]
Robert Bastow
though, you know, we're an island in an enormous world of people spewing out CO2, you know, even our little bit will save us money. Yeah, Emma, we're nowhere near getting to the bottom of all of this. Much more to talk to you about, but we're just going to go to a quick break.
- [26:10]
Podcast Host/Announcer
This episode is sponsored by Starling, the bank that helps you organize your money, build great habits and stay in control of your spending. Now, I talk a lot about financial literacy and its importance in our economy. You know, giving people knowledge but also confidence with money too. And Starling reckons anyone can be good with money and you can start simply by checking your balance daily. It gets easier every day and it takes the mystery out of it and then the real value comes from digging into the details with tools like Starling Spending Intelligence. So this is an AI powered search bar within Starling Current Accounts where you can ask a question about your spending habits and get an instant answer in app. It helps deepen your knowledge and make more informed money decisions. It's a little like having a financial copilot in your pocket mapping out exactly where your money goes. Search Starling bank to find out more Good with money starts here. Did you know about one in three people with plaque psoriasis may also develop psoriatic arthritis which causes joint pain, stiffness and swelling. Does this sound like you listen to what it sounds like to be a million miles away? Trimfya Guselcomab, taken by injection is a prescription medicine for adults with moderate to severe plaque psoriasis who may benefit from taking injections or pills or phototherapy. And for adults with active psoriatic arthritis, serious allergic reactions and increased risk of infections and liver problems may occur. Before treatment, your doctor should check you for infections and tuberculosis. Tell your doctor if you have an infection, flu like symptoms or if you need a vaccine. Imagine being a million miles away. Explore what's possible. Ask your doctor about Trimfire. Tap this ad to learn more about Trimfire, including important safety information.
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Emma Pinchbeck
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Robert Bastow
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Emma Pinchbeck
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- [28:44]
Emma Pinchbeck
I always used to think in my last job when the energy sector is saying we think the fuel of the future is electricity, standing in the way of that is kind of like the people that looked at steam engines and thought, nah, I'll stick with the plow, thanks.
- [28:56]
Robert Bastow
You know this is obviously going to be worrying if you're a Gulf state, but there is quite a lot of data already that what's happened, you know, in terms of the Trump's Iran war is already accelerating lots of countries.
- [29:07]
Emma Pinchbeck
Electric vehicle sales.
- [29:08]
Robert Bastow
Yeah, electric vehicle sales, investment in wind farm, solar and all the rest. So you know, we think at household level.
- [29:15]
Emma Pinchbeck
By the way, there's a Cost of living crisis and that hasn't gone anywhere. Debt on the energy suppliers books is higher than it was in 2022. People can't pay their energy bills, which is the point of this conversation. But if you have solar PV and a battery today, a typical household will save money. If you drive an electric vehicle today, you will be saving money. If you have a heat pump and a battery and a solar panel and a flexible tariff, you will save money today. If we did something about electricity prices in this country by moving the levies off, just that move alone, households start to save money and then if there is another price shock, a household with these technologies then versus carrying on as we are is 15 times less exposed.
- [29:56]
Robert Bastow
That's great. Why isn't the government pouring money giving every home the ability to have battery storage and solar power?
- [30:04]
Emma Pinchbeck
So the one thing I wanted to get off my chest in this conversation from having sat in the chair in 2022 when we had to figure out a response. We are connected. With these big global markets, it's very difficult for us to do anything about supply. Honestly, I spent a pregnancy walking everyone up the hill that we couldn't fix the energy crisis. I've got a very I knew based on how big I was about how far the conversation had gone and how much we had to fix before imminent baby like he's now 4. You think we'd have learned some lessons, but we spent a lot of time walking everyone up the hill that there were very little tools on the supply side of energy. New power plant, North Sea, you name it. We have so few tools because we're connected to this global market and we're not and never will be a price setter. And we have a very gas based economy.
- [30:57]
Robert Bastow
Exactly.
- [30:58]
Emma Pinchbeck
So you can't fix it on the supply side in a quick way that helps people. What you can do is do something about demand. We have a huge amount of gas going into heating in this country relative to other parts of the uk. Part of your question about why have we got higher prices? We have more gas coming in, half of it is going to heating. We haven't invested in an energy market that can reward people for having flexible tariffs and services. We've put all our costs onto electricity, not gas. So people are not incentivized to get an electric vehicle or or a heat pump. We have not thought about any of these technologies or energy efficiency as a way of managing energy security. And that was the one thing we learned about 2022. If you want to do something fast to help people Roll out insulation, roll out heat pumps, roll out electric vehicles, get your electricity price down, help industrials get clean electricity. Yes. Sort out your infrastructure on the supply side, but do a lot more on demand.
- [31:52]
Robert Bastow
Yeah. So why, why on earth is the government's response? There's bits of money going in that direction, but not enough.
- [31:59]
Emma Pinchbeck
I mean, I'm now a well behaved public servant, as you know, so.
- [32:04]
Robert Bastow
Yeah, but you're supposed to give, you're supposed to give impartial advice.
- [32:07]
Emma Pinchbeck
I'll tell you what, the citizens, so we do social research with citizens and some of that I think gives a clue to the politics, which is it's challenging. People are skeptical about interventions in their homes. So you have to work, you have to explain to them the benefits of this. They read a lot of misinformation about climate change and technology. So you have to get over that hurdle. They are a new technology, so they want specialist comms and support with them. They want their installers to be able to have that conversation with them. So there's a real need for communication. Communication is hard and technology takes effort and it's not quick. And then I think the other thing is to get electricity prices down, as the early part of this conversation revealed is really complicated. There are trade offs. Every single change, every single thing you can do to the energy market has a political win or loss to it. In a constrained political environment and in a constrained public spending environment, it can be a hard thing to say, I'm going to move all the levies into taxation, I'm going to move levies somewhere else that comes to it with a, with a short term cost and it, it's a difficult political climate. Now all we can do at the committee is lay out the alternatives, which is one thing we do. So we show them different policy options and where the trade offs are for different households. But fundamentally you do need someone to, to want to own that challenge of talking to households about the change that is coming or own the complexity of making electricity cheap before it otherwise will
- [33:36]
Robert Bastow
be because you'd think that you could put this together in a way that was a vote winner. You know, you say to people, we're going to subsidize this, your bills are going to fall by, you know, a big chunk because it could, you know, because you do it properly, people will pay a hell of a lot less for energy. It's funny that nobody you know is prepared to look through because obviously this is the work, it will be the work of years. It would take you through an election cycle. But it's funny that nobody is putting together a package like this, like that and trying to sell it.
- [34:08]
Emma Pinchbeck
And the deliberative point too, which is when we do these citizens panels, people often come in with questions or skepticism. But in being willing to have a long conversation with them and show them trade offs, the public is smart. They think about the bills all the time and they will happily advise us where they think those trade offs are. They never come out saying we shouldn't do it. They come out saying things like we think that you should put in place support for the vulnerable. But they, they give a clear frame of reference for the transition. None of them think that we shouldn't be doing it or that they can't see the advantages. They just want a politician to communicate the problem better, lead them through the process and make some decisions about the kind of trade offs in a straightforward way. I don't know why, I mean from my point of view, I think that you need to do both things at once. You need to build the infrastructure and you need to think about the bill. And sometimes, sometimes there is a, you can't make those two things meet, but often you can and you should wrap it all together. And especially in the environment we're in, we at the Climate Change Committee really think that, that it is essential we get cheap electricity away. Yeah, if you don't do that, you'll end up subsidizing it somewhere else. We make the electricity price cheap and then people are going to want to adopt electric technologies and happily that will get us a long way down the road to net zero.
- [35:27]
Robert Bastow
I mean, there's one other thing I need to ask you about, but actually one thing, things, you know, just to take us back because I should have said this earlier actually. You know, Edmund, the Energy Secretary, Climate Change Secretary and Desno's did announce what I thought was a pathetically minor reform to the marginal pricing by basically whacking up the tax on the fixed price generators in the hope that they would move to these so called contracts for differences. I mean, even if it, even if it does provide, even if it does put pressure on some of them to change to a different kind of contract that will bring the price down over time for all of us. It's trivial compared to what's necessary.
- [36:05]
Emma Pinchbeck
Well, yeah, it occurs to me that we should explain that as well as the wholesale price in the market, there are these fixed contracts and a lot of energy infrastructure is receiving a fixed price contract for a service one way or the other. But in particular all of the new Renewables projects are receiving this contract for difference, but some of the older ones are on a more direct former subsidy called the renewables obligation. A lot of that tails off in the2030s. There is no question that you're going to start to see changes in the market from the2030s. What the climate Change Committee recommended and what others have suggested is you do something about those legacy costs early to get the cheap price early. And the government moved some of them, some of that legacy price off, but not all of it. Other organizations, including my old one, have recommended things like moving VAT off the bill or looking at some of the other costs and moving those. The Climate Change Committee said the renewables obligation, the feed in tariff and some of those support schemes. So they've done. It's good. They have like done that thought process and moved some. The golden thread for the Climate Change committee, by the way, as much as we care about low bills in the environment we're in, is that we want the electricity to gas price to be at a ratio of 3 to 1. Right? Which is a level of geekery I appreciate for most people.
- [37:23]
Robert Bastow
3 is obviously a magic number.
- [37:25]
Emma Pinchbeck
A successful electrification in other economies, particularly for heat places like Poland or Italy or Scandinavia. The magic ratio for when a investment in a heat pump rather than a boiler, or a electric vehicle rather than a chemical vehicle, when it really starts to pay off is around the 3 to 1 ratio, preferably 2 to 1, but 3 to 1. And so that decision to advise to move the levies in some way is because that chunk on the electricity price is enough to get you to that 3 to 1 ratio, depending on what the wholesale gas price is doing in a typical year.
- [38:03]
Robert Bastow
Now, there's one other thing I need to talk to you about because I know that there's probably not a world in which I can tempt you to say it is, nor, just to be clear, this is not a view I necessarily take. But there are politicians who say, like Nigel Farage, get every last drop of oil and gas out of the North Sea. The sort of climate argument that some make for more exploitation of the North Sea is that the climate costs, while we still need oil and gas in our economy, the climate costs of importing it on tankers, of actually getting it from fields where they themselves in the way that they extract the stuff, is less climate friendly. So there are those who say the reason we should simply get every last drop out of the North Sea, it's not because it's going to bring the price down here very Much climate, but actually the climate costs of exploiting stuff that's near to us in our much more responsible way makes that the right thing to do.
- [39:12]
Emma Pinchbeck
So firstly, it's a good thing that we've now set a baseline that says the North Sea won't change price because it's sold onto a global market. And that is a change, I think from my experience of 2022 and the last energy crisis where the knee jerk response was we'll do the North Sea and that will help. Let's just be clear. There are two ways you can get it to reduce bills. One is if you nationalize the industry, which I would argue is quite an expensive thing to do in the middle of a crisis where their profits will be higher. Or two, and it's also mining basin. So I'm not sure. Yeah, that would be the best possible investment. But also the other is you could hypothecate all of the revenue and, and use it. But then you're saying you're going to do that whilst also saying you're going to send a strong investment signal to private sector companies to invest. So I, I practically, yeah, it's very hard.
- [39:58]
Robert Bastow
I agree.
- [39:59]
Emma Pinchbeck
It's not going to do much for bills. So that's a good thing that we're clear on that. On, on carbon, again, it's because it's a international market. The same thing applies which is, yes, on paper, imported LNG has about, I think, three times the emissions footprint of the North Sea. The Norwegian gas pipe from the other side of the basin is about a quarter of the emissions of North Sea. And that's because the Norwegians have done a lot more in terms of the carbon intensity of their production over the past 15 years. 70% of our gas is piped from Norway. Right. It's only about 30. That's on, on LNG. And, and the bigger thing here is I. So if you were to choose to invest in an Aussie, would that change any of that import, export balance? Possibly not, because it's sold on. Well, it's maybe a bit, but it's sold onto an international market you might like. Maybe, maybe it might impact some of the stuff coming through the pipeline, but then you'd be replacing less carbon intensive Norwegian gas maybe with more carbon intensive North Sea gas.
- [41:02]
Robert Bastow
Can you be certain about demand? Because one of the things, again that seems to me to be the problem with where we are now is all sorts of things have been built, whether it's generation in the wrong places or grid in the wrong places, where patently obviously people were totally wrong about demand.
- [41:23]
Emma Pinchbeck
Yes, because so much of demand is coming from oil to drive our cars and we're already seeing electric vehicles cheaper than internal combustion engine vehicles. So I'm confident about that change and I'm also confident about renewable energy.
- [41:34]
Robert Bastow
So just to be clear, you think that the changing structure of the energy market means we can be more scientific in forecasting, Is that what you're saying?
- [41:41]
Emma Pinchbeck
It's no, just that the energy transition in the long run is pretty clear. So a lot of what we've been talking about with the markets is also a relatively short term, if painful and we should do something about it problem that generation and the network build out on the power sector is done by 2035. That's the power sector is mostly done. And once it's built, you start to get the market changing around those technologies fully. Some of the things you're talking about with constraint payments for wind or with the merit order is because of the moment we're in right now, it's not where we'll be by 2035. There's a need to do something about bills right now, but it doesn't mean that bills in the long run are going to stay where they are. They will start to come down on the energy system as a whole. I'm talking about, we use energy right across the economy about 1800 terawatt hours worth. 1400 terawatt hours to 1500. It comes from oil and gas. If you follow a net zero trajectory because you're electrifying so much more of the economy, you get to not self sufficiency, but only 280ish terrawatt hours of oil and gas left. That is a massive change. It's £40 billion worth a year of avoided costs of importing gas and oil to run the economy, plus all the savings you're getting from a more efficient energy system, plus the avoided climate damages, plus these technologies are also efficient at a household level. A heat pump is three to four times more efficient than a gas boiler. You use less primary energy to have the same output in your economy. There is no economist in their right mind that will tell you that that's not a better world to end up in.
- [43:15]
Podcast Host/Announcer
Of course.
- [43:15]
Emma Pinchbeck
And as a consequence you also save yourself from the kind of volatility of fossil. So that to me looks like we should be focusing a lot more of the conversation. How do we reduce our demand for this commodity which is volatile and unproduct predictable and the fact that you can do that whilst also delivering on the calm budgets is a nice thing for my job, but I would have been saying the same thing in my previous job and did at the time of the 2022 crisis.
- [43:37]
Robert Bastow
All right. Unfortunately, we're almost out of time, but I have got one final question, which is we've agreed that the destination of self sufficiency with clean energy is a very attractive destination. Right. Why is it so apparently politically unpopular and what does any government do about it? I mean, obviously there are, you know, people within the Green Party, people in the Labour Party who believe in all of this stuff. But that's, you know, where. But the government is currently massively on the defensive. Right. I mean, all the debate in energy that seems to matter at all in this government is should they open up the North Sea more or not?
- [44:20]
Emma Pinchbeck
Not.
- [44:20]
Robert Bastow
Right. Which, you know, from the point of view of the big Prize is sort of neither here nor there. I mean, I understand why it's politically an issue at the moment, but actually in the context of our energy needs, it's sort of trivial. And the big, the big goal ought to be to stop, whether it's Putin or Trump being able to blow up our economy, which they do when they, they, you know, embark on these wars because of our dependence on imported energy. So why, if you, if you were, you know, if you were prime minister, how would you sell this?
- [44:58]
Emma Pinchbeck
Energy is really misunderstood. I don't think people realize how fundamental it is to the cost of absolutely everything. In 2022, our tomatoes were 40% higher in cost because of the cost of fertilizers and the cost of heating greenhouses. I think the Food and Drink Federation is saying food price inflation will go up 9% this year and a lot of that will be the energy inputs. It's the cost of red diesel in tractors. It's the cost of your family holiday because the price of jet fuel. It's the cost of making the things that we use in the economy because our industrial electricity prices are higher. And it's the cost of your energy bill. So I think you have to have a conversation with people about this. Yes. Being about doing our bit to prevent really damaging climate change impacts which are real and tangible and happening now. And also about powering the economy of the future, that in order to get there, we have to build some stuff now. I don't think they've done that. I very rarely hear that first case principle. So that's the first thing. I don't think people understand how important energy is. I don't think, as this conversation illustrates, people Understand how complex it is. There are very few simple answers in energy. There are in the long run, but in the short run, all of them have cost benefits, trade offs and others. And I think we need to have a much more honest conversation with people about those trade offs, more debates like this one. And the third thing I think is I think you have to have people who can do the big kit and the, and the impact on people at the same time and work out where the balance between those things is. So you need to think about the impact on the energy bill. Right now there is a cost of living crisis. We need to get the price of electricity down. You need people who can think about retail policy. You mentioned the chief executive octopus earlier. You need those people that are all about tariffs and services and getting kit into people's homes to be having an argument with the people that want to build big stuff and kit and grid and to be willing to then, as a politician, make a bold judgment call about which world you're in and then explain it honestly. Does that sound like something that is easy to do in the political climate we're in where it's quite short term and immediate and it's hard to have like big complex debates and lead with nuance? No, but that doesn't mean that it's not the right thing to do. And when we get our social research back, that is the thing that people are crying out for. The most common thing that is said in our citizens panel work is, I didn't know this information. Why didn't anyone tell me this? I wish I had time to understand this. And they often come out of that deliberative process in a very different place. And it's not because we're going in to change their minds, we're just giving them evidence as we are. It's not our job to campaign for an outcome. It's our job to kind of show people the evidence and show politicians the evidence. More of that. I feel like I'm the queen of nuance in an age of where you're supposed to have an immediate short term
- [47:54]
Robert Bastow
solution, but people are not particularly. Politicians don't appear to be rewarded nuance these days, I think.
- [48:01]
Emma Pinchbeck
Thank you for giving me that bad news. But you could also, I mean, there are things we can do. If you made electricity cheap now, if you did some of that policy change, if they'd gone a step, you go a step further on the renewables obligation. If you make some bold moves now, you will get short, medium and long term payoffs for it. For the economy. So I appreciate it's a really difficult time for everyone and a difficult time for politicians. But we do need some big choices to happen. And for them to happen now, leadership,
- [48:29]
Robert Bastow
that's what we need. Anyway, if we've been trying on this with this conversation to get the facts and information out there. Well, let's see if, you know, let's see if Rest is Money listeners feel, you know, happier, more confident about the transition.
- [48:49]
Emma Pinchbeck
I look forward to the emails of marginal pricing.
- [48:52]
Robert Bastow
Yeah. My favorite subject, as you probably worked out. Emma, as always, very good to see you. And that's it for this edition of the Rest is Money.