“There is a pervasive misconception that switching to clean, green energy will be painful, costly and mean sacrifices for us all – but that’s just wrong.”
Professor J. Doyne Farmer
After nearly two weeks of focusing on greater things, the United Kingdom will now be returning to reality with a massive bump. The pound has collapsed against the US dollar, driving inflation still higher as the cost of imported goods increase. And, in a couple of days’ time, the Bank of England will announce a swingeing interest rate rise — some estimate it could be as high as 0.75% — after deferring their decision for the past fortnight.
Meanwhile, the Government announcement of an energy price freeze may provide some solace for cash-strapped households and businesses, but it won't answer all the questions; and it could result in a massive increase in the national debt. All the time, the war in Ukraine — which has caused all this stress — grinds on.
There are, however, some real grounds for optimism: the most important of which was almost totally eclipsed when it was published last week. They may explain why Liz Truss was right to place so much emphasis on energy supply when opening the energy debate in the House of Commons on 8th September.
The ground-breaking announcement from the Oxford Institute for New Economic Thinking is that decarbonizing the energy system by 2050 could save at least $12 trillion compared to continuing with our current levels of fossil fuel use.
Investment seminars have been pointing in this direction for several years : in particular, I recall attending a Miton presentation, and reporting it in this commentary (14 Oct 2019), showing how in the United States there was a steady build-up of renewable energy generation in Republican States, which otherwise might be expected to support fossil fuel use.
The Oxford research, however, provides in-depth analysis with strong support for a massive and swift move away from fossil fuels. No doubt it is this same logic which has fuelled the huge investment commitment to X-Links, on which we commented on 25 April.
There are three truly massive upsides which will flow from this transformation, both from the reduction in the cost of, and the resultant investment in, renewable energy: climate change, economic stability, and the opportunity for peaceful co-existence.
The climate change benefit is obvious, of course, but it will not come fast enough to reverse the massive disruption that we are already starting to experience, most recently in Pakistan, or to stop a significant rise in sea level. We will still need mitigation measures, such as the barrage across the Straits of Gibraltar of which we spoke on 5 August 2019.
The economy will benefit hugely from the whole scale re-evaluation of the cost benefit of heading for net zero. As we have discussed over recent weeks, energy is such a huge proportion of the economy at all levels: household, business and Government. Traditional economics draws its distinction between the duality of capital and labour, but energy is just as vital a component in keeping the wheels turning.
So a big fall in the cost of energy, which should start to be apparent within the next couple of years as North Sea wind farms and other initiatives come on stream, will not only reduce direct costs but also enable a recovery in the exchange rate as supply is brought more into balance. There are even voices increasingly speaking of the UK becoming a net exporter of energy.
So inflation will fall from these painful levels and interest rate rises should be relatively short-lived, although we should still expect big increases in the short-term in order to hold back translation into a wage-price spiral. That’s no doubt why Liz Truss is proposing fracking and extracting more oil and gas from the North Sea, but hopefully her weekly conversations with King Charles will help keep the extent of these in check. Meanwhile, those conversations between the Chancellor and the Bank of England Governor will have developed a clear understanding of how to hold back the domestic economy with higher interest rates while at the same time energising growth, investment and exports by cutting taxes.
Short-term pain, long-term gain.
But most importantly, a massive rise in renewable energy generation will remove the stranglehold with which Putin is trying to throttle western democracies. If the current energy supply imbalance is removed, it would require Russia to think again about behaving in a civilised fashion.
Meanwhile western democracies are now fully aware of the risks of such a high trade imbalance with China: and, once that is addressed, perhaps peaceful co-existence is something we can look forward to.
Finally, when the world is running on a steadier foundation, we can make it permanent by introducing a more egalitarian form of capitalism which properly respects social justice, individual freedom and enterprise in all countries and for all people, no matter what their circumstances or background.
So — the Oxford research is hugely significant and deserves plenty of attention. let's hope it turns into reality as soon as possible.
Gavin Oldham OBE
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