The full cost of energy

Energy prices have hit the headlines. Consumers are not happy. The media is angry. The government is wrestling with long term policy challenges around competition, renewables and security of supply. I am, of course talking about the UK. But I could just as easily be talking about the Philippines. Energy challenges are tough. The right policy requires finding answers to the question — what is the full cost of energy?

There is the price that we as consumers are charged through our monthly energy bills. In the UK, we are acutely aware of the social price that is paid when consumers, particularly those who are vulnerable, pay a high proportion of their income in energy bills —  known as “fuel poverty.” Britons need energy to keep warm. The Philippine Institute for Development Studies estimates that up to 16 million people in the Philippines have no access to electricity. Millions more want to switch on a light, charge a phone or power fans.

In the UK, we are tackling the problem of costs by addressing imperfections in the energy supply and distribution markets. By making it easier for consumers to switch suppliers, encouraging competition and welcoming foreign investment, we believe we can offer consumers a better deal. Our experience in Britain tells us that the nationality of our utility companies is immaterial. We benefit from global capital, technology and greater choice. Helping consumers become more energy efficient is another big part of the plan.

While consumers want cheap bills, investors require reasonable returns. Get this balance wrong and energy shortages are the result. The price of power outages and insufficient supply is paid by many. The social costs are high but the economic costs, reduced economic activity and jobs, are higher still. The most important factor is certainty: when investing for 20 to 30 years, energy companies need to know that the policy and regulatory environment will set prices that allow them to make a return on the capital they have risked.

Some argue that subsidies are the answer to keeping costs down. But the Philippines is ahead of the curve by not having open ended support mechanisms. Subsidies mean that the consumer pays the price twice, once through their bills and again through their taxes. Subsidies create perverse incentives that have very negative economic effects, especially in the developing world and disproportionately benefit richer members of society. Subsidies are unaffordable and become overtly political.

There are costs to the planet too. An over-reliance on fossil fuels, in particular coal, is one of the prime causes of global warming that is perhaps the greatest risk the Philippines faces.  Typhoon Yolanda was a shocking example of the greater intensity of weather we now face. The cost of climate change, if it is not tackled by every single country, will be catastrophic. Gas is cleaner, even though it can require more upfront investment to put in place the necessary infrastructure.  The Philippines has further potential in renewables including solar, biomass and geothermal sources.

There is no one solution to energy policy. Countries face difficult choices to balance the range of risks and opportunities. There are, however, some policy principles that can work for all of us. Competition and smart regulation is better at delivering energy at affordable prices than subsidies or monopolistic, public or private, enterprises. Short term price caps may appear attractive but there is a longer term price to be paid if investors are discouraged and capacity fails to keep up with demand. An even bigger cost will be to the environment if carbon emissions and wasteful use of energy increase on current trends.

Each country must find its own route to energy and climate security. Around the world, the public, governments and businesses need to weigh up the full cost of energy in search of solutions.

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(Asif Ahmad is the British Ambassador.)