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carl mortished

It's cold in Britain. Not the cold Canadians would recognize, but subzero temperatures with heavy snowfalls so early in winter are unusual. The stock of Victorian housing is ill-equipped for cold, which puts extra pressure on National Grid, the utility that runs the gas and electricity network, to maintain supplies.

More than ever, electricity in Britain is about fossil fuels. About 80 per cent is produced by burning coal and natural gas (split roughly 50-50). The third main source is nuclear reactors, supplying 12 per cent; while the rest comes from pumped storage, oil, and imported electricity from French nuclear power stations. The final supply source, and most certainly least, is renewable energy.

Britain has built 2,400 megawatts of wind-turbine generation capacity, but on an cold Monday the windmill fleet was generating less than 450 megawatts, about 0.8 per cent of total electricity demand. Notwithstanding their erratic performance, Britain is committed to increasing windmill capacity to 32 gigawatts by 2020, from the current 2.4 GW.

As the UN Climate Change conference convenes this week in Cancun, Mexico, it's worth asking why in our efforts to reduce our reliance on carbon we continue to plow the same old furrows with inadequate tools.

The first, and simplest, reason is that there is no global political consensus to do anything significant to cut greenhouse-gas emissions. Emerging countries won't cut carbon for fear of hindering growth and job creation, and richer countries won't pick up the tab after a nasty recession.

The lower-carbon job has been dumped on the private sector and herein lies the second, and more troubling reason, why the world is failing the carbon challenge. The pursuit of new energy technologies is high-risk and non-cash generative.

That is a problem for energy companies, such as the German utility E.ON, and the oil and gas multinationals, such as ExxonMobil, Shell and BP, which are under pressure to pay ever-higher dividends to support pensions. Together, Shell and BP account for between 20 and 25 per cent of the dividends paid out by stock-market quoted companies in Britain. Their solution is to stick with profitable, cash-generative oil, gas and coal - businesses perceived to have low investment risk.

However, Vivienne Cox, a former director of BP and now chairman of Climate Change Capital, an investment advisory group, makes a telling point. In a recent article in the Financial Times, she asked whether pension funds rely too heavily on payouts from the oil and gas sector. Pointing to the Deepwater Horizon disaster, which forced BP to suspend the payment of its dividend, she argued that risk is not adequately priced into oil and gas companies.

Ms. Cox calls for the creation of a new market in long-dated "green" investment bonds to support utility investments in "green" infrastructure. It sounds lovely but without the guarantee of "long-dated" government subsidies, such bonds would attract the same risk profile as any low-carbon energy project. It is true that Deepwater Horizon has highlighted the risk in Big Oil's fat dividend, but does it make the potential payout that much less attractive?

Put simply, do you want your pension invested in expensive new nuclear technology, novel biofuels and carbon-capture schemes of uncertain economic value, rather than barrels of oil? You do not and nor would the trustees of your pension fund unless the investment came in a gilt-edged wrapping courtesy of the government.

The taxpayer, however, is exhausted and the British government has ruled out subsidies for new nuclear power. The biggest potential private investor, Electricité de France, is quarrelling with Areva, the supplier of nuclear technology. Last week came the news of fresh delays in Finland where Areva is building its first, third-generation nuclear plant. The project is four years late, cost overruns are €2.7-billion ($3.6-billion) and Areva is haggling over the terms of a capital injection by a Qatari sovereign wealth fund.

Financial markets are notoriously bad at assessing the risks in new technology (consider the boom). It is not surprising that utilities stick to their knitting, even when the knitwear is a knot of leaking pipes and valves a mile deep in the Gulf of Mexico. It's a risk, previously unknown, but in the words of one U.S. secretary of defence, it's a known unknown.