Stop arguing about Net Zero badly

It's not just an argument about principles, there are real, difficult trade-offs to consider

POD! On YIMBY Pod this week, Martin and I tell the respective stories of why we both decided to get solar recently – and Martin risks cancellation with his opinions on electric cars. Then we speak to Ben Garratt from Logistics UK about why, well, logistics, is an underrated part of getting Britain growing. Listen here or wherever you get your pods!

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“Net zero scepticism is not climate-change denial,” wrote Kemi Badenoch at the end of last week, in a blog post.

It was in response to a frankly surprising column by Ambrose Evans-Pritchard¹ in the Telegraph, criticising her purge of prospective Conservative candidates who don’t share her desire to repeal the Climate Change Act, and other measures that have been put in place to tackle climate change.

Leaving aside the fact that ‘prospective Conservative candidate’ sounds like a position about as enviable as Trump Administration ethics advisor, it was a striking moment. Not just because it barred well-known figures like former cabinet minister Michael Green Grant Shapps from standing for the party, but because it seems like the end of an era.

Wherever the party goes now, it seems a long way from David Cameron’s ‘hug a husky’ moment, Theresa May’s passage of the 2050 Net Zero target into law, and Boris Johnson hosting the COP climate change summit in Glasgow.

Needless to say, then, Badenoch’s response has proved extremely controversial. Many people on my timeline were quick to jump in, snarking at Badenoch for questioning the wisdom of Net Zero during a historic heatwave, when the stakes of the climate change debate have been made clear by nature itself.

But there was something that bothered me about the response on my half of the political spectrum. I’m worried that many people on my side – the lefty side – aren’t quite grasping the contours of the debate. Because it’s much easier to argue about the principle of Net Zero, where the answer is unambiguous – obviously we should decarbonise – than it is to engage with the actual policy choices that Badenoch is disputing.

Because here’s the worst thing about Badenoch’s Net Zero criticism: she might have a point.

Now, I’m not saying that I agree with her diagnosis, or her prescription. But what’s clear is that if you take Net Zero seriously, under the high-level argument about principles there are actually some difficult trade-offs we need to navigate.

So let’s dig in and find out what they are.

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The complexity of energy pricing

The reason the Net Zero debate often defaults back to abstract principles is that understanding energy pricing is unbelievably complicated. But let’s run through some of the basics to make sure we’re all on the same page.²

First, the price of electricity is always changing and is pretty volatile. In principle, the price is set by the amount of energy being supplied in the system and how much demand there is for that energy at any one time.

Secondly, because the plug sockets in your house don’t care whether the electricity came from a gas plant, wind turbines or a solar farm, the cost of the energy that reaches your home is heavily influenced by the price of power needed to meet demand at any given moment – which is often gas. This means that even if gas is only supplying 14.6% of the grid – as it is right now at the time of writing – if gas prices rise or fall, it also influences how much money renewable suppliers can earn selling electricity they have generated too.

The consequence of this is that it makes it pretty difficult if you’re an investor thinking of building, say, a wind farm. If you put millions of pounds into building turbines, whether you make back your money is basically entirely out of your control – it depends on what happens with gas. So why risk putting up the cash to build the turbines in the first place?

This problem is why during the Coalition years, the government started a scheme called Contracts for Difference (CfD). The idea was that the government holds a reverse auction where renewable developers bid for contracts guaranteeing a fixed “strike price” for the electricity their project generates.

The developer then still sells their electricity to the wholesale market like normal, but if the market price for their energy is £60/MWh, and their agreed strike price is £90/MWh, the CfD makes up the £30 difference. And what’s smart is that the contracts also work in reverse. If the market price rises above the agreed strike price, the generator pays back the difference.

In the years since, this scheme has basically been wildly successful in supporting Britain’s energy transition. Our electricity is now over 50% renewable. It’s a genuinely huge transformation of Britain’s energy system that has taken place.

But the CfD system does have certain trade-offs embedded within it.

Top-up cash

The benefit of CfDs is that they take the risk away from the renewable generators, which is good for building out renewables. But one consequence of them is that the corresponding gains and losses have to be accounted for elsewhere in the energy system.

To continue the example from above, who is paying the extra £30 to top-up what the generator gets paid, if the market price is only £60/MWh? If the generator was promised £90/MWh, the extra cash has to come from somewhere.

So in the short term, the top-up cash to make up the difference is paid by energy suppliers like British Gas and Octopus, who are charged a levy on the energy they buy from generators. And this – usually – leads to an increase in energy bills as the costs are passed on to consumers.³

For example, the Q3 price levy for this year has been set at £10.559/MWh – or just over a penny per kWh. So for a typical household using 2,500kWh of electricity every year, that works out at around an extra £26 per year.

Ed’s gamble

I know what you’re thinking - £26 per year isn’t that much money. So why did so many people get so mad at Ed Miliband when he was Energy Secretary?⁴

Ignoring the hysterical know-nothing frothing, the serious critique is that he’s basically placed a big bet that might not pay off, and that his choices in his previous job have stored up more energy bill pain at a time when there’s already a cost of living crisis.

This is because so far any levy that has increased energy bills so far is actually a consequence of earlier CfD auctions – those made under previous Conservative governments. The real-world impact of Ed’s choices hasn’t actually been felt yet.

So what exactly did he do? When he took office in July 2024, he inherited the sixth round of CfD allocations, known as AR6, and he chose to pile in an extra £530m to projects representing 9.65GW of generation capacity, much more than had been planned by the Tories.

Then, between August last year and February, the seventh allocation round took place – AR7. This increased the offshore wind budget by £890m, taking it to £1.79bn, and increased the total guaranteed generation across all technologies to 14.7GW.

In other words, he’s been signing contracts that could conceivably lead to an even larger premium on energy bills in the future, depending on future wholesale energy prices.⁵

And because of his more aggressive approach, it’s also conceivable that the hit on bills could go higher still. CfD top-ups only pay for the cost of the energy generated, but we will also need to build more infrastructure to actually use it, such as new pylons and substations to take energy to where it is needed. And if we build more renewables more quickly, more supporting infrastructure will be needed more quickly too. So it will probably lead to an increase in standing charges on energy bills too.

Of course, all that said, it could turn out that Ed’s bet will pay off, and that bills won’t increase by all that much as a consequence of these choices. The start of the Iran war in the spring certainly makes his commitments during AR6 seem less crazy. Because if we’re now facing years of structurally higher energy prices, the wholesale price of energy will be higher – meaning fewer top-up fees that need paying and thus a lower levy. Which still won’t be great for bills in the short term, as the underlying cost of fossil fuels has shot up, but it will make the idea of more rapidly building out renewables seem smarter in the long term.

However, this is, ultimately, a bet that has been placed with some degree of uncertainty. And this leads us to something else worth noting about the downside risk if it doesn’t pay off. Which is that though we mostly think about energy costs in terms of household bills, the levy affects businesses too. And this means that any increase in bills could have a larger downstream economic impact in terms of competitiveness, productivity, investment and so on too.

Zero vs Cheap

So what is the real, serious debate at the heart of Net Zero? It’s not about the principle of Net Zero – but a question of speed.

When he was Energy Secretary, Ed Miliband chose to optimise for speed, in order to meet the Labour manifesto’s Clean Power 2030 commitment – which pledged to have a 95% Net Zero electric grid by the end of the decade.⁶

And as per the wildly complicated explanation above, what this essentially meant in practice was a commitment to front-loading more of the costs of decarbonising now, instead of spreading that commitment out over a longer period of time.

This is why the policy has been repeatedly attacked by the Shadow Energy Secretary, former YIMBY Pod guest Claire Coutinho. She instead argues that it is more important to optimise for making energy as cheap as possible – which implies a slower transition as it means fewer risky bets on CfDs, and fewer top-up fees put on energy bills.

And what I think is interesting about this debate is that there isn’t really a clean answer here.

On the one hand, if we optimise for ‘speed’, we can choose to decarbonise the grid quickly. This would increase bills in the short term, but it would pay off in the long term, when we would have more, cheaper, clean energy – not to mention the political benefits of a more resilient energy system that is less exposed to international turmoil. We’d also be setting an example internationally, and would further reduce Britain’s contribution to global emissions.

But on the other hand, if we optimise for ‘cheap’, we could help people with the cost of living in the short term, and reduce the cost burden on businesses – but at the cost of leaving us more exposed to Putin, and pumping more carbon into the atmosphere.

Details, not principles

At risk of giving you an unsatisfying conclusion, I think both sides of the debate make strong arguments. There are real trade-offs involved, and I say that even though I’m a solar panel guy who cares deeply about climate change and the principle of Net Zero.

But there are obvious challenges to the speed approach. For example, ultimately Britain’s actual contribution in terms of carbon emissions is tiny. We’re responsible for less than 1% of global emissions, so what we do with our grid doesn’t really matter all that much, whatever we do.

That’s also why I think Tony Blair is right that the most effective thing we can actually do is use our scientific and financial muscle to support India and China’s development needs by pushing them in a cleaner direction. What those two countries do is basically going to entirely determine whether the world mitigates climate change or not.

So if our scientists can, say, invent solar panels that are 1% more efficient and their innovation is deployed globally, that will matter far more than the exact proportion of renewable energy on our grid.

It’s also why – and I hate that I’ve reasoned myself to this view – I’m not that fussed if Andy Burnham decides to allow more North Sea drilling. The emissions impact would be small,⁷ and it would, more importantly, neutralise a dividing line between Labour and Reform, making it more likely Labour will be reelected and that we’ll actually still have people who believe climate change is real in power.⁸

But despite this, and though I am a staunch advocate of cheap energy abundance, I also want it to be clean. And that’s why I think the “cheap” advocates have a flaw in their argument.

Despite the current debate, I still haven’t really heard an argument from Kemi Badenoch or any other sceptic of the current policy about what a path to Net Zero actually looks like if we dump the current approach. Like, what should the revised timeline look like?

And this is why despite recognising the criticisms, I’m sympathetic to the fact that the Ed Miliband approach actually grapples with the need to decarbonise. If there is one iron rule of British politics, it is that politicians love to kick the can down the road – so is there not something to be said for actually doing something?

So even if we slow the Net Zero transition now because of our current economic woes, at what point will it ramp back up? This question matters, because if the world doesn’t mitigate climate change, that too will not be costless in terms of global population displacement, crop yields and increasingly catastrophic weather.

And this is ultimately why I think that despite the difficult trade-offs, on balance I’m on Team Speed. Well, perhaps more accurately Team Tony. But more importantly, instead of just snarking about abstract principles, I’m happy to admit that when you look at the details the choices become rather complicated.

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1. Yes this is a real person and that is his real name. No prizes for guessing what sort of school he went to.

2. This footnote is a polite request for energy industry professionals to forgive any simplification here for the sake of making something impossibly complicated vaguely palatable to normal humans.

3. The thing I haven’t mentioned above as it makes the explanation even more complicated is that consumer bills are also mediated by the price cap, which is set by the energy regulator Ofgem.

In theory, Ofgem could conceivably force energy generators to absorb the extra levy costs themselves, without passing on the cost on the cost to customers – but in practice this would just lead to a bunch of energy companies going bankrupt, like we saw at the start of the Ukraine crisis when the price cap did not keep pace fast enough with the rapid rise in the cost of energy.

(And even if we somehow created a glorious socialist future under Commissar Zack Polanski, with a single nationalised electricity company – or a return the old system of regional electricity boards – the added costs if not covered through the cap would still be passed on to consumers but through taxes instead.)

4. Something I find consistently funny is how Ed Miliband is often spoken about by people on the right.

If you listened to the most hysterical people on the website we used to call Twitter, you would be forgiven for thinking that if ‘Red Ed’ had been made Chancellor, then the first weeks of Andy Burnham’s premiership would not have been spent capping bus fares, but collectivising the farms and liquidating the bourgeoise.

5. It won’t just depend on wholesale prices – whether or not the bet pays off will also depend on other impossibly complicated factors, like balancing costs, and backup capacity. But my point is these factors are pretty unknowable when the decision is made, so the decision has to be made with a degree of risk baked in, and Miliband has baked in slightly more risk.

6. The headline claim during the election was to have an entirely Net Zero grid, but when it came to actually working out how to deliver it, the official DESNZ policy landed on a 95% clean grid, with 5% left for unabated gas to cover when we absolutely need it. Presumably this is to cover base-load, when the sun isn’t shining and the wind isn’t blowing, because there’s no way we can build Sizewell C to cover this before 2030.

7. Not least because it would take quite a long time for the new capacity come online, meaning that it won’t actually make much of an impact on bills in the short term anyway.

8. There’s also an argument that North Sea oil and gas is cleaner than fossil fuels sourced from elsewhere, because our drilling is better regulated, and we don’t have to transport it over long distances. Which is an uncomfortable argument to make as it’s like arguing that smoking just one cigarette is better than two, but it’s still a still true argument.