EU Energy Policy Blog

The American natural gas sector has undergone a ‘quiet revolution’ in recent years spearheaded by new innovative drilling techniques. These have given greater access to unconventional gas supplies, particularly so-called shale gas. With these new supplies the American gas market has soared; shale gas is now responsible for about 20 per cent of total US gas production while back in 2000 it was still in single-digits.

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Climate negotiators recognize that, at root, the climate problem is a free-rider problem. Each country would prefer that the others do more. But the free-rider problem is not immutable, and that has been overlooked. The design of agreements can exacerbate it or alleviate it. Instead, the implicit assumption has been that it must be overcome by moral suasion and scientific argument, both of which are weak instruments when dealing with national self-interest. Because of this oversight, both Kyoto and Copenhagen negotiations followed a global cap-and-trade framework, which has proven ineffective. We find that adopting cap-and-trade rules polarizes the free-rider incentive and discourages cooperation.
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The UK energy and climate change policy is failing, and failing at a high cost. Electricity bills are going up as consumers are asked to pay for ever increasing subsidies to renewable energy, the deployment of which does nothing to reduce greenhouse gas emissions. The situation will get worse as other low-carbon technologies ask for, and obtain, specific subsidy schemes based on the argument that they, too, are ‘needed’ to de-carbonise the economy.
These patchworks of support mechanisms are destroying the electricity market, creating unmanageable uncertainty for non-subsidised investments. The claim that ‘the market cannot deliver’ is a self-fulfilling prophecy: ill thought-out interventions destroy economic mechanisms, leading to major uncertainty and underinvestment, leading to more intervention.

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Mention nuclear power and most people think big, a 1,000 to 1,400 MW reactor, or a cluster of reactors, on a gigantic site quietly humming and feeding juice through massive transmission towers to the grid. This has been the traditional business model to capture the full economies of scale of nuclear power. Since it takes massive amounts of investment and many years to build them, why not build them big and make them last? Over the years, nuclear reactors have grown bigger, more expensive and more complex.
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