December 06, 2006

Comprehensive energy policies

A former secretary of the UK cabinet discusses the need and shift to more comprehensive energy policies that take into account all costs

A good modified market energy portfolio should take into account the volatility of the availability and price of different fuels.

Natural gas, as the world has witnessed, can fluctuate enormously. In the U.K., the spot price of natural gas doubled between 2004 and 2006. Even more damaging were two price spikes, in which U.K. gas prices briefly rose about 400 percent. Importing nations, in particular, have little recourse if suppliers raise prices suddenly (as Russia’s Gazprom has done) or supplies approach a natural peak (as has been predicted for oil). Other fuels are relatively stable; once reactors are built, the price of nuclear power remains relatively constant. Nuclear power can therefore take the role that bonds play in a pension fund: not necessarily the highest-yielding asset, but one that reduces volatility.

Recent analysis conducted by the U.K. government shows that nuclear power would be viable over a wide range of scenarios. It would struggle to compete only if gas prices and the shadow price of carbon were both low. That combination is inherently implausible, however; it would almost certainly lead to a higher shadow price for carbon, bringing nuclear power back into contention.

A consensus is building in Europe and North America with respect to global climate change and energy security, and it is coupled with a growing sense of urgency. We now have a moment of opportunity to create a framework that enables the essential energy choices to be made — not by dictating them, but by providing open competition and building all the relevant factors into the marketplace where choices are made.

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