“Not good, but fine.” -- how important to UK growth is getting industrial electricity prices down?
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“I am increasingly drifting into the opinion that [the UK having very high industrial electricity prices] is fine. Not good, but fine” I put on twitter the other day. I followed up with a thread setting out my view that high energy prices were “not good, but fine” but also a smaller problem and of a lower priority than many other restrictions on growth in Britain.
Some people didn’t like that.
A lot of people just didn’t read what I’d written. One commenter, who I felt was rather quick to call me mental, was more gracious in realising that I said “not good” rather than “good” as they had thought. Others were less polite. Christopher Snowdon at the IEA opted for patronising me with a level of rudeness I react more and more poorly to with age. My view may be wrong. It is not “silly”.
Experience teaches me that many of the pompous blowhards I have deferred to in the past turn out to be wrong. I think Christopher is wrong on this topic and out of touch with people who run businesses rather than write pamphlets on the economy and host policy events in Westminster.
There were hundreds of other responses.
My favourite was probably a large venture capitalist expressing their exasperation at my opinion until someone pointed out to them that they live, work, and invest mostly in the mainland US state with the most expensive industrial electricity, and that their firm advises companies they fund in tech to outsource their data centre and compute needs to low cost locations, exactly as I suggested. Their tweet is now deleted.
My least favourite responses were the barrage of anonymous right wing economics opinion-havers who flung insults at me. Their arguments ranged from non-existent to poor. Sadly, some progressed to sending messages to my employer.
I am a significant shareholder in my own businesses, and a director, but these things still need to be discussed with other members of the board. Thankfully the insistence of the complainants that I am a "faggot" undermined their case for my dismissal.
Some of the anons decided to contact clients of mine insisting that the poor quality of my work was undermining their reputation. Again, nothing that a quick phone call couldn’t sort out, especially since their efforts to point out flaws in my work were no more accomplished than their online performances earlier in the week. But dealing with their complaints was not a great use of time in a country struggling with low productivity and desperate for growth.
This kind of thing is thankfully still quite rare. I am glad to have substantial stakes in the companies I run. It is clear that I could not share my opinions as I do if I didn’t.
Why am I so desperately wrong?
I speak to a lot of companies in my job. And I speak to even more people who speak to even more companies. Energy prices are a topic of conversation, but rarely a big enough one that I pay huge attention. At the North East Growth Summit I spoke at in Sunderland recently, Nissan didn’t mention energy prices beyond saying that they weren’t concerned about them. In the risk statement in their most recent annual accounts it’s not flagged. Many other things are a bigger priority for them. I suggest asking them about their microgrid if you ever get to Sunderland.
My attention on the issue was upgraded a few weeks ago when UK Day One published a survey of (almost certainly quite South British, but we don’t know) economists. Nuclear power was felt to be the number one thing that a UK government could increase spending on to boost growth in the economy. Number one. Top position.
I got a number of messages from fellow (quite North British) economists ranging from “do you know these people?” and “have you seen this?” to “is it 1970 again?” and “what the fuck?”. Many of us spend much of our time trying to convince places in North Britain that high salaries and secure jobs in the service sector are at least as valid as jobs in mills, mines, and factories. We organised a repeat of the survey with a different panel and found that nuclear power dropped to seventh place on the list of priorities, much closer to where I expected it.
Clearly a memo has been sent to economists, quite probably from the USA since it is the source of most London policy fads, that I and much of the rest of North Britain have not received. And so I started asking questions.
Why do pro-growth economists in South East England, even usually quite free-market and economically liberal ones, want to spend lots of government money to build lots of Nuclear power stations?
Cheaper domestic electricity to enable electrification of domestic transport and domestic heating while keeping our decarbonisation promises was the popular response that I agreed with. Though with Hinkley Point C likely to generate its first, very expensive, electricity some fifty years after planning of its construction began in 1981, that is a brave argument to make. Still, it’s a decent argument and if Nick Clegg hadn’t opposed nuclear energy on such grounds when he was close to power we would be closer to progress today.
I support the completion of that power station and the urgent reform of planning laws in our countries to make construction, including of nuclear power stations, less eye-wateringly expensive. I remain unconvinced that the state should play much role in actually building them. If we can’t make building power stations fast and cheap enough that the private sector will fund their construction then I doubt it’ll be a good investment for the state.
Of course this point isn’t related to the meltdown that anon twitter had about my opinion.
Arguments to make domestic electricity cheaper are clear, but in many ways they contradict the goal of making industrial electricity cheaper. Given the UK’s slow planning system, England’s de facto ban on onshore wind power, heavy restriction on solar power, the lack of capacity on the national grid to distribute energy, strong local objections to greater international interconnectors or electricity pylons (especially in the South of England where they are most needed), and the high cost of the electricity created from natural gas (the only source from which we can increase supply of electricity quite quickly), decreasing industrial electricity prices would probably increase domestic electric prices.
There were two other arguments. First, that we should secure a global lead and sovereign capacity in the AI industry by powering cheap data centres. Second, that Britain should reindustrialize, whether to spread prosperity more broadly across our country, or to keep up with Silicon Valley’s ambitions in this area as robotics technology accelerates, or to ensure that we have the ability to defend ourselves against an ever more warmongering Russia.
Comparative advantage: why do we want data centres?
I understand these arguments and I find them unconvincing. So did most of the pro-growth economists in our survey.
Let me explain by travelling to Manchester as I did two days ago, on a diesel train, at an average speed of 30 miles an hour.
When Manchester rose to become the world’s original modern city, it did so by importing cotton via Liverpool on the first inter-city railway in the world. The cotton was processed in Greater Manchester’s mills and the resulting goods were shipped back to Liverpool and exported to the world. Cotton bed sheets on the other side of the globe in Australia are still called Manchesters to this day.
It didn’t matter that Manchester couldn’t grow cotton. Manchester’s unique value add was the expertise to build and maintain the machinery and systems that processed it. Low value cotton growing was offshored at almost no net cost to Britain. West Yorkshire’s wool and linen industries infamously generated no more wealth by using domestically produced inputs.
Today, ARM chips designed in Cambridge power the vast majority of the world’s computers and are likely to extend their dominance to the highest performance computing within a few years. DeepMind in London are world-leading developers of AI and their CEO Demis Hassabis is a Nobel prize winner for his work.
Neither ARM nor DeepMind manufacture anything of note. What compute power they use for their work can either be offshored trivially or costs such a small percentage of their salary and rent bills that high UK industrial electricity prices don’t matter to them. Fibre optic cables (another British invention) have replaced railways as the medium for value transfer. I see little reason to think that we lose much more value in Britain by not hosting data centres here than we did by not growing cotton in the 1800s.
There may be some national security argument for retaining some domestic AI capabilities, but the requirements are likely to be similarly small to our sovereign capability to build warships on the Clyde and submarines in Barrow. If we cannot rely on Canada’s near-free electricity to power our AI data centres in the same way as we relied on wheat from its great plains during the second world war then we are in serious trouble.
Reindustrializing Britain.
I find the case for reindustrializing Britain even weaker.
Many of Britain’s most successful companies are like ARM and DeepMind. Bet365, OnlyFans, PrettyLittleThing, Rockstar Games, even HSBC, are almost completely uninterested in UK industrial electricity prices. They consume very little UK electricity or could offshore most of their consumption without disruption if they wanted. Our largest mining company, Rio Tinto, has no mines in Britain. British American Tobacco’s last remaining UK factory in Southampton does still manufacture cigarettes but adds much of its value from R&D on smokeless tobacco. Its exports to the world are more about innovations in vaping than goods. The company as a whole barely cares about UK industrial electricity prices. They, like so many other companies, stopped consuming UK industrial electricity when it was cheap because Britain's strengths lie elsewhere.
The list goes on and on and covers almost every successful business in every sector of our economy, even manufacturing. I’ll give just three companies I know well in Yorkshire.
Phosyn, acquired by Yara shortly after I worked for them, produce speciality crop nutrition and crop nutrition delivery systems and processes in Pocklington. They export them all over the world. Their high value exports are usually added in tiny proportions to bulk nitrogen fertilizer produced by the Haber-Bosch process in countries like the USA, Russia, and Canada with cheaper natural gas than we could ever access. If you’ve ever seen circles of crops grown in the desert you’ve probably marvelled at Phosyn’s work.
Croda International in Snaith, East Yorkshire have graduated from being a bulk industrial lubricant company selling a waste product of Yorkshire’s wool industry to being the near-monopoly producers, among much else, of the speciality lipids that encapsulated the mRNA in the Covid vaccines that we all took in 2020 and 2021. Their most recent annual report proudly celebrates that “energy costs represent approximately 3% of our sales. Our efficient use of energy, sourced from diverse internal and external sources, minimises its proportion in our cost structure”.
McLaren F1 racing, a world-leading British manufacturer, in their latest annual report, show that their industrial electricity costs, even at today’s prices, even if they were fully incurred in the UK, add up to just under 1% of their revenue.
I find it hard to look at these companies’ reports, or listen to them and Nissan talk about their businesses, and believe that UK industrial electricity prices are a top priority for boosting growth in the UK. I don’t think this makes me mental, silly, or retarded.
No such thing as a high-income low-energy country
A graph that was shared with me repeatedly during the most intense periods of being called a retard was this. It shows a strong correlation between high electricity consumption in a country and a strong economy in that country.
I agree that there is no such thing as a high-income low-energy country. I do not wish the UK to become a country that goes without life-improving electricity consumption, even if I do still currently choose not to own a tumble dryer and I have no need for an air conditioner this far North. What would be the point of being rich if we didn’t spend that money on the fantastic things electricity can buy?
I’m not going to make the argument that towards the very top end of the graph the gradient may well be getting less steep. We’ve seen from previous graphs of life satisfaction as a function of income levelling off that were later shown to be wrong that this can be an illusion.
We can and should keep generating more electricity, especially for domestic consumption. We need to get heat pumps for our homes and enjoy the return to instantly-available hot water that gas combi boilers stole from us. We need amazing induction cookers like those made by Impulse Labs that cook better and faster than ever before while keeping indoor air clean. We need to switch our cars, trains, buses, and bicycles to electricity to make our cities quieter and less polluted places to live. I want to hear more birds and less traffic and for my washing to smell less of diesel when I take it off the line.
We’ll need to build more generation capacity, more grid capacity, and more electrical storage capacity to achieve that. Legalising wind power in England, fixing our planning system so solar panels and grid scale batteries can be built more quickly and cheaply, strengthening our grid so power can be transmitted, imported, and exported more easily, and introducing regional electricity pricing are all options that we have that could start improving things right now without big state investment.
But my tweet was about industrial electricity. I’ve already explained why that’s somewhat different from domestic electricity because we can import energy use for many purposes at almost no cost. While energy import has historically been mostly of coal in the form of steel or gas in the form of fertilizer it is increasingly of electricity in the form of compute. I suggest that we keep our effective electricity consumption high, and going up, but import part of the extra demand, not in the form of electricity but in the form of compute.
And instead of worrying too much about industrial electricity price and huge public spending on nuclear energy, let’s focus on public spending that would do more to grow Britain’s economy and generate the returns that will keep our national debt down.
A productive Britain.
Britain currently has the joint-weakest, tied with France, economy in Northern Europe. Our major cities except London have just about the weakest economies in the world. We have huge and growing fiscal transfers with money flowing out of our sole productive regions in South East England to large cities like Birmingham, Manchester, and Leeds to fund public services that they come nowhere close to affording by themselves. This pattern is deepening while energy prices are high now, just as they deepened while energy prices were low for the four decades before.
Correlation is not necessarily causation of course. Neither in observing the relationship between a nation’s prosperity and its electricity consumption as in the graph above nor in observing the opposite relationship between a region’s prosperity and its de facto energy consumption in the graph below.
Lowering energy consumption in a region of Britain does not necessarily mean that the region’s economy will strengthen. But we should think hard about the clear pattern that the more energy a region of Britain’s economy uses, the weaker its economy is. Our highest energy using economies by far, Northern Ireland and Wales, are our poorest regions. Our lowest energy using economies, London and South East England, are our most prosperous by far.
We can’t compare industrial electricity prices with economic strength or economic growth in the UK because our nationalised system of electricity distribution largely sets the price at a constant level for the whole country. I have already argued that we should get rid of that and move closer to the USA’s system of regional and local pricing.
And since the USA already has regional pricing of industrial electricity we can see how it impacts on the strength of its economy.
Yet again, a challenge to people putting cheap industrial electricity near the top of their list of priorities. US states with the cheapest industrial electricity such as Louisiana, New Mexico, and Mississippi, are among the poorest. US states with the most expensive electricity, California and Massachusetts, are among its richest. New York state’s cheap industrial electricity is, for those interested, largely the result of subsidies and locational pricing. New York City’s residential electricity prices are very high.
I think that more of Britain's economy looking more like London, Oxford, Cambridge, San Francisco, San Diego, Boston, Chicago, and New York is a path to greater prosperity for our country. And I think that's what the economists we surveyed thought too.
So let’s return to the results of our survey of 44 pro-growth economists in (mostly) North Britain and see what they put above government policy and spending prioritisation of Nuclear power.
Their priorities above nuclear power were,
- Investing in rail infrastructure.
- Reforming the planning system.
- Investing in housing.
- Devolving fiscal powers.
- Increasing spending on scientific research.
- Changing fiscal frameworks to borrow and invest more efficiently.
- Investing in a better electricity grid.
- Achieving closer EU alignment to boost trade.
- Investing in transport other than rail.
- Prioritising high skilled immigration.
- Investing in renewable energy.
- Nuclear energy.
I largely agree. This is close to the recipe that has seen East Germany’s economy overtake North England’s in the past three decades.
There is an alternative timeline with a divergence point around the time of the election of Margaret Thatcher where the UK deindustrializes less. In a successful world, our economy looks today more like West Germany, Austria, or Switzerland. In a less successful world, it looks more like Italy or Portugal. Whether we had succeeded or failed on that alternative path, Britain would be quite a different country.
If you’re interested in exploring that path, and maybe even putting Britain back on it, I cannot recommend anyone more highly to talk to and read than Richard Jones. We have written influential reports together, he currently works on the innovation-led development of Greater Manchester, and he blogs at Soft Machines.
Richard understands that the comparative success within Britain of Greater Manchester is in large part due to its service sector growing strongly such that it is one of just five major cities of Great Britain — along with fellow strong performers London, Glasgow, Edinburgh, and Bristol — with less than 10% of GVA coming from manufacturing. But he also understands that this 9% of the economy of Greater Manchester, especially in places like Rochdale and Oldham and Bolton still matters enormously, both economically and politically. He knows that energy prices matter more to these places and their industries than they do to service companies in the city centre like PrettyLittleThing. He also knows that, even in manufacturing, other things matter even more still. The UK deindustrialized quicker than Germany over decades where it had cheaper energy after all. Canada deindustrialized nearly as quickly as Britain and struggles economically to this day despite having nearly free electricity and a huge surplus of energy.
The free marketers and Thatcher fans who surprised me with the vigour and passion of their support for a huge UK government program of building Nuclear power stations may find Richard’s view on how we achieve what seem to be their desired outcomes even more disappointing than mine. That he has provided over the past week just about the only coherent argument that adds value to mine in a different direction is a sign, I think, of some problems among British economic thinkers of the type who responded to UK Day One’s survey.