Review of ‘Energy Abundance’ – Part II
A second look at the SDP's green paper and its revolutionary approach to fixing the economy through energy independence and a new economic approach called Energy Credit.
In my previous article, A Review of ‘Energy Abundance’ the SDP’s Green Paper on Energy, I concentrated on understanding the switch from a global market-driven energy system (albeit with massive state intervention) to a system managed explicitly by the state with the explicit goal of sourcing energy at home at lowest cost. I found a lot to like, including:
A renaissance for nuclear power as the core of our energy independence.
A ‘nothing off the table’ approach to power generation, opening up opportunities for any technology that can provide cheap, reliable baseload power.
The end of renewables for grid scale generation. Although there would be nothing to stop companies and consumers having their own renewables, such as rooftop solar, in practice this wouldn’t be economic for the next reason.
A fixed (and low price) for power of 10p per kWh, which would reduce in real terms over time due to inflation.
A complete rejection of the underlying drivers for renewables, i.e. acceptance that natural climate change can explain most of the climate change we see.
What I struggled with was the underlying policy mechanism to make a fixed price possible once we have transitioned to this new model for energy supply. Specifically, the author Matthew Kirtley and his colleague Alastair Mellon, call this new approach the ‘Energy Credit’ system. This ties the supply of energy to the Bank of England’s and the government’s tradition financial controls. I.e. Energy Credit will be managed alongside monetary policy (interest rates and quantitative easy) and fiscal policy (tax, spending and borrowing).
However, given the need to get this right (and we’ll probably only get one shot the way the economy is going) it is worth investing time to understand Energy Credit better. In my first article I listed 11 questions at the end, some of which might sound naïve to anyone with a better understanding of economics than myself. However, I sent a copy of my article to the Matthew, and he was kind enough to take me seriously and provide comprehensive answers.
I’ll go over his responses later in the article but first, for economic numpties like me, I have done a bit of digging, using the usual AI tools, and come up with a simplistic primer to help better understand Matthew’s explanations. If you are already up to speed on this topic, please feel free to skip to the next section ‘Answering my questions on the Energy Credit System’.
Overview of UK Economic Management
The UK government, in coordination with independent institutions like the Bank of England (BoE), uses a mix of tools to influence the economy, including inflation (the rate at which prices rise) and the value of sterling. These tools fall into two main categories: monetary policy (focused on money supply and interest rates) and fiscal policy (government spending and taxation). They work together but are managed separately to promote stability. The goal is often to keep inflation around 2% (target set by the UK Treasury) while supporting growth and employment.
Bond markets (including government bonds and corporate bonds) play a key role in funding government activities, especially when spending exceeds tax revenues (a budget deficit). Let’s break this down step by step.
Monetary Policy - Controlling Money Supply and Interest Rates
Monetary policy is primarily handled by the Bank of England, which operates independently from the government to avoid political interference. The BoE’s Monetary Policy Committee (MPC) meets eight times a year to set policy based on economic data and uses two key tools:
Interest Rates (Bank Rate): The BoE sets the base interest rate. Raising rates makes borrowing more expensive, which cools spending and borrowing, helping to control inflation by reducing demand for goods and services. Lowering rates does the opposite, stimulating the economy.
Quantitative Easing (QE): The BoE creates new money electronically to buy government bonds (gilts) from the market. This injects cash into the economy, lowering long-term interest rates and encouraging lending/investment. It’s used when rates are already low (e.g. post the 2008 financial crisis or during COVID-19). The reverse, Quantitative Tightening (QT), sells bonds to reduce money supply.
Impact on inflation
The MPC targets 2% inflation (measured by the 12-month change in the Consumer Prices Index) using a “forward guidance” approach, signalling future moves to influence expectations. If inflation deviates, they adjust policy to bring it back. MPC performance in setting rates has been variable and generally seen as poor in recent years. This highlights a significant reason why a new approach tied to physical generation capacity may be a good idea.
Impact on Sterling
Sterling floats freely on foreign exchange markets, so its value is determined by supply and demand from global investors. Higher UK interest rates attract foreign capital (seeking better returns), strengthening the pound. Lower rates can weaken it, making exports cheaper but imports (like oil and gas) more expensive, which can feed into inflation. Hence, if we have energy independence then a key downside of lower rates goes away.
Fiscal Policy: Government Spending and Taxation
Fiscal policy is set by the UK government (via the Chancellor of the Exchequer and the Treasury) and approved by Parliament. It’s outlined in annual Budgets and Spring Statements. Unlike monetary policy, it’s more political and focuses on the overall budget. Its key tools are as follows:
Government Spending: Increases in spending (mainly on infrastructure) boosts demand and growth but can fuel inflation if the economy is already hot. Cuts do the reverse. Incidentally, not all spending has a positive influence, since increased spending on the NHS and welfare can severely reduce growth.
Taxation: Raising taxes (mainly income tax, VAT or corporation tax) reduces disposable income, curbing spending and lowering inflation. Lower taxes stimulate it. For example, during recessions, “expansionary” fiscal policy (more spending, less tax) supports recovery, as seen in the 2020s furlough schemes. Whether this was in fact a sound policy is open to much debate!
Link to Inflation and Sterling
Expansionary fiscal policy can overheat the economy (driving inflation) or widen deficits, pressuring sterling if investors worry about sustainability. The government aims for a “balanced budget” over the economic cycle, guided by the Office for Budget Responsibility (OBR) for independent forecasts. However, the OBR is coming under increasing scrutiny as its historical forecasts are often revised by large amounts.
Fiscal and monetary policies interact. If fiscal stimulus is too aggressive, the BoE might raise rates to counteract inflation, creating tension between the two.
Bond Markets: Funding Government Spending
When government spending exceeds revenues (i.e. is in deficit), the UK borrows by issuing gilts (government bonds) through the UK Debt Management Office (DMO), part of HM Treasury. This is how bond markets “support” spending without printing money directly. The market works as follows:
Issuance: The DMO auctions gilts (short-term: under 5 years; long-term: up to 50 years) to investors like pension funds, banks, and foreign governments. Buyers lend money to the government in exchange for regular interest (coupon) payments and the principal back at maturity.
Market Operation: Gilts trade on the secondary market (e.g. via London Stock Exchange). Prices move inversely to yields (interest rates). If demand is high (safe haven buying), prices rise and yields fall, making borrowing cheaper for the government.
Bonds therefore play an important role in the economy:
Funding deficits without immediate tax hikes.
Influences broader rates: Gilt yields benchmark mortgage and corporate rates.
BoE involvement: Through QE, the BoE buys gilts, keeping yields low to support spending indirectly.
High deficits can raise yields if investors demand higher returns for perceived risk (e.g., inflation eroding bond value), increasing borrowing costs. Therefore, the DMO tries to manage debt sustainably, targeting a mix of short/long-term gilts. As of the time of writing gross debt is over 100% of Gross Domestic Product and bond yields are rising. Weak investor confidence in gilts can sell off pounds, devaluing sterling, which is what we are seeing today.
Tying this to our current energy policy
Rather than ‘fine-tuning’ the economy on a daily basis, UK economic management relies on loosely rules-based approaches. Monetary policy handles short-term inflation and sterling fluctuations, while fiscal policy sets long-term priorities. Bond markets provide flexibility for borrowing but enforce discipline via yields. Challenges like energy shocks, pandemics, or wars, test this system, often requiring coordination.
Imported energy prices are hugely important to the UK’s economic performance (far more than in many other advanced economies) because the UK is a large net energy importer and energy costs feed very quickly into consumer prices, business costs, and government spending.
Energy is a fundamental input to almost every sector. When imported energy costs rise:
Manufacturing costs rise
Food production and transport get more expensive
Services (both public and private) face higher operating costs
Firms then pass these higher costs on, creating broad-based inflation as well as putting pressure on government spending, since public services are a major consumer of energy.
Answering my questions on the Energy Credit System
I can now turn to my questions and Matthew Kirtley’s answers.
Q1. Why 10p per kWh specifically?
10p/kWh happens to be currently roughly the cheapest grid electricity unit price going worldwide, which makes it a good target from a political perspective of electricity price correction.
But the true reason is somewhat more arbitrary: it’s a base ten figure. Our energy credit system effectively wishes to maintain this nominal fix forever, and establish an identity relationship between the sterling and entitlements to grid electricity. This means ease of convertibility for laypeople in the long-term is quite important for psychological buy-in.
This seems like a reasonable rationale.
Q2. How can the state guarantee this price forever, especially if global fuel prices or inflation rises.
Once the energy credit fix is established, the value of the sterling on global markets will become enmeshed with the state’s ability to guarantee the provision of energy - along with British state borrowing costs.
This is deliberate. The big problem facing energy provision by the state is the temptation to procrastinate on capital expenditures to expand supply (as part of the public sector’s general tendency to “deprivilege” capital spending in general). The energy credit regime means that an acute financial and economic penalty is felt by future governments who attempt to replicate this bad habit.
Critically, it also bakes in incentives for states to lean towards energy autarky, to remove exposure to global fuel price fluctuations and arbitrage.
As conceived, an energy system running largely off of imports would collapse under the energy credit - the sterling outflows for fuel that consumers do not have exposure to the price mechanism for would be ruinous. It demands domestic energy, and at maximum efficiency.
This is why the energy credit’s implementation must come at the end of our proposals, not before. It requires cheap, domestically sourced power - and leveraging maximum energy density sources.
This now makes much more sense. I better understand how the energy credit system is ‘integrated’ in economic policy setting. Unfortunately, I also appreciate now how novel this approach is and therefore how challenging it would be to implement. However, the system would not be introduced until the end of the energy independence attainment period (10 years). Therefore, there should be time to appreciate its strengths and weaknesses, and for it to be fine-tuned.
Q3. If the price of energy is fixed, it will effectively become cheaper over time due to inflation, and presumably at some point it would be effectively free?
This is exactly right. The energy credit is incredibly profound: it changes the incentive structure for economic management.
If the nominal price of energy is fixed and the state is required to maintain the credibility of the system to avoid fiscal ruin, the state must build generation capacity (along with ongoing investment in transmission/distribution infra) to match the demand forecast of the upcoming period.
That demand forecast will be a function of inflation. Which means that the monetary/fiscal policymaking that determines inflation suddenly has a new constraint: it needs to produce a long-term rate of inflation whose consequent demand forecast can be met by coming supply growth.
This “physicalist” constraint means that continued inflation is tied to improved productivity/affordability of supply. The system will always break even. In the case energy productivity/affordability falls, it conversely accepts deflationary periods.
This is all wedded to the core intuition behind the system: an economy where key metrics represent productive capacity and real value.
I strongly welcome the idea of tying economic policy to something physical and so fundamental to modern society. It harks back to the way the Bretton Woods agreement in 1944 tied the value of the US dollar to the value of gold. However, like Bretton Woods, the energy credit system requires policy discipline and that’s not a quality we see in much evidence these days.
Q4. A related question, won’t this encourage more waste over time?
Absolutely. But we should consider what the problem often is with waste: its externalities and its opportunity costs.
In a system backed by cheap fission, wasteful use of energy doesn’t impose much in the way of an opportunity cost and the externality in terms of fissile by-products is (literally) microscopic.
And, critically, many wasteful activities can often conceal value creation. A lot of innovation has its birth in wasteful activities that were incredibly low-productivity, but we discovered interesting ways to scale. Or we didn’t realise were value-creating until we stopped them.
I found this to be a particularly illuminating answer. With cheap energy, think about all the many innovations that could be explored so much more cheaply than is possible today. Some might argue that this would increase CO2 emissions. However, an emphasis on nuclear would not increase emissions proportionately, and there would be nothing inherent preventing concerned citizens and organisations from continuing to practice energy efficiency.
The other point to bear in mind is that the global population is predicted to peak around 2085. The consequences of this will be profound and challenging in ways we have hardly begun to think about. When we have a rapidly diminishing population thoughts of curtailing CO2 emissions will make no sense whatsoever. In fact, we might well face the prospect of plummeting CO2 emissions, with the consequent threat to life on earth.
Q5. Alternatively, will this encourage more technology investment since the cost-of-capital reduces because energy is always a significant factor?
It will encourage innovation in energy-intensive industries and energy-intensive technology that improves labour productivity significantly.
Yes. If only a small fraction of the ‘waste’ goes towards supporting innovation, then it becomes another aspect of investment in the future. When you start to think about this in detail, it’s an incredibly exciting idea and completely counter to today’s thinking constrained by ever increasing energy prices. And that is not to mention how much more secure the new system would be.
Q6. Why wouldn’t the price be impacted by major system failures, such as a nuclear power plant going off-line, or several if a major flaw was discovered in a specific reactor type?
This makes long-term planning an essential requirement for the energy credit regime to work. The planners will need to ensure use of a mix of reactors to prevent consolidation of risk. In general, we’ve been quite successful at making sure gigawatt-scale reactors are reliable and safe: there’s naturally so many eyes on each projects at every level of development.
Fair point.
Q7. If Central Energy is a monopoly, how can it guarantee a high-quality, efficient service? This is not something public bodies are well-known for.
Ultimately, it will require firm political leadership to hold Central Energy to account and ensure continuity of service provision. And critically, since the sterling’s value on global markets is now linked to continuity of provision, signalling this becomes a continuous incentive for the state.
For historical parallel, the CEGB is a good illustration of succeeding in expanding generation and transmission capacity (3% p.a. for 30+ years for the former) at a rate that was well-regarded by the public. The main area I have concern over is regional distribution, which has always been where weaknesses in quality seem prone to emerging. I would consider this to be one of the big challenges facing any government that seeks to impose our system.
Agreed.
Q8. Specifically, the Bank of England does not have a good record for controlling inflation. How would they perform better taking on the additional responsibility for adding energy to the monetary equation?
The BoE’s remit is broadly to hold inflation at sub-2%, but it also has vague commitments to macroeconomic stability thrown in there too. Our system is significantly more mechanical: what level of inflation produces a demand forecast that we can provide supply for at a lifetime break-even price in the next five years?
In our system, we’ve effectively removed the rationale for BoE independence: the government manipulating interest rates for short-term electoral and economic boosts that undermine long-term price stability. By contrast, the government has to make sure the demand forecast can be addressed in our regime, or else sterling and bond markets become extremely unfavourable. In practice, I believe this opens the door for a centralised fiscal/monetary/energy planning body to rationalise a lot of governmental economic decision-making.
Looking at our current crop of politicians in government, one can see both the necessity for a system like this and the challenge to get it implemented. This is a key reason why I would like there to be a serious conversation between Reform UK and the SDP on this green paper. We need a pragmatic approach.
Q9. A state-controlled enterprise would be subject to future changes in government policy, whereas this strategy requires a long term multi-decadal commitment and stability. I.e., how do we prevent such a body being mis-directed by a future government more focussed on ideology than economics?
Sadly, this is the core challenge facing bold decisions in democratic governments. I don’t feign an answer at this juncture. But ultimately, we have created a system whose disincentives for energy and fiscal profligacy are so acute that the political capital burned on an ideological crusade would be too acute for most to bear.
I am not sure about this. Watching Ed Miliband on his ideological crusade, I see no sign at all of either himself or his colleagues recognising the ruinous nature of their policies. The problem is that it has been impossible, until quite recently, to have a rational discussion about climate change and Net Zero. It does feel like the Overton window has shifted significantly just looking at Bill Gates’ recent article Bill Gates admits rising CO2 isn’t going to kill us. The recent problems at the BBC may also help to open up the discussion as they have been more guilty than any other media organisation in stifling sceptical views.
Q10. How do we overcome the government’s disastrous track record on major infrastructure projects, such as HS2?
Central Energy’s ability to self-grant planning permission, access to government bonds, and general top-down technocratic mandate (rather than the constellation of competing bodies that we sadly see in modern ’stakeholder’ democracy) is what we believe will allow this to succeed.
There is an absolute requirement to jettison the mountains of regulations surrounding new build of nuclear, fracking and indeed all forms of energy. There will be political opposition to this but as I wrote about previously, it’s vital that we do this in order to get planning and construction to be affordable and deliverable in relatively rapid timescales.
Q11. How do we get people on board that believe that there is a climate emergency?
CO2 emitted by burning fossil fuels that were hitherto sequestered warms the planet up. This is true. But we’re only at a fraction of the planet’s CO2 concentrations on a geological scale. This means that the emergency is not existential, but a matter of disruption via sea levels, coastal communities, and biome shifts.
Changes in these variables have been the reality for the entirety of life on Earth. So the question is whether we’re raising the rate of change in these variables to cause unprecedented and irrevocable damage to human communities and flora/fauna. And the answer is ’no’, if we take seriously our role of stewarding the environment.
Life on Earth is on a timer. We’ve less than a billion years without intervention until the main photosynthesis pathways don’t have enough atmospheric carbon to keep going and the biosphere collapses. My main thought is extending this window, rather micro-regulating inter-century CO2 concentrations - extending the period in which the universe’s only known harbour of life may keep going.
Human stewardship over the Earth is the only way we can achieve this, through the ability to engineer our atmosphere and the lithosphere. But to do this, we need to economically and technologically develop to ensure our continued survival and develop the raw productive capacity to enact such engineering projects. A non-catastrophic increase in atmospheric CO2levels to ensure humans industrialise, modernise, and assume our role as stewards to ensure our biosphere’s long-term survival? This is a trade-off worth making, in my view.
I freely admit this may not be an accessible doorstep answer, but it’s my sincere one.
I think this is already getting easier. Even though polls show that most people (60%) support the ‘idea’ of Net Zero, very few are prepared to pay the necessary costs. With the likes of Bill Gates downplaying the climate crisis, time will be an important factor for two reasons. As costs reduce, consumers and business will welcome the impact on their budgets.
Secondly, as time goes on and the climate crisis keeps moving off into the distance, people will simply forget that there ever was such a thing. Think acid rain, the hole in the ozone layer, the population time-bomb and the 1970s ice age cometh’.
Wrapping up on the Energy Credit System
With my background study and Matthew’s helpful answers I’ll try to summarise the main features of the Energy Credit system as I now understand them:
Energy Credit becomes the third lever in managing economic policy alongside existing monetary and fiscal controls. It will require strong coordination between Central Energy, the Bank of England and the Treasury.
The pound’s credibility is tied explicitly to the planned provision of energy and relies on maintaining the required investment to meet forecasts of future demand. This linkage will be enforced by the markets, such that the 10p/kWh will be enforced through fluctuations in exchange rates and bond yields.
The system is designed to make it extremely painful for governments to neglect the required planning and investment. This gets to the heart of my earlier lack of understanding. The market will only trust the value of the pound if the government is demonstrably building the physical capacity required. However, in order for this to be successful future governments cannot be tied to Net Zero dogma. Step forward Reform UK, ideally in partnership with the SDP.
Matthew asks us to think of the Energy Credit system as a “physicalist constraint” on economic decision making which will force the government to track the nation’s productivity and affordability of supply. This probably obviates the need for an Independent Bank of England since the key economic metrics must “represent productive capacity and real value”.
If long-term inflation risk predicts that demand will outstrip Central Energy’s future capacity, then interest rates can be increased in a timely manner in order to tighten the economy and so put a break on inflationary growth. Since the inflation adjusted price falls, customers will be sheltered from a key attribute of traditional inflation, i.e. increasingly expensive energy.
In an inflationary period, Central Energy can decrease the money supply by encouraging customers to purchase energy up-front, by offering bonus units.
Conversely, if the economy enters a deflationary period, then Central Energy can effectively increase the money supply by adding credits to customer accounts to offset the impact of the nominal price feeling more expensive as the real value of money is reduced.
Critically, a home-grown energy policy would shelter the UK from global energy price fluctuations and arbitrage. It would therefore act to remove one of the key drivers of inflation and will be a mandatory feature of the new system rather than a ‘nice to have’. Without energy independence the energy credit system would simply not be possible. This would also have the benefit of making our grid more reliable and secure.
I still have a lot more questions, particularly about the balance of benefit from firstly achieving a home-grown energy system compared to the more fundamental change to our economic model. What proportion of the benefits would we get from energy independence alone?
I appreciate that this has been a long read, and if you got this far, you have my sincere thanks. I don’t see a more important goal than to fix our broken energy system.