This article was originally published on CAPX.

The Prime Minister’s drive for AI, announced this week, is commendable. AI can, if appropriately used, lead to a significant improvement in productivity.  It is often said that while people may not lose their jobs to AI, they will lose their job to someone who knows how to use it. 

However, your AI search requires substantially more energy than a normal internet search. Indeed, energy and water for the data centres that are needed to power AI are at a premium. Already, high energy costs have stopped Ireland from building more data centres. But UK energy costs are far higher than other G7 countries. Our planning restrictions also make it difficult to build anything in the UK, and this applies as much to data centres as anything else that tends to get more political attention such as housing. The Labour manifesto did highlight the need to build data centres and make it easier to get these through the planning process, which is a positive step, but the Government’s energy policy has not succeeded in the fundamental task of lowering energy costs.

How do we lower energy costs in the UK?
The Growth Commission, which I chair, has made a number of suggestions here. First, we need to massively increase power generation. Instead, the Government has made it more, not less difficult to generate energy through its North Sea oil and gas policy, which is making major players in this sector consider leaving the UK. We need to explore all options here. 

The high cost of energy is perhaps the biggest challenge UK business faces in being globally competitive. In a world where Donald Trump’s energy policies are likely to lead to even more of a differential in costs between the UK and US, it is almost impossible to see how UK companies generally can be competitive. 

The UK also has a poor track record on approving the construction of new nuclear power stations. Wylfa languishes in Anglesey. Sizewell C has taken far longer than would have been anticipated on any reasonable timescale. The Small Modular Reactor (SMR) competition is scheduled to produce a winner in July, but why we are not simply allowing the market to accelerate the approval of SMRs, as other countries are doing? While the push to renewable energy is a wise one, we need to be realistic about the reliability and base load provided by wind and solar and other energy sources. Great British Nuclear, launched by the previous government, and Great British Energy launched by the present one, both involve significant government distortions which are likely to crowd out, rather than crowd in the private sector activity needed in this energy emergency.

So much for generation. But the problem does not end there. The Competition and Markets Authority looked at a series of anti-competitive market distortions in the energy markets back in 2015. It made a number of recommendations including dealing with grid connections, and we have referred to those in our Growth Commission budgets. The UK Government needs to implement these suggested reforms. 

There is a series of energy cost increases which emanate from the Climate Change Act, and beyond that, conspire to increase the carbon floor price well above other G7 markets. This needs to be urgently addressed. 

The Growth Commission has also evaluated the cost to the UK of the EU’s Carbon Border Tax Adjustment Mechanism (CBAM), and this alone (without considering the underlying energy cost increases from the Climate Change Act and the Emissions Trading Scheme itself) costs individual Brits at least £700 (from a GDP per capita perspective). By applying a tariff on products produced with cheaper energy from abroad, the CBAM allows the high cost of energy in the UK to be perpetuated. It is a policy we can no longer afford. 

The US as a major energy exporter
Under President Trump, the US will continue to be a net energy exporter and its exports are likely to grow. This will help the UK, provided we are in a position to do deals with US suppliers. Our own energy and environmental policies will be key elements of this.

In this context, we have advocated an entirely different approach to climate change, drawing on the key ideas of the Climate and Freedom Accord (CFA). The CFA proposes an international free market agreement on climate and sustainable development, rooted in the insight that best way to accelerate the innovation needed to solve the challenges of both climate and poverty is more freedom for innovators. The key to which is fewer barriers, burdens and costs for free enterprise. Free trade, open, competitive markets, low income taxes and private property rights all drive down the costs of new investment, which speeds up the cycle of innovating better, more efficient and cleaner products. The CFA proposes that nations agree to such a framework. Subsidies and punitive carbon pricing would be phased out in favor of new kinds of internationally reciprocal, technologically neutral supply-side tax cuts that accelerate cross-border capital flows for manufacturing and other capital investments. The Growth Commission costed this approach and found that it increased UK GDP per capita by £1,000. Given these numbers, the Government should at least investigate this – it is likely to find more receptivity to these types of ideas than the European CBAM approach. 

In addition, it is evident from Trump’s initial forays into discussions with Canada and Greenland that the US will be seeking to do deals with countries that have energy production capacity. The UK stands in a better position here than others in the EU, but only if it is willing to use its natural resources, and align to US approaches on energy generation. 

The Path Forward
Given the likely emphasis on energy generation initiatives around the world, there is cause for optimism. But this will depend on the UK’s ability to actually harness its assets and contribute to the overall energy demand the world faces due to AI and other technology demands. The risk for the UK is that others will advance and the UK will fall behind, harming all its citizens.