Britain faces two urgent energy problems. First, we have simply not invested enough in infrastructure to meet future demand for heat and power. There is a yawning capacity gap that, in the next decade, will force prices up for consumers and industry. The second problem is how to mitigate climate change by cutting carbon emissions. The two problems will need more than £200 billion to fix in the next decade.

This week the Government made one small step in the right direction. It has speeded up the planning process and set out which sites should be considered for new nuclear power stations. However, in 2003 the Government had effectively ruled out nuclear power. The lights would be kept on by wind and gas. But within three years a spectacular U-turn had been made: now nuclear is essential. All the time this prevarication has been going on, existing power stations have been getting older, North Sea gas reserves have been running out, and climate change imperatives have become more pressing.

Luck has been on the Government’s side. But for the economic crisis, the red lights would already be flashing. Ironically, the recession has proved to be our best energy policy, cutting energy demand and, with it, carbon emissions. It has brought us a breathing space.

How did we get to this state? Partly because energy policy has never been taken seriously. Without a crisis, it is always someone else’s problem — and one for the future. Most solutions require customers (and voters) to pay more now — and that is something politicians are loath to admit. But bad news on bills — and an energy crisis — is coming unless radical action is taken soon.

Instead of a coherent, integrated policy, we have piecemeal support for particular technologies. Politicians want to be seen to be “doing something” for the various interested parties — especially for renewables and clean coal. So each gets its own set of supports.

Take wind. Britain has one of the most expensive support packages in the developed world. Customers have to buy a proportion of energy from renewable sources, paying the usual price and a premium that the Government guarantees. And that has been doubled for offshore wind.

The costs are far greater than conventional technologies, and make even nuclear look cheap. If, as a result, overall emissions were cut on a significant scale, it would at least meet the carbon objective. But because the wind does not blow all the time, there has to be back-up — carbon-emitting coal and gas.

Next, take clean coal. It too has its own government support. Carbon sequestration (CCS) — storing carbon in the ground — will be subsidised by a new levy on customers — linked to the price of carbon in the European Emissions Trading Scheme. What the customer gets is not, however, just clean coal technology — they will support several large new coal stations, most of which will not have to store carbon emissions until 2025. We need coal now because otherwise we will be too dependent on gas — and to back up the intermittent wind.

Now take nuclear. Unlike with wind power, customers are not obliged to buy it, and there is no special subsidy or levy. Nuclear is left to the market, but wind and clean coal are not.

The result is a mess, driven by the dangerous combination of the Government choosing the winners and lobbyists trying to capture subsidies. For all the good intentions, the result will be high cost and low impact. Instead of starting with the cheapest ways of reducing carbon emissions, Britain has started with the most expensive. So far success has been limited: We not only pay among the highest bills for wind, but in Europe only Cyprus and Malta generate a lower proportion of their electricity from it. Old nuclear is closing, but new nuclear is unlikely to appear much before 2020, and coal will not come to the rescue any time soon. The result is more gas, and, but for the recession, real risks to the security of supply.

There is a better way. Good energy policy is not rocket science. Instead of the piecemeal approach, coherence and integration are needed. Start with carbon. We must put a long-term price on it. This way the market can sort out the best way to reduce emissions and the financial costs that go with them. It was intended that the EU Emissions Trading System would do this, but it has proved short term, volatile and the prices are very low. A simple carbon tax would immediately create a uniform price; and if politicians commit to never lowering it, investors would have the confidence to put money into schemes and technologies that have a low carbon count.

No one likes new taxes, but a carbon tax would be a lot cheaper than the implicit taxes already in the pipeline for wind and clean coal. It could either be levied “upstream” on the carbon going into energy supplied to factories and households and the carbon content of manufacturing, or “downstream” on goods and services bought in the shops. Either way it will go on bills, and is better explicitly stated. It could also go on the carbon content of imports too, so British manufacturing is not disadvantaged.

The carbon tax is on its way. France has adopted such a proposal, and the Scandinavian countries are already there. Soon most countries in Europe will go down this route. Even the Conservatives suggest something similar. The trick will be not just to introduce a carbon tax, but to get rid of other levies as well. Simplification should be a core objective.

The second step is to sort out how to ensure that investments are made into a diversity of fuel supplies. Governments want large-scale, long-term, capital-intensive power stations. Investors have to know that there is a good chance customers will pay. They need commitment, and creating long-term contracts is the obvious way forward. To do this, the energy markets must be reformed so that they deliver security of supply, not just short-term energy. What is needed is a longer-term market in energy contracts — in effect a market in the capacity to produce the energy when needed. Markets are means to ends: government must specify the ends.

The bad news comes if we carry on as we are. Present energy policy will be very expensive, especially later in the next decade. As capacity margins tighten, long before the lights go out, prices will rise. Higher prices are the real consequence of inadequate investment.

Britain now needs an energy policy — before, not after, a crisis.

Dieter Helm is Professor of Energy Policy at the University of Oxford and a Fellow of New College

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