Edward Davey Politics Home article: Keeping the lights on, bills down and the air clean
Seven months in as Secretary of State and I’m more aware than anyone that the energy and climate change agenda raises passions. It goes right…
Seven months in as Secretary of State and I’m more aware than anyone that the energy and climate change agenda raises passions. It goes right to the heart of what we all hold dear - how we power our economy, how we lead our lives and the state of the planet we live on.
These are long term challenges that demand long term action. That’s why the forthcoming Energy Bill is so crucial. Few things can be more important than keeping the lights on, bills down and the air clean.
The reforms are designed to address a basic problem in our energy system: demand for electricity is projected to rise, but a fifth of our power plants are closing.
In the next ten years, we must secure some £110 billion of investment in electricity infrastructure. That investment must go into low-carbon supplies, so that we can meet our legally binding targets. To give you a sense of scale, £110bn is 7 times the investment Crossrail will bring to London; or every year until 2020 it’s like building 20 Olympic Stadiums.
So we’re proposing new long-term contracts for low-carbon electricity supply - feed-in tariffs with contracts for difference. We’re also introducing a new way of ensuring we have enough back-up power, an emissions performance standard to limit emissions from new fossil fuel power stations, and arrangements for transition from the current system.
The Coalition introduced these reforms nearly two years ago. We’ve published a white paper, and a technical update; we’ve consulted industry and the public extensively; we’ve held workshops, convened expert groups, and introduced a draft Bill for pre-legislative scrutiny.
But this is a big piece of legislation, and there are still rumblings that the Bill is off-putting to investors. So let us look at some of the misconceptions about the Bill that are doing the rounds.
Myths
As I see it, there are five myths that need to be knocked down.
- It’s too complicated.
- It’s too statist.
- It’s a nuclear subsidy in disguise.
- It’s only going to make the Big 6 bigger.
- It’s unnecessary, because there are better ways of achieving our aims.
Complicated
The first myth is that the Energy Bill is just too complicated, scaring off new sources of capital, and working against new entrants.
I believe feed-in tariffs with contracts for difference are trusted by investors. I’ve spoken to global fund managers who’ve say that the uncertainty of the current arrangement put them off investing, but that CfDs give them the predictable revenue streams they need to invest in big projects.
By providing long term price stability for all forms of low carbon electricity generation, they bring down the cost of capital, allowing more investment to come forward sooner.
Global companies and investors are already used to working across different regulatory regimes. And it’s not like our model is an unknown quantity: Canada used a CfD to finance the recent upgrade of a nuclear plant, the Netherlands use a top-up feed-in tariff model for renewables, and Denmark use something similar to pay for electricity from offshore wind.
Dirigiste
The second myth says that our reforms are too interventionist; that it’s a case of government picking winners and fixing the market to suit them.
According to this line of argument, the Energy Bill is a dirigiste throwback, a planned-economy solution to a free market problem. I reject that, because I think it misunderstands both the reason for reform - and the timescale.
The case for intervention is clear: markets have failed to properly account for carbon emissions. The carbon price is not high enough to drive serious low-carbon investment at the scale we need. That’s why there is already significant intervention in the market, from the Renewable Obligation, to Emissions Trading Scheme.
The reforms in the Energy Bill are specifically designed to move us away from such intervention - and blaze a trail towards competition. That is their ultimate aim.
Of course I’d love to see low-carbon power sources competing on cost alone. But the playing field is far from level, and we can’t simply bulldoze it flat. So our reforms are phased.
First, we’ll introduce contracts for difference; with prices set administratively.
Then, as different technologies mature and start becoming more cost competitive, we’ll see the first technology specific auctions.
When all technologies have matured, we’ll move to technology neutral auctions. Demand side response, and additional storage and interconnection, will play an increasingly important role.
Finally, when all technologies are mature enough and the carbon price is high enough, all generators will compete without any intervention. The move from price setting to price discovery will be complete, with low-carbon electricity sources competing on cost to provide clean, affordable, secure energy for UK consumers.
Subsidy
The third myth is that EMR is a stealth subsidy for the nuclear industry.
Nuclear has an important part to play in the mix, but it will be for private companies to construct, operate and decommission nuclear power stations. There will be no public subsidy for new nuclear power, unless similar support is made available for other types of low-carbon generation.
Of course different energy sources respond to different incentives. So we’ve looked at our model to ensure that it suits both intermittent and baseload technologies. But - and I cannot stress this enough - this tailored approach applies to all potential sources of electricity.
Advantage
The fourth myth says that our reforms won’t open up the market and encourage new entrants.
I think we’ve been pretty clear that a key aim of our reforms is to encourage new entrants and new sources of finance. Participation and diversity is vital to a truly competitive market, and consumers will get the best deals when suppliers face hard competition. So we are working with the regulator to strip away barriers to entry.
Ofgem are taking forward a proposal to address liquidity in the wholesale electricity market. And my Department is looking at other barriers, such as the way independent participants secure long-term contracts to finance projects.
We’ll be reporting our findings in the autumn, and where necessary, we’ll act to remove structural barriers to entry that aren’t addressed by Ofgem or market-led initiatives.
Aims
The last myth I want to knock down is that there are better, cheaper, easier ways of securing investment, cutting carbon and keeping the lights on. That our reforms are unnecessary, because a global glut of cheap gas will solve our investment and carbon problems.
Let’s get one thing straight: I am not ideologically wedded to any energy source. I want a diverse, secure energy mix that allows us to decarbonise our economy at an affordable pace.
We know gas will play an important part in our energy system for many years to come. We see a clear role for gas in the medium term, not just providing backup electricity, but baseload too. Our Carbon Plan projects some 10 to 20GW of new gas generation coming online in the next two decades, a figure we are revising regularly.
So gas is a key part of our energy economy, and will remain so for the foreseeable future. But we should think carefully before buying the argument that says we can achieve our aims simply by switching to gas, for two reasons.
Firstly, because although gas is much cleaner than coal, it still carries a carbon impact.
Our numbers show that we can accommodate around 30 to 45GW of unabated gas over the next twenty years and still hit our carbon targets, but any further fossil fuels will need CCS, which is not yet commercially viable.
And secondly, because gas is an internationally traded commodity, its price can be volatile. Wholesale energy costs already account for more than half of the average energy bill. Last year, global gas prices rose 40%, putting consumers under real pressure. Some surveys show rising energy costs are the top financial concern for most households.
Yes, prices can go down, as well as up. And yes, unconventional gas can make a difference, although perhaps not as big a difference as some sections of the press would have me believe.
The International Energy Agency predict shale gas will double its share of the market by 2035, but that will still account for barely a third of global demand.
Analysts think shale gas extraction in Europe will be more expensive than in the US, and probably won’t happen at scale until the end of this decade.
And we’re competing with fast-growing economies which are hungry for gas. Demand in the Middle East is rising steeply; the IEA think it will rise 20% in the next five years, outstripping supply. China alone is expected to double its demand by 2017. No wonder the consensus is that gas prices will either remain high, or go higher.
So yes - gas has a key role to play in meeting our energy security and climate goals. But this is in conjunction with renewables, nuclear and other low carbon sources, not instead of them.
Conclusion
We need an electricity market that can take advantage of all kinds of cheap clean energy sources, without tying ourselves to one in particular. That is why I believe our reforms are the best solution to the unique challenges we face - falling supply, growing demand, and carbon.
And there are real benefits on offer: Up to 250,000 jobs as energy infrastructure is upgraded; household energy bills 4% lower than they would otherwise have been; and lower bills for businesses and energy intensive users, too.
I think The Energy Bill is good for business, good the country, good for consumers, and good for the environment. It can help ensure Britain stays competitive - and nurture the green businesses which drove a third of the growth in our economy last year.