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The transformation of the British energy landscape: keynote speech to the Danish Energy Association Annual Meeting.
Thanks to Lars and Poul and the Danish Energy Association for hosting this important event.
We in the UK government greatly value our strong relationship with Denmark, including on energy and climate issues, and the continuing and important presence of Danish investors in our energy market. I’m delighted to be here today to reinforce that, and to participate in your conference.
Indeed, the theme of the conference - planning for a green, secure and competitive energy system in the context of an unstable financial environment – is clearly an issue of global significance, and I’m pleased to be able to share some thoughts on the UK’s experience of tackling this challenge.
The job of the Department of Energy and Climate Change could be summarised as fulfilling two missions:
Powering the country, now and in the future.
And protecting the planet from catastrophic climate change.
How do we, as nations, and as part of a global family, meet future energy needs, future development needs, affordably - and at the same time, reduce carbon emissions?
This is what I want to talk to you about today. The energy challenge, the solutions we need and the technology we require.
But before I turn to the UK approach let me begin by setting out the drivers for the transformation of our energy landscape.
We are living through an age of global transition.
The UN estimates that by 2040, the world’s population is likely to be around nine billion people.
If, as is likely, global energy supply struggles to meet growing demand, we can expect upward pressure on prices.
And yet we face a climate change imperative that means as a planet we cannot go on using unabated fossil fuels at the rate we are now and keep global temperature rises below 2°C.
It is clear that we need to limit climate change to manageable levels by lowering emissions of greenhouse gases on a global scale – effectively decarbonising the way our societies function, as our energy demands increase.
So we have a real challenge ahead to make sure our economies are not only growing but growing sustainably.
This task is only made more important by the current challenge of deficit reduction and the need to stimulate growth and jobs across the whole European economy.
The economic opportunity
One of the areas where opportunities exist is on the supply side. And in this supply side story, in that long-term economic sustainable growth story, infrastructure is critical.
Nearly half of the UK’s infrastructure needs are in energy. Much of this reflects the changes that need to be made to decarbonise our energy supplies. But we also have the particular challenge of having to replace a lot of energy generation that is getting to the end of its lifetime.
Between now and 2020, 20 per cent of our energy generation is going to go offline, including many of our coal plants and the oldest of our nuclear plants; so we have got to replace that just to stand still.
And of course we need to invest in low carbon electricity generation; new nuclear, carbon capture and storage and renewables in their many forms, offshore wind, but also onshore biomass, solar and the networks needed to support them.
Just between now and 2020, outside oil and gas; we believe there is £110 billion of investment, that we need to attract in the energy sector.
And if we are going to do that; if we are to meet that challenge to upgrade the UK’s infrastructure, particularly energy infrastructure, we have got to make sure that investors want to come to the UK – investors not just in generation and transmission, but also in energy efficiency and innovation.
We are looking to attract sustainable investment which creates sustainable long term economic growth.
So our driving force is to make sure what we are doing in the UK creates a predictable framework.
A long-term framework, a stable framework backed by political consensus.
And backed by a new legal framework. Bringing certainty to this age of transition.
That is why the UK has fully transposed the third package regulations into national law.
But national measures are also needed, so let me turn to the UK approach more specifically.
Underpinning this certainty is our 2008 Climate Change Act - the first comprehensive economy-wide climate legislation of its kind, committing the UK to achieve a cut in carbon emissions at least 80% by 2050.
But while this commits the UK to legally binding targets, it doesn’t set out how to achieve them.
That is what we have been working through.
We have been taking action on three fronts: saving energy; reforming our electricity market; and encouraging new solutions.
Let me start with energy efficiency.
To meet our climate change targets we’ll need to cut our energy use by between a third and a half by 2050.
Heat is the single biggest reason we use energy in our society, taking up 44% of final energy consumption.
With domestic buildings responsible for a quarter of UK emissions, the cheapest way of cutting carbon – and cutting bills for consumers – is to become far more efficient in the way we use heat.
A fifth of the housing stock in the UK was built before the First World War, and another fifth before the Second – all designed before the widespread use of modern central heating.
We have some of the oldest and most inefficient housing stock in Europe.
Designed to vent through chimneys, not prevent heat escaping.
So our idea is to create a market in energy efficiency, so there are incentives for private companies to invest in new products, new services, to get the work done.
And incentives for individuals to invest themselves.
And there are a whole host of initiatives to do this because it is so critical.
The roll out of smart meters so that people can monitor their energy use and understand it more.
Renewable heat initiatives to change the way we heat buildings in the first place.
And the Green Deal, a new market to retrofit the housing stock to make it energy efficient.
We are also reforming our electricity market to make it fit for the challenges of the next decades. The UK’s Electricity Market Reform is a market-oriented package. We are currently putting an Energy Bill through our Parliament to implement this.
Our long-term vision is for a competitive market where low-carbon technologies participate on a level playing field.
Long-term electricity price stability will be provided for investors in all low carbon generation (not only renewables, but also nuclear and CCS). This will be achieved through Contracts for Difference (CfDs) within a framework that will allow us to treble the current levels of support for low carbon technologies to £7.6bn per year by 2020.
We know we need to deliver a smooth transition from the existing Renewable Obligation to CfDs and a process for enabling early investment decisions to be made before the arrival of CfDs.
That is why we are consulting on the evidence to inform renewable CfD strike prices in July and publishing those prices before the end of the year.
Developers will be able to apply for a CfD once they have Grid connection and planning agreement, so investors will be able to commit development expenditure secure in the knowledge that they will receive a contract.
Alongside the introduction of CfDs, we are planning for a Capacity Market to ensure secure energy supplies as we transform our infrastructure and integrate more low carbon generation.
We published a range of design decisions for our planned capacity market alongside the Energy Bill. We have announced that we are minded to run the first capacity auction in 2014, and that this will be open to new and existing generation. We will consult formally on detailed proposals later in the year.
Of course all these changes must be made in the context of the single European energy market. The recent European Council on energy confirmed the importance of a well-functioning energy market for EU growth and competitiveness. The UK strongly endorses this and the deadline of 2014 that our leaders have set for implementing the single market legislation. That is why it is important that, in developing policies such as a capacity market, Member States ensure that the internal market continues to function. The best way to do this is for Member States and the Commission to cooperate and develop compatible solutions.
And I welcome the initiative of Martin Lidegaard in this area in establishing the Northern European Energy Dialogue to discuss among the key players how to reduce barriers to investment in European energy infrastructure. I’m pleased that the UK will be hosting the next meeting later this year.
Research and Development
My third strand is research and development. Quite simply, the UK won’t meet its low carbon targets with current technologies at current costs.
Innovation will be absolutely essential. This is the ‘push’ to the market’s ‘pull’.
Let me talk about two areas in particular that have potential.
First Carbon Capture and Storage (CCS).
The Government is fully committed to the development and deployment of CCS as a technology that can help to ensure the security and diversity of our electricity supply.
We have invested £125m co-ordinated CCS Research and Development programme.
And our CCS Competition, designed to bring forward the first projects, is progressing well.
We have recently announced two preferred bidders – the Peterhead project in Aberdeenshire, and the White Rose project in Yorkshire.
Second, Energy Storage.
While UK consumption peaks at 60GW, the UK has generation capacity of 80GW but storage capacity of only 3GW.
Greater energy storage capacity can save money, reduce the national carbon footprint and help maintain security of electricity supply- all at the same time.
Energy storage systems are currently at different stages of development and cover the full range of engineering disciplines: flywheels and other mechanical solutions; compressed air and liquid air systems; electrolysis and many types of batteries.
But we need to reduce the technology costs to secure viable, cost-effective energy storage.
DECC is currently running a large-scale energy storage technology demonstration competition.
This has attracted bids from leading universities and businesses of all sizes from across the UK and more widely who have brought forward novel ideas for storage.
We will be announcing the winners later this summer. Ultimately of course we hope that one of these demonstration projects will help to make energy storage a cost-effective solution.
I have talked about the UK experience – which is still work in progress. But as I said in my opening remarks, sustainable growth in this age of transition is a global problem and requires international solutions.
So while the UK is acting through the Energy Bill and other policies – we need to act in Europe too.
We must act together as the EU to exercise the influence we have on the world stage. This is the only way to deliver on our energy needs and our climate change responsibilities.
And it is impossible to sit around an international negotiating table and speak with any authority unless you are able to demonstrate that you are doing some of these things at home. That is why we have recently announced support for an ambitious EU 2030 energy and climate framework to 2030.
In that context and more broadly, we in the UK look forward to continuing our productive partnership with Denmark to influence the climate and energy debate in Europe and by extension to the rest of the world.
Finally, ultimately we have to deliver on the ground. I am glad to say that we have a successful track record of cooperation with Danish energy companies. The UK’s commitment to green growth cannot deliver without the professionalism and capabilities of the companies in this room – the partnership, investment and knowledge-sharing that has already happened between us must, and will, continue.