Charles Hendry speech to the CBI Energy Conference, 14 June 2011
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Introduction - Challenges It is a year in which we have seen the energy landscape change beyond recognition. If you look back just 15 months…
Introduction - Challenges
It is a year in which we have seen the energy landscape change beyond recognition. If you look back just 15 months, we have had Macondo and what that has meant in terms of oil and gas exploration; the crisis in the Middle East and what this has meant for our oil and gas security; Fukushima and what that means in terms of our nuclear safety; and Germany saying they will not only have no new nuclear, but will also bring forward the closure of its nuclear plant. We have also seen the coldest winter in 100 years, and the challenge that requires us to meet in terms of guaranteeing the energy security. In just a year the outlook has changed, and also the challenge we face with that.
The challenge we as government face is to come up with an energy policy that delivers safe, secure, low-carbon and affordable energy to 2050 and beyond.
It will not be easy. Demand for electricity could double by 2050, as we see increasing use of electricity to heat our homes and the increasing role out of electric vehicles. And over the next ten years, a quarter of our generating capacity will close. As the reserve margin of spare generating capacity falls, the risk of interruptions to our energy supply rises. And nothing to you as industrialists and business people would create a greater risk to your energy costs than a shortage of supply. So for me as Energy Minister, I want to ensure you have the security of supply for the years ahead, in a low carbon way, and you have the affordability that you need.
If we are going to do that, we have to have record levels of investment, this is an incredible business opportunity in its own right. We have to see twice the levels of investment as in the past decades. The fact is we are not seeing anything like those levels of investment and we have to catch up. Because if we fail to do that, it will be catastrophic not just for business, but for the UK as a whole.
And it must be low-carbon. By the end of this decade, the UK must cut its carbon emissions by 34% on 1990 levels. And we need to generate 15% of our energy from renewables by 2020, up from 6.7% in 2009, to meet our contribution to the EU renewable energy target. And this comes at a time we need to update our energy infrastructure in any case. A third of our coals closes as a result of the Large Combustion Plant Directive in five years’ time; much of the rest of our coal plant closes at the end of the decade; and by 2023 only Sizewell B as our newest nuclear plant, is guaranteed to be open.
So what we have to do as a government is make the United Kingdom one of the most attractive places in the world to invest in energy. This transformational agenda is a huge commercial opportunity for British business worth billions - it’s that opportunity we need to unlock.
One year on
We have always been clear that the ‘greenest government ever’ should be judged by its actions, not just by our words. So I would like to begin by reflecting on the great progress the government has made over the past year in incentivising the development of low carbon technologies and providing investors with the certainty they need to invest here in the UK.
Let me start with renewables. We all know the UK has a challenging target to produce 15% of renewable energy by 2020. We are committed to meeting this and in doing so bring a massive boost to the UK’s manufacturing industries. Renewables are important not just because they are low carbon. When Sizewell B was out of operation for a period last year, our wind system helped to fill the gap by producing 4.4 TWh of electricity from April to September - this is what around a million homes would use in a year. 3.1TWh of this generation was from onshore turbines. I have no idea what the price of other resources will be next year, whether uranium, gas or coal. But the price of wind, and marine I know - where there is a cost of construction, but where the fuel itself is free. This brings a lot of energy security.
Over the past year we have brought forward a suite of instruments to financially incentivise the renewable energy industries.
In the Spending Review the Prime Minister announced up to £60 million for offshore wind manufacturing infrastructure at ports to boost offshore wind projects. And one of the most exciting aspects about all of this is that some of the areas of our country that have been in decline over the last 30-40 years, will now see high quality, good, clean, well numerated jobs, and with them a lifetime of opportunities.
Since the announcement, companies such as, Siemens, Gamesa, Vestas and Mitsubishi, have announced potential offshore wind investments in the UK over the coming years. Whilst there is still a great deal of work that needs to be done before these announcements translate to operational factories or research centres, this indicates the attractiveness of the sector in the United Kingdom - and these announcements represent potentially hundreds of millions in investment into the UK economy and thousands of new jobs.
We have also brought forward the Renewables Obligation Banding Review by a full year, introducing RO grandfathering and phasing for offshore wind and sustainability standards to encourage confidence in developers and investors thus enabling further deployment.
And we have launched the Feed-In Tariff Scheme and announced details of the Renewable Heat Incentive - the first financial support scheme for renewable heat of its kind in the world.
But we are not just about setting and following targets for the sake of it. We need a vision and we need roadmaps, to get us there that provides certainty and clarity for potential investors. So we will shortly be publishing our Renewable Energy Roadmap - which focuses on how we overcome barriers to deploy the technologies that are key to the delivery of our 2020 targets.
And we will setting out a vision beyond 2020. In every discussion I have with businessmen, we know 2020 is too close to make investment decisions. And you need to know there is a market out there to 2050 if you are going to be building new plant to meet that demand.
And we expect to do that across the whole of the UK. Next week I shall be setting out with the Prime Ministers, and First Secretaries of the country - from England, Scotland, Northern Ireland and the whole of the British Isles - how we can provide an All-Islands-Approach. So we can look at where there is resource available, how we can harness that most effectively, and how the resources across the islands can contribute towards the wider good.
Improving Grid Connections
Of course you can’t proceed with new plant without grid connection. Connection to the electricity grid represented a significant barrier to renewable and other low carbon generation in recent years. In fact, previous grid access arrangements had meant connection dates as late as 2025. We set about reforming this approach in an enduring way because we believe that is essential for investor confidence.
In August 2010, we introduced a new enduring ‘Connect and Manage’ grid access regime, enabling new generation to connect to the network quickly. This built on the successful interim arrangements introduced by Ofgem, and has provided greater certainty for new generators about the rules for grid access over the long term.
To date, 69 large generation projects - representing a total capacity of 26 Giga Watts, a third of our existing capacity - have advanced their connection dates under ‘Connect and Manage’ by an average of six years. In terms of what government can do to really drive forward investment, this is one of the most important changes we can make. And In addition, 74 small-scale generation projects have also benefitted. This demonstrates the value of ‘Connect and Manage’ in supporting investment in new generation.
We are working with Ofgem and National Grid to ensure that our grid access reforms continue to deliver the right results.
We have also shown we are up for backing investment in energy innovation. For CCS, which is a game changer internationally - it means coal and gas can play a role in the future for many decades to come.
The government is committed to public sector investment in CCS technology for four power stations. The allocation of £1bn in capital expenditure announced in the Spending Review last October for the first demonstration competition is the largest confirmed commitment to a single commercial-scale CCS project in the world. This will ensure that the UK continues to lead the way on developing CCS. The announcement was particularly significant coming at a time of severe pressure on the public finances.
We aim to reach agreement on the first project, which we hope will be Longannet in Scotland, and launch a competition for further projects later this year.
In the last few years CCS projects around the world have been delayed or cancelled. In contrast The United Kingdom is committed to pushing ahead with the timescales set before.
CCS represents a massive opportunity for the UK - for jobs, for development and for our economy. CCS could sustain 70,000-100,000 jobs by 2030 alongside other related Carbon Abatement Technologies in the power sector; and the export opportunities for the British economy could amount to -up to 10bn a year by the late 2020s.
And we have the best academics in the world; a skills base with the experience of working in the hazardous conditions of the North Sea; and some of the best investment structures through the City of London. So we ought to lead the way in this technology, and the Government is committed to doing that.
Green Investment Bank
In this year’s Budget the Chancellor announced an additional £2 billion of funding on top of the £1bn allocated in the last spending review for the new Green Investment Bank, the World’s first national Bank dedicated to delivering investment in green infrastructure.
The GIB will be an independent and enduring institution that is enshrined in legislation. The Bank will have an explicit mandate to mitigate risks that the market currently will not take in order to mobilise private sector investment.
The Bank in Holland relatively similar to this had 1 billion Euros of core funding, which secured another 100 billion of related capital. And we are looking for that sort of leverage too to make sure we see similar progress here. We are determined to demonstrate rapid progress with the first investments coming forward within less than a year. From April 2015 the Bank will be able to borrow which will enable it to further upscale its activities
Planning & Nuclear
I know that for many of you as well, reform of the planning system is a huge issue for many of you here today. It is crucial that energy projects don’t face unnecessarily hold-ups, people get a chance to have their say about how their communities develop, and decisions are made in an accountable way by elected Ministers. That’s why we are putting in place the changes we are making.
But there will be no unnecessary delay in decision-making as a result. The Localism Bill sets the same timetable for Ministers to make decisions, and I can assure you that we will be aiming to take each decision as quickly we can. Decisions which are taken by Ministers, based upon National Policy Statements approved by Parliament and MIPU recommendations should be as legally robust as possible.
Last year we decided to consult again on our Energy National Policy Statements. To make sure they are as robust as possible, to give investors maximum confidence and to minimise the risk of successful judicial review.
But after the tragic events in Japan, we asked the Chief Nuclear inspector to report on the lessons learnt. We needed to consider these before proceeding to finalise the NPSs. Last month Dr Weightman made clear in his interim report the differences between Japan and the UK - we do not use the same reactor types, and do not plan to in future. We also do not expect to experience the extreme natural events seen in Japan.
As the Prime Minister and The Rt Hon Chris Huhne MP have both said, we want to see new nuclear as part of a low carbon energy mix going forward, provided there is no public subsidy. The Chief Nuclear Inspector’s report reassures us that it can. As does the Climate Change Committee, who support our view that nuclear is a safe power and the lowest cost, large scale, low carbon electricity source.
I can confirm today that we are very close to finalising the NPSs and will publish them extremely shortly, so that they can be put to MPs for approval before the Parliamentary recess.
We are looking too at the issues of energy efficiency. The starting point in moving us to a low carbon economy must be in reducing our demand in our homes and in our businesses. It’s where the “Green Deal” comes into force. People can invest in the energy efficiency measures that make sense for their homes and businesses - saving them money and energy.
We are well on track to bring in the Green Deal by Autumn 2012. The primary powers are contained in the Energy Bill which is currently going through parliament, and secondary legislation is being developed for consultation in the autumn.
We have high ambition for the Green Deal. Together with the energy company obligation it will help cut household CO2 emissions by 29% by 2020, in turn driving up to 14 million installations for the insulation industry alone. This is the sector that will employ hundreds of thousands of people by the end of the decade.
The recent Budget confirmed the government’s commitment to act to incentivise and encourage take-up of the Green Deal and DECC will work with the Treasury and other departments to consider how best to do this.
It is increasingly clear energy efficiency will be a key benchmark of a globally competitive company in the new century. The introduction of the Carbon Reduction Commitment has already increased attention on energy efficiency amongst the target groups.
We are however very aware that stakeholders are concerned over the complexity and administrative burden of the CRC and we have committed to simplifying the scheme.
We do not intend to keep fiddling with the scheme - we have this chance to get it right. We will come forward with more formal proposals in the course of the next few months.
Electricity Market Reform
But all of those issues which change the regulatory regime, are no longer going to be enough to stimulate the type of investment we need in this country. We have to show investors how they can make money by investing in the UK energy sector.
The current market has worked well, delivering adequate capacity margins and it is still delivering some of the cheapest oil and gas prices in the UK compared to Europe.
But it has not delivered enough investment in new plant. A quarter of our old power stations are closing, just as electricity demand is set to rocket as we move to using electricity for things like transport and heating. Over the course of this decade we need to attract more than £110 billion investment in new power stations and grid connections by 2020 - that’s double the investment rate of the last decade - and much more beyond that. And potentially £200 billion by the mid 2020s in the energy infrastructure overall.
And this is not going to happen if we don’t have a radical change. The process we are going through with Electricity Market Reform is the most significant change to the market in 30 years and the most important work we are doing as a government department in this Parliament.
We recognise that the companies we are appealing to are global companies, with global opportunities they have to find something that makes it attractive for them to come here or they will go somewhere else. So we must continue to make a compelling case - not just to the existing players, but new entrants as well, as competition is central to getting the best deal for consumers. We need to bring in new players both as generators and suppliers in order to drive down prices.
That is why the government’s proposals to reform the electricity market are the best deal for Britain: getting us off the hook of relying on imported oil and gas by creating a greener, cleaner and ultimately cheaper mix of electricity sources right here in the UK; nurturing a new generation of power sources including renewables, new nuclear, and carbon capture and storage, bringing new jobs and creating new expertise in the UK workforce. And establishing a long term role for hydrocarbons like gas as well, taking account of how the global market has changed over the years.
The reforms are aimed at giving existing players and new entrants in the energy sector the certainty they need to raise the level of investment they need. Ofgem’s review into the liquidity of the wholesale electricity market will be an essential complement to the reforms.
DECC is concerned about the contestability of the supply market and the barriers small suppliers face to entry and growth. That is why yesterday I announced an increase in the threshold from 50,000 customers to 250,000 for participation in two of our environmental and social programmes - the Community Energy Saving Programme and the Carbon Emissions Reduction Target for the remainder of these programmes. It is of course vital that we improve the energy efficiency of our housing stock, but we must do so without placing disproportionate costs on small suppliers which reduce their incentive to grow.
However alongside these opportunities that decarbonisation brings there are also fundamental challenges.
Industry is a major energy user and greenhouse gas emitter. In 2007 it produced 93 MtCO2 of greenhouse gas emissions and demanded 408 TWh of energy, 15% and 21% of the UK respective totals. This is despite falls in output from some of the most energy intensive sectors, as a result of the recession.
The government intends that UK-based energy intensive industries must and will play a full part in and benefit from the transition to a low carbon economy.
As announced as part of the fourth carbon budget statement, government will announce before the end of the year, a package of measures for the Energy Intensive Industries whose international competitiveness is most affected by our energy and climate change policies.
It would be madness to end up in a situation where big companies in the UK moved overseas, we lost the jobs, and carbon emissions would still be emitted in other parts of the world. We would have to re-import those products, there would be no climate change benefit, simply an economic loss to Britain. And so we are determined through those measures to address the threat of carbon leakage and make sure these businesses have a long term viable future in this country.
We are speaking to the sectors affected and further announcements will be made by the end of the year.
We have also taken action to address the potential competitiveness impacts of domestic legislation on electricity prices for energy intensive industries. For example, this year’s Budget announced:
- the government will not proceed with a Carbon Capture and Storage levy or RHI levy on electricity and gas bills and instead will fund its commitments to from general taxation;
- a cap on the cost of policies funded through energy bills;
- an extension of the climate change levy discount on electricity for participants in the Climate Change Agreements scheme to 2023 and an increase in the electricity discount from 65 per cent to 80 per cent from April; and
- a further 1 percent reduction in corporation tax to 26 per cent from April 1 2011. By 2014, it will be reduced to 23 per cent.
A skilled workforce is essential if we are to meet these ambitions and our carbon targets and realise the significant economic opportunities of the transition to a green economy.
But we know that there are challenges in growing the workforce and that action is needed to retain skills and train a new workforce.
As the energy sector is highly globalised these issues affecting the UK skills base are also evident around the world. It is therefore essential that we attract skilled workers to the UK to ensure we remain competitive within this global market.
That is why last week I wrote in support of evidence being presented by industry to the Migration Advisory Committee, in particular in the fields of nuclear, oil and gas, to encourage the free flow of highly skilled personnel these industries require.
So in all of these areas I hope you can see that we are listening to the concerns which you as the CBI have expressed and that we are working with you to make sure we deliver the right solution.
The long term transition to secure, affordable, low carbon energy on the way to an 80% cut in our greenhouse gas emissions by 2050 will mean major changes in the way we generate and use energy. It is going to one of the most important periods of industrial change this country has ever seen. Over the course of the next generation we have to change the way we generate electricity, we manufacture, communicate and travel. All of these areas offer incredible scope for innovators, investors and British businesses.
To meet this challenge, it is vital we set the right market frameworks to deliver these ambitious targets and address the challenges in reaching 2050 emissions targets.
These reforms will lay the foundations for a sustainable economy, bringing billions in investment in the UK through greater certainty, safeguarding jobs up and down the supply chain, and giving the UK real competitive advantage in advanced energy technologies.
Our goal is to make Britain the most attractive place to invest in energy. So for you as people that can be part of that rebuilding, and people that will be using the energy as well, we can make sure we make this a country that has secure, low carbon and affordable energy for the decades in the future.