Speech

Charles Hendry's speech to the NOF Energy Conference

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Introduction Thank you for that kind introduction. It’s a privilege and a pleasure to be here today. And it’s a wonderful time to be talking…

Introduction

Thank you for that kind introduction. It’s a privilege and a pleasure to be here today. And it’s a wonderful time to be talking about opportunities within the energy industry and the supply chain, and I’d like to continue along that theme.

The North East has enjoyed a long and fruitful relationship with the energy sector, especially when it comes to engineering and building complex structures for the North Sea.

Over the past four decades many of the important oil and gas producing platforms were constructed in yards along the Tyne and Tees. Today, after years of retrenchment, we are now seeing a renaissance with increased levels of investment and the promise of a new life at the heart of the offshore renewables industry.

Oil and gas remains a hugely important sector both from security of energy supply and also for the prosperity and jobs it supports in our national - and this region’s - economy.

Last week the industry association, Oil and Gas UK, published its activity report, which confirmed my own view of real upturn in investment, which I am confident will filter down to business here in the North East.

It’s also clear that last year was an exceptional year for the UKCS, with a significant increase in the level of investment and number of new oil and gas projects approved - 14 new offshore developments including several large projects of a scale we haven’t seen for some time.

The outlook for this year is even stronger. This high level of activity is extremely encouraging and will have a positive impact on security of energy supply for the UK. It should also stimulate significant opportunities for this area and the UK businesses as a whole, creating many new quality jobs and supporting local economies.

Have no doubt that we will pursue policies to ensure we extract as much of our own oil and gas as we possibly can. Hydrocarbons have a key role in our own imports and I want to see as many jobs here in the UK to promote our own growth. I’m not prepared to see jobs exported when they could be here.

But I’m also here today to talk to you about Electricity Market Reform (EMR).

To me it’s is at the heart of DECC’s delivery. It’s one of the most important pieces of work that we will do this Parliament.

Our priority over the coming years is to see that the price signals and investment incentives through the markets continue to bring forward investments in energy generation. So that they are sufficient to “keep the lights on” in the medium- to long term.

There’s no doubt our market, although it’s operated well historically, needs to adapt to the newer challenges and priorities that this era brings.

So market reform is fundamental to all of our energy needs - to our energy security, to the low-carbon agenda and to affordability. It is to ensure that at a time when we need to rebuild our energy infrastructure anyway, we do it in a way that is truly low carbon. And in doing all of that, it will deliver a better deal for consumers.

So the purpose of EMR is to make it attractive for businesses to invest in our electricity and wider energy infrastructure. And that is made harder because today, so many of those potential investors are based overseas, looking globally for the best opportunities.

So, we have to make it attractive for that investment to come here - not just the existing players, but new entrants as well, as competition is central to getting the best deal for consumers. And for getting jobs in the supply chain.

The challenge

That’s why last December we published a consultation on EMR.

These changes are not being made on a whim or some flight of fancy. We are making them because we have to.

Because the simple truth is that the old system will not deliver the volume of investment on the timescale that we need it. In just five years, one third of our coal plant will be closed. Much of the rest will have closed by the end of the decade. In twelve years time, all but one of our nuclear plants is scheduled to have closed. So, the reality is that we needed to see more new plants under construction than is currently the case.

And because of the failures in the past to do enough to address the threats to our energy security, it has been harder to respond to our needs to decarbonise our society. And in turn, that is putting more pressure on prices - both for domestic and industrial consumers. I never forget that you, the companies represented here today, are not just building up our energy infrastructure; you also have to pay the bills.

Government doesn’t just need a plan. It needs a roadmap and to know how to deliver that roadmap.

What EMR can do

EMR is also designed to ensure we have a balanced portfolio of electricity generating assets, so we never become too reliant on one source of electricity.

Gas is abundant today in a way that was not expected even five years ago, but we are increasingly dependent on imports. A prudent government should see the benefit that gas generation can bring but ensure that it is one element in a broad energy mix.

We want to see new nuclear in the mix, but even the most ambitious nuclear programme possible would only see us replacing retiring nuclear plants over the next ten to fifteen years.

We want the UK to be a world leader in CCS, but as yet it is an unproven technology - yes, we firmly believe it will work, which is why we have allocated £1bn to our first commercial CCS project. But it will be the end of the decade before we roll it out more generally.

So all of that means that we must do much more to harness our own resources - not just because renewables are an integral part of our low-carbon future, but because they are an integral part of our energy security.

Once a wind or marine facility is built, the ‘fuel’ is free and it’s ours. Of course the output is variable, but at a time of recent high oil and gas prices, it would be a total failure of government not to ensure we get the most out of our own home-grown - or perhaps more appropriately, home-blown(!) - resources.

And the North East stands more to gain than most.

Through reforming market it’s assumed that your average electricity bill could increase by less than what they would have done without EMR reforms. That’s on the basis of $80 barrel oil price [central fossil fuel price assumptions].

A higher oil and gas price will mean more savings in the long term because with EMR electricity bills would not follow fossil fuel and carbon prices to the extent they do today. But in doing this, we must never lose sight of the interests of those who pay the bills.

The market structure has delivered real benefits for consumers, who have historically had some of the lowest gas and electricity prices in Europe, but all that changes if supply does not keep up with demand.

It is the most basic law of economics that if demand rises ahead of supply, then prices will rise; and if supply goes up faster than demand then the consumer gains.

We need to get away from the idea that the Government has to choose between energy security, low carbon or affordable prices. And instead we have to recognise that the key to affordability is energy security. In the modern age, security and low carbon go hand-in-hand. And there’s our problem.

As we see greater use of electricity over coming years to power electric vehicles and to heat our homes, demand is going to rise - even with our massive commitments to energy efficiency, we will need almost 50 per cent more electricity in 2050 than today. And we are not seeing plans to build enough new plant to deliver that extra supply.

Indeed, over the rest of this decade we need to see investment in the electricity sector at twice the rate of the last decade if we are to ensure our energy security in the medium- and long-term, and meet environmental targets. If we don’t do that, prices will go through the roof and it is only through the reforms we are making that we can avoid that.

It’s a £200 billion opportunity in top of the North Sea opportunities. Those involved in CCS in this room also stand to gain from this. I’m determined to see more of those supply chain jobs come to the UK.

Conclusion

But of course, none of this will happen overnight. Nor will it come cheap. But all this is absolutely within our reach. The glass is most definitely half full.

My ambition is to take the issue of energy security off the agenda completely. It is to put in place a structure that will make the UK one of the most attractive places for investors.
Having competitive energy markets is integral to the delivery of climate change goals in the UK. And not going through with this reform has severe consequences.

It is by taking action now that we secure the low carbon jobs for Britain and keep prices affordable. Only with you can we make this happen. In fact, it’s what we’ve been missing over recent years. It’s called an energy policy.