Speech

Michael Fallon speech to the Npower business customer conference

Innovation has always been the key to successful energy policy.

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

The Rt Hon Sir Michael  Fallon MP

Introduction

Innovation has always been the key to successful energy policy.

It has never been as simple as rolling out one proven means of power-generation. On the contrary, we have always endeavoured to find new sources in new places, whether we look at the first generation of nuclear power stations in the 50s, or the opening up of the North Sea in the 60s.

In the past, innovation has given us access to more – and therefore more secure – energy, and at lower cost.

Today, it must also mean cleaner energy, so that we can move towards a low carbon economy and a sustainable, secure, affordable energy future.

I am going to set out what Government is doing to set the framework for an innovative, diverse energy mix and I will talk about some particular technologies at the forefront of energy policy.

Electricity Market Reform – Outline

Electricity Market Reform is the framework which will deliver the cleaner energy and reliable supplies that we need, at the lowest possible cost.

Set out in the Energy Bill, which reached the House of Lords this week, EMR will attract £110 billion investment in this decade alone – the amount needed to replace our ageing energy infrastructure with a diverse and low-carbon mix.

This is essential to keeping our homes heated, our industries powered and our lights on.

Renewables, fossil-fuel plant equipped with Carbon Capture and Storage, gas and nuclear will all play their part.

Diversity will provide security for our electricity supplies and the low carbon mix will help us meet our emissions and renewables targets.

It’s not only that this will power our economy – the investment will also directly create jobs and growth across the UK.

Electricity Market Reform – detail

EMR works with the market and encourages competition, thereby minimising costs to consumers as we attract the investment we need.

Costs to consumers will fall only when the new plant start generating, with costs spread over the operational lifetime of the schemes.

At the core of our reforms is a new mechanism, the Feed-in Tariff with Contracts for Difference.

These long term contracts will provide long-term electricity price stability, and therefore revenue certainty, to developers and investors in technologies such as carbon capture and storage, renewables and nuclear.

Competition will bring down overall costs and, eventually, provide a level playing field where low-carbon generation can compete without support with other technologies in the electricity market.

We will also introduce a Capacity Market, to ensure that sufficient reliable capacity is available to meet electricity demand as it increases over the next decade.

These new mechanisms will be underpinned by a robust and transparent institutional framework which will provide certainty for industry and investors.

Energy Bill

The Bill is making good progress through parliament. This is a reflection not only of Coalition consensus around our reforms, but also representative of cross-party agreement on our objectives for the sector.

Discussion in the Commons has been wide-ranging – covering issues ranging from the setting of a decarbonisation target for 2030 to transparency. This debate is healthy and welcome – it is hugely encouraging that these discussions are around the fine-tune EMR rather than a disagreement with the underlying principles.

We are on track to achieve Royal Assent of the Energy Bill by the end of this year, setting in law the framework for Electricity Market Reform, and allowing the first Contracts for Difference to be signed in 2014.

Decarbonisation Target

The new Government clauses added to the Energy Bill enable the Secretary of State to set a legally binding 2030 decarbonisation target for the electricity sector in 2016.

These provisions enable the Government to set the world’s first legally binding target range for power sector decarbonisation and they do this in the right way by taking into account the needs of investors for clarity about the long term, the costs to consumers, and the transition of the whole economy to meet our 2050 target.

A decision to exercise this power will be taken once the Committee on Climate Change has provided advice on the level of the 5th Carbon Budget and when the government has set this budget, which is due to take place in 2016.

This timing ensures that any target would be set at the same time as the fifth carbon budget, which covers the corresponding period and within the overall framework of the Climate Change Act.

This means that a target would not be set in isolation but in the context of considering the pathway of the whole economy towards our 2050 target, and making sure we do that in a way that minimises costs both to the economy as a whole and to bill payers.

North Sea

Last century, electricity generation was dominated by fossil fuels. Oil and gas will remain central to the UK’s energy mix as we make the transition to a low carbon economy.

We continue to work closely with industry and we have a fiscal regime that encourages further investment, bringing forward new UK fields while the existing infrastructure is in still place.

Working together, my two Departments have launched an Oil & Gas Industrial Strategy to maximise recovery, maintain competitiveness, and promote growth of the UK supply chain.

Shale Gas

Shale gas is a prime example of a new option available because of technological innovation. A combination of hydraulic fracturing and horizontal drilling have opened the possibility of exploiting fuel which were deemed too difficult or too costly to extract just a few years ago.

It is true that shale has led to significant price falls in the US. However, we are still at an early stage in the UK and need to explore and prove the potential, safely and while protecting the environment.

Despite some far-fetched claims in the media about the implications of shale gas for the UK, there is no doubt that it has the potential to add to indigenous energy supplies.

We are building momentum - by setting up the Office for Unconventional Gas and Oil; taking forward work on a new onshore licensing round; and planning to incentivise shale gas development, as announced in the Budget.

Carbon Capture and Storage

Carbon Capture and Storage will have a critical role to play in reducing emissions in the UK and allowing gas and coal to continue to participate in our future low carbon energy mix.

We want to see CCS deployed at scale in the 2020s, competing on cost with other low carbon technologies.

To make this happen, Government has created a comprehensive programme, including a CCS competition with £1bn capital funding available.

Our two Preferred and two Reserve bidders were announced in the Budget. We aim to sign FEED contracts in the summer; with decisions to be taken in early 2015 to construct up to two full projects.

These projects offer us the opportunity to ensure that both gas and coal generation have a hugely reduced impact on our carbon emissions.

Renewables

We are strongly committed to a long-term future for the UK renewables - a commitment underpinned by a publicly-stated annual budget of £7.6bn for low-carbon electricity by 2020.

However, our ambition extends beyond 2020. Our goal is to put renewables firmly in the energy mix over the period of the 4th carbon budget.

To take marine energy, we have prioritised funding for the next big step for the industry: the move to the first arrays. Firstly through DECC’s £20m Marine Energy Array Demonstrator – MEAD for short; and secondly through prioritising marine energy projects in accessing EU NER 300 funding.

As a result, a Scottish Power Renewables’ and a Marine Current Turbines’ projects were recently awarded around 40m € in total of NER 300 funding. This represents a tremendous opportunity for these two UK projects to demonstrate the sector’s future potential.

New Nuclear

The UK has everything to gain from becoming the number one destination to invest in new nuclear.

We are in negotiations with NNB Genco about the potential terms of an Investment Contract (an early form of CfD) that might enable a decision on their Hinkley Point C project – for which planning consent has been granted.

The last quarter of 2012 also saw the successful sale of Horizon Nuclear Power to Hitachi, regulatory approval of the EPR reactor design, and the beginning of site characterisation work at Moorside.

Direct Innovation

The government also invests directly into a variety of smaller projects across a broad portfolio of innovative technologies - in excess of £800m in this spending review.

This will ultimately drive down the costs of new low-carbon technologies, making clean energy cheaper for householders and businesses.

Business Consumers

I know higher energy bills are hitting businesses hard.

Competition is key to keeping prices as low as possible. Although there is more competition in the business supply market than in the domestic market, we need to see greater engagement from small business consumers.

Ofgem’s non domestic retail market review proposals will provide greater protection and clearer information to small business customers to help them engage in the market.

Ofgem plan to introduce new enforceable standards of conduct will mean suppliers will have to act promptly to put things right when they have made a mistake.

And they will widen existing licence conditions to enable up to 160,000 extra smaller businesses to benefit from clearer contract information on their bills.

Energy Intensive Industries are also critical to the UK economy and the Government is committed to ensuring that they remain competitive. We announced the £250 million package of compensation for these industries whose international competitiveness are most at risk from indirect costs of the Carbon Price Floor and the EU Emissions Trading Scheme.

Conclusion / Energy Efficiency

So, Government is legislating to put in place a framework which will see our energy supply diversified to meet our energy goals: secure, low-carbon, affordable.

And work is underway across the board to facilitate the development or deployment of promising power generation technologies.

One final area of innovation which may be of particular interest to businesses is energy efficiency.

The Coalition Government has a mission to seize this opportunity. The Energy Efficiency Strategy sets out actions to exploit untapped, cost-effective potential.

We estimate that we could be saving the equivalent to 22 power stations in 2020.

And we have also brought forward amendments to the Energy Bill so that a financial incentive to encourage permanent reductions in electricity demand can be delivered through the Capacity Market.

The Electricity Demand Reduction incentive would be available to a range of sectors and technologies and could target reductions at peak demand and so incentivise reduction at times when it is more valuable.

As you will appreciate, doing more with less makes economic sense for businesses and for the country.

Published 7 June 2013