Speech by the Secretary of State at the Low Carbon Investment Conference 2012
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Introduction When I think of the many visits I've made to Scotland in the course of my career, I think first of people I've worked closely with. Michael Moore, Malcolm Bruce, Charles Kennedy, Ming Ca...
When I think of the many visits I’ve made to Scotland in the course of my career, I think first of people I’ve worked closely with. Michael Moore, Malcolm Bruce, Charles Kennedy, Ming Campbell, Danny Alexander, Alistair Carmichael.
But as Secretary of State for Energy and Climate Change, I have even more compelling reasons to be here.
With its superb natural - and human - resources, Scotland is central to our plans for a thriving low-carbon economy.
This country is home to a significant proportion of Britain’s wind, wave and tidal energy, and almost all the hydro power.
Scotland has innovative companies and entrepreneurs; it has universities that specialise in energy research; and now Edinburgh hosts the UK’s Green Investment Bank, due to be launched very soon.
Much of the work we do to attract investors to Britain’s energy markets directly benefits Scottish businesses and Scottish communities.
So it’s particularly appropriate that I should be here to talk about opportunities for low-carbon investment.
Over the next decade, the UK energy sector is going to change radically: as more and more renewables and low-carbon energy come online, and significant infrastructure investments are made.
The UK’s investment need is strong. As ageing infrastructure is shut down, as demand rises, and as we meet our emissions and renewables targets, we need to double the current rate of investment in energy between now and 2020.
There are huge opportunities for new investors. Existing players’ balance sheets alone will not deliver investment at that scale. And when it comes to energy industries, the UK is a highly rated and attractive location for investment.
The opportunities for British businesses, if we play this right, are just as significant. From offshore wind to marine and tidal, we can turn promising beginnings into genuinely world-leading industries, with supply chains to match.
My priority is to provide certainty. To reassure investors and entrepreneurs alike that the UK is - and will remain - a fantastic place to do low-carbon business. And if you look at what we’ve done so far - and the work that’s still underway - I think you can see that priority clearly.
We are opening up markets, giving investors confidence for the long term, and removing barriers to entry.
Take the reforms of the electricity market in the Energy Bill, which are designed to unlock some £110 billion of investment in electricity infrastructure.
We want to encourage competition on cost between low-carbon electricity sources. So our strategy is to set up a framework that will offer reliable contracts delivered in ways that are trusted by investors.
We have chosen the Feed-in Tariff with contracts for difference, providing a guaranteed price to deliver clear and predictable revenue streams, bringing down the cost of capital.
I’ve spoken to global fund managers who say that the uncertainty of the current arrangement has put them off investing, but that contracts for difference give them the predictable revenue streams they need to invest in big projects.
Here’s how they work. We set a fair price for low-carbon electricity. The generator sells its electricity in the market, and is paid a variable premium to top up if necessary. And if the market price is higher than the strike price, the generator pays back the difference.
The key thing here is certainty. Contracts for difference can help smooth out market volatility, not only minimising costs to the consumer, but also making investment and financing decisions easier. And because energy still needs to be sold in the market, there are still powerful incentives to encourage energy efficiency.
The reforms in the Energy Bill are specifically designed to move us away from such intervention - and to blaze a trail towards competition. That is the ultimate aim of our reform of the electricity market.
Let me be clear: I’d love to see low-carbon power sources competing on cost alone. But we can’t just flick a switch and make it happen instantly. So our reforms are phased.
First, we’ll introduce contracts for difference, with prices set administratively to begin levelling the playing field.
Then, as different technologies mature and start becoming more cost competitive, we’ll see the first technology specific auctions, perhaps as early as 2017.
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 in managing supply.
Finally, when all technologies are mature enough and the carbon price is high enough and sustainable 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.
So the reforms in the Energy Bill are about building a framework for a new, competitive electricity market - unlocking a huge amount of investment, and changing the way we generate electricity.
But we also want to change the way we save energy. So we’re creating a new market, to bring substantial energy savings within reach for millions.
The Green Deal is our flagship energy efficiency programme. It will enable homes and businesses to pay for energy efficiency improvements through savings on their fuel bills.
A successful, effective Green Deal will save money, save carbon - and make a real contribution to economic growth: supporting new jobs and businesses, and unlocking unprecedented choice for consumers. It’s a programme that will to run not for years but for decades.
People will get warmer homes for less. And businesses will get the chance to be part of new installation and supply chains stretching right across the country.
We want to establish a vibrant new market in energy efficiency, one that could attract over £10bn of new energy efficiency investment in the residential and business sectors over the next decade.
Then take our work to bring on renewables. It’s not just about hitting our legally binding targets; it’s also about reducing our energy imports, and insulating our country from spikes in global energy markets.
A greater role for sustainable energy sources within our diverse energy mix can protect Britain from fossil fuel price shocks.
It can also bring significant growth to our economy. Last week I was at the launch of norstec, a new industry-led network focused on realising the potential for offshore renewables in the northern seas. Some of you may have been there too; certainly I hope to see many more of you at future events as the network continues to grow.
Norstec set out a vivid and compelling vision of the opportunities this sector can bring, the jobs and investment it can generate. And I made clear, as the Prime Minister also has, that this is a vision that we support fully.
We are focused not just on growth, but on a more balanced form of growth, with decisions taken for the long term.
Our commitment to a low-carbon future is driven by a hard-headed assessment that it is good for our economy and essential for our long-term energy security
That is why we want more renewables in our energy mix - and why, over the past two years, we’ve added more renewable capacity than at any time in the last decade.
That’s a good start, but we still have a long way to go. If we’re to get 15% of our total energy from renewables, we’re going to need closer to 30% of our electricity to be renewable. That is a significant challenge in itself, but we also need these crucial new technologies to deliver in a cost-effective way.
The cost of support for renewables isn’t huge - at the moment, it’s around 3 pence out of every £1 on the average household electricity bill - but it is there. We have a responsibility to our citizens to create a low-carbon energy mix that’s affordable - for the taxpayer, the bill payer, and the wider economy.
We expect the cost of generating electricity offshore to fall, and we are working closely with industry to deliver further savings.
There’s a historical precedent here: our oil and gas supply chain benefited from direct and indirect government support, building a world-class industry.
As Lord Browne argued in a report for the Royal Academy of Engineering, we can and should do the same for offshore wind.
And as the Cost Reduction Taskforce showed, if we work together, cost-competitive offshore wind could be less than a decade away. Right across the supply chain, from research and design to operations and maintenance, I want all of our renewable industries to be ready and able to hold their own on the world stage.
Scottish Island Renewable Generation announcement
Scotland is already at the forefront of the UK’s renewables industry, and I am keen in particular to harness the tremendous wind and wave resources in the Scottish Islands.
I have been impressed with the wind and marine developments I’ve seen on Shetland and Orkney this week.
I welcome the role that the Islands want to play in meeting our renewables targets; but I also recognise the concerns they express about the speed of progress with their projects.
So I am pleased to announce, in conjunction with the Scottish Government, an independent study on Scottish Island Renewable Generation, driven by a new Steering Group.
This study will assess the commercial viability of renewable projects on the Scottish Islands, and consider any barriers to their development.
I want all interested parties to have a chance to engage with this study, and I want progress to be quick.
Carbon Capture and Storage is another technology we want to see in our low-carbon energy mix - and another sector where Scotland has significant expertise.
So I am pleased to announce a £20m investment, through the Energy Technologies Institute, to develop next generation CCS technology for gas power stations - investment which is part of the Government’s 4-year, £125m R&D programme to develop cheaper, better CCS technologies.
This project will see a new five-megawatt CCS demonstration plant constructed, the core of which will use Scottish-manufactured components, and which will be capable of capturing up to 95% of CO2 emissions.
Immediately after this conference, I am heading down the road to Renfrew, to see for myself the work being done by the two Scottish-based companies involved in the project.
One is Howden - a 150-year-old company which worked on London’s iconic Battersea Power Station back in the 1930s. It has now shown decades of Scottish innovation, has already exported $10m worth of CCS components, and is still creating jobs and actively hiring engineers.
The other is Doosan Power Systems - a global company which has chosen Scotland as the base for its CCS Centre of Excellence.
CCS provides an excellent opportunity for British manufacturing, and I am delighted to see Scottish companies in the vanguard, creating jobs for skilled workers and growth for the economy.
I am determined that the UK will retain its reputation as one of the best places in the world to invest in energy.
So we’re also working to break through some of the non-financial barriers holding up investment - for example through planning reform. The National Policy Statements on energy will make our planning system faster, more predictable, and more accountable.
To overcome non-financial barriers to deployment of renewables, we’ve got the Renewable Energy Roadmap, which focuses on the eight key technologies which have greatest potential.
And we’re determined to see a more liquid and competitive power market, so we are working with industry and Ofgem to ensure all investors can manage risks and have fair routes to market.
Consumer bills: collective purchasing & switching announcement
As we drive forward low-carbon investment, I’m keen that we don’t lose sight of the critical interaction that most people outside the industry have with the energy industry: their household electricity and gas bill.
Here in Scotland, I know that consumers have faced rising bills, and I am more convinced than ever that collective purchasing and switching can play a big role in helping Scottish households get a better deal for their gas and electricity.
That is why I am issuing a challenge to local authorities and third-sector organisations to come up with new collective purchasing initiatives, and why the Government is putting up £5m in funding, across Great Britain, to help these get off the ground.
I am particularly keen to see schemes focused on using collective purchasing to help the most vulnerable households.
It would not be possible to speak here in Edinburgh about the energy industry without at least noting the independence debate that is unfolding.
It won’t surprise you to hear that I believe Scotland is stronger as part of the UK and that the UK is stronger from having Scotland within it. Renewables are a case in point.
Scotland’s superb natural resources and growing expertise hold massive potential, helping the UK to deliver our target of 15% of energy by 2020.
And the economics of renewables means that Scotland benefits from complete integration with the UK consumer base, providing certainty and security to underpin the full commercial potential of renewables here.
In an increasingly interdependent world, I believe it’s an inescapable fact that we are best able to make the progress we want on energy security and climate change by remaining not only in a single energy market but within a single economy.
I believe that a stable constitutional settlement and consistent economic framework contribute significantly to investor confidence.
Facing so many collective challenges, we must share our strengths and pool risk where we can.
And I believe that it is by working together, as proud nations within the United Kingdom, and without creating a new international boundary between us, that we can most effectively realise our shared objectives.
I mentioned the UK Green Investment Bank earlier. Alongside our reforms to the electricity market and a step-change on energy efficiency through the Green Deal, the UK Green Investment Bank heralds the beginnings of a new industrial policy, as it opens for business and starts making its first investments.
As with the Government’s other energy and climate policies, the UK Green Investment Bank is about looking to a different horizon - not just thinking short-term, but building a more sustainable economy.
The Bank is genuinely a world first, and I know that capitals around the world will be looking to this great capital city, monitoring the Bank’s progress.
Without wishing to labour the point, it is also a perfect example of the strengths of the UK - why Scotland and its partners in the UK are better off together.
People in England, Wales and Northern Ireland will benefit from the significant expertise that Scotland’s financial and green energy communities - working closely with colleagues in London - can bring to the UK Green Investment Bank.
And the decision to base the Bank in Edinburgh - a bank capitalised with £3bn of UK Government money, thanks to the strength and depth of the UK fiscal base - means there is real potential for the development of green energy and finance clusters in Edinburgh and the rest of Scotland, to the benefit of us all.
But the next speaker is more qualified than I am to talk about the Bank, so let me hand over to him. Thank you.
Ed Davey acts on Scottish energy issues
DECC Press Release