Speech to the CBI Energy Conference 2014
Edward Davey speech to the CBI Energy Conference 2014.
Introduction
The last speech I gave - last week at the launch of Smart Energy UK - I was followed at the podium by Sir Bob Geldof – who gave a typically forceful, engaging and…..shall we say….colourful…speech.
Today I’m being followed by Fatih Birol, from the IEA.
I’m sure he’ll give an engaging speech too - though I’m not expecting quite as many ‘f words’……
But there is one ‘f word’ I do want to start with today.
Fiscal. The fiscal deficit this Government inherited.
When the Coalition Government took power in 2010, the economic challenge ahead of us was clear.
Reduce the deficit. Get the public finances in order. Get the economy back off its knees. Get Britain moving again.
This was the central reason the Coalition was formed in the first place.
And the Liberal Democrats were proud to take charge of the Department of Energy and Climate Change.
Because we recognised that energy could be a driver for the growth the country so desperately needed.
Growth is now returning to the economy. Britain’s fiscal deficit is shrinking.
There can be no complacency. But with the fastest growing economy in the G7 we can at least be optimistic.
More people are in jobs than ever before.
And what’s more, today’s growth is more balanced than in the past - with the major sectors of manufacturing, services and construction all on the up.
And as I want to demonstrate today – energy and climate change policy is one of the drivers of Britain’s new balanced growth.
To tell the story of the Coalition’s energy and climate policy, I do need to take you back to 2010. For the difficult inheritance we faced was not just on the economy.
It would not be hyperbole to say that back in 2010, we faced an energy crisis, alongside our economic crisis.
But - just like with the economy – we’ve been gradually turning things around.
And to illustrate the huge progress we’ve made, I want to focus on two things today – first, the huge investment we are now seeing in Britain’s energy infrastructure;
And second, and linked, energy security, and how we have now defused the energy security time bomb we inherited from Labour.
Today I am publishing the Government’s first ever annual Energy Investment Report. This sets out the record in each area from electricity to gas, renewables to nuclear, energy efficiency to the North Sea.
And it’s a record I believe we can be proud of.
Because it now places Britain not just as one of the most attractive countries to invest in energy infrastructure – in the world.
But also as a global leader in low carbon energy technology.
And – interesting in the light of today’s CBI poll - one of the most energy secure countries anywhere in the world.
But let me start with that picture back in 2010.
And, to be balanced, let me also start with what was beginning to go right – as it wasn’t all bad.
Climate change
For, by working across parties to achieve a wide political consensus, Ed Miliband, as Energy and Climate Change Secretary, piloted the 2008 Climate Change Act through Parliament.
That Act is a key feature of our energy policies today – rightly – because it ensures that, alongside energy security and price, low carbon energy is a core objective.
Indeed, you here at the CBI has been at the forefront of arguing for action on climate change. And you deserve credit for that.
This organisation and its members recognise both the risks to the UK from climate change – as well as the opportunity that low carbon growth provides.
To coin a phrase – the colour of growth is green.
Yet while the last Government and the last Parliament did achieve the link between energy and climate, unfortunately that’s where the good story ends.
For in almost every other area of energy policy, the legacy left by Mr Miliband in 2010, was woeful. Verging on the negligent.
Negligent on markets and energy prices. Negligent on low carbon energy investment. And negligent on energy security.
The markets
Let me start with energy markets.
While New Labour had taken forward the process of privatisation, lifting price controls and the like, it took its eye off the competition imperative.
Miliband failed to challenge the excessive market power the Big 6 had been accumulating. And consequently diversity and innovation decayed.
And Miliband even botched the reforms to Ofgem, the energy regulator Labour created, failing to give them the powers to properly help consumers.
And in the absence of both competitive markets and strong, consumer-focused regulation, the results were predictably bad.
An opaque and complex system, with poor customer service for many. A baffling array of tariffs. Confusing bills. A tortuous switching system that was a discouragement rather than a spur to competition.
And no reason for the suppliers to compete fiercely on either price, service or value.
Slowly and surely, we are turning this around.
Deregulating to stimulate market entry – so there are now a dozen new independent suppliers taking on the Big 6. With the market share of independents growing more than five fold since 2010 and still increasing fast.
We’ve empowered Ofgem - and backed them fully when they’ve acted to help consumers and boost competition:
Easier to understand bills; simpler tariffs; faster switching. In little over 4 years this has been quite a revolution.
But there is still a long way to go.
That’s why last year I asked the competition authorities to do an assessment of the energy markets.
And Ofgem has subsequently referred those markets to the new Competition and Markets Authority.
Some in the industry don’t like what I’ve had to say on competition – that’s tough.
Tackling these issues through independent competition authorities, rather than through ill-thought through electoral gimmicks like state-regulated price freezes, is a far better way to provide companies and investors with the confidence that future market reforms will be evidence-based, fair and just, and free from political interference.
But, in 2010, it wasn’t just the markets that needed desperate attention.
Decarbonisation
On decarbonisation itself we inherited legal obligations to cut emissions, and meet carbon budgets - but without any credible, practical long-term strategy to deliver that.
So we had to work fast – with the most profound reforms to Britain’s electricity markets since privatisation.
We have now put in place one of the best and most comprehensive financial and legal frameworks for energy policy anywhere in the world.
The 2013 Energy Act puts in place the incentives necessary to drive investment in low-carbon electricity generation. To create the world’s first low carbon electricity market.
With a transition that is gradually moving us away from the clunky, expensive interventions we inherited, towards a technology neutral market that incorporates all kinds of low-carbon technology, from renewables, to nuclear, to carbon, capture and storage.
And that means we will go green but at the lowest possible cost.
For our move to low carbon market mechanisms is first reducing subsidies, then requiring investors to compete for ever lower subsidies and then will see such subsidies reduced to zero, as new technologies like CCS and offshore wind mature and become competitive in a world where carbon will be properly priced.
And while there is no question that there is a cost in the short term, unlike other countries, we have introduced robust disciplines on those costs – and helped the more vulnerable consumers and businesses with those costs.
The Levy Control Framework is our budget for low carbon support – and it’s capped. That’s why you hear about some CCS and some renewable projects not going ahead – because not every project can get support when we’ve a limited budget to keep costs down.
And while the levy control framework still has a cost, we’ve acted to target help for the fuel poor with that – for example with the Warm Home Discount targeted at 2 million low income households. And we’ve acted with targeted support for energy intensive industries too.
And once again, to reaffirm our commitment to transparency on these costs, I will be publishing the detail in the Annual Prices and Bills Report during the summer.
Transparency that you don’t see in other countries.
Energy security
But going back to 2010, perhaps the worst energy policy inheritance the Coalition had was in energy security.
When the Coalition Government came to power, we inherited a record of historic underinvestment in energy infrastructure, that, if neglected threatened an energy security crisis - specifically on the security of electricity supply.
A fifth of our existing power stations were scheduled to close by the end of the decade because they were old, inefficient or polluting.
Electricity transmission and distribution networks needed major repair, replacement and investment.
No new nuclear power stations had been commissioned for decades.
And while renewable generation was growing slowly – the pace of growth was far too slow to plug the gap.
In 2010, Ofgem’s Project Discovery report not only set out the scale of this problem - but also suggested that the mid-decade period we are now coming to would be particularly challenging as so much plant would come off line.
Energy Security should be a critical task for all Governments.
For it’s not just about making sure that our people can heat and power their homes – vital though that is.
It’s about industry – powering our factories. Energy security is a key economic task.
If businesses don’t have confidence in the security of energy supply, they invest less. And employ fewer people. And their costs go up.
So I have seen this task – driving investment into energy infrastructure to ensure long-term energy security – as a key part of the Government’s long-term strategy for growth.
Let me remind you of just some of what we’ve done to make sure Britain can once again enjoy an energy secure future.
Dealing with the crunch
Last month, I confirmed plans we first set out over a year ago, as to how we would deal with the short-term electricity security issue - this winter and the next.
Working with Ofgem and National Grid, new balancing measures are being put in place that deal with the immediate problem. Using powers from the 1989 Electricity Act.
And for the medium term, we are on track to re-introduce into Britain a capacity market – an approach common in many US states and other countries round the world.
And we are on course to run the first capacity auction for our new Capacity Market this December, as we said we would nearly two years ago.
This will help ensure we get the best out of our existing electricity generation fleet and drive new investment in gas powered supply and cost effective demand side response.
We have also legislated to enable Electricity Demand Reduction to be included in future Capacity Market auctions.
There is a huge, untapped opportunity to reduce the amount of electricity the economy needs.
It’s a straight trade off – instead of building a new power station, we could improve the equipment used by hospitals, factories and businesses to save the same amount of electricity.
If we can get it right we can make savings equivalent to around 9% of total demand by 2030.
But, while there are similar approaches in the US, this is still a relatively novel approach here.
So we need to ensure we properly test the concept and get it right.
That’s why we’ll be helping businesses, industry and other organisations to permanently reduce their electricity use through more energy efficient equipment – which may be as simple as upgrading their lighting or installing better motors and pumps.
To do this we’re launching a two year pilot worth £20m.
And I can announce today that we’ll be open for formal expressions of interest from 29th July for our first £10m auction.
And we have already had over 400 organisations come forward, from hospitals to airports to supermarket chains, who are all considering taking part.
Electricity Demand Reduction is part of the answer in our drive to create an energy secure, energy efficient, energy saving society.
It is clearer than ever that energy efficiency is one of the most cost effective ways of meeting our objectives for clean, affordable, secure energy.
The multi-billion pound energy efficiency market itself now supports over 100,000 jobs in the UK.
But while it would be nice to think we could meet our energy and climate change objectives just through energy efficiency and reducing electricity demand, I’m afraid that’s not possible.
Not because of economic or even population growth.
But because to decarbonise, we will need much, much more electricity than in the past – as green electricity replaces fossil fuels in heating and transport in the decades ahead.
And it’s also impossible to think that we can move in one quick leap from a fossil fuel economy to a low carbon economy. It will take a few decades not a few years. And as our Carbon Plan shows, as we decarbonise, fast, over the next few decades, we will still need huge amounts of oil and gas.
So as we consider our energy security, we also need to think about Britain’s short and medium term fossil fuel needs.
And that means getting the best possible return from the North Sea and other indigenous gas and oil reserves – including shale, which Fatih Birol will address.
But as for our offshore oil and gas industry, I commissioned Sir Ian Wood to advise us – and we are taking forward his recommendations rapidly, not least in the Infrastructure Bill, now before Parliament.
And now the Treasury is following DECC’s work with a long needed review of the North Sea tax regime.
Yet we also need to think how we use oil and gas better as we decarbonise.
Gas replacing coal makes real climate sense. As does making our vehicles ever more fuel efficient.
And so does working hard for commercially viable Carbon Capture and Storage.
I’m proud to say that the UK is the only country in Europe with two carbon capture and storage projects in development supported by up to £1bn of government funding.
And the only country in the EU to have won EU funding for CCS.
So, from new balancing reserves to our new capacity market, from new supplies of gas to new electricity interconnectors with Europe. From electricity demand reduction pilots to new energy technologies.
I can tell you, Britain is energy secure.
Indeed, according to the US Chamber of Commerce, Britain is today the most energy secure country in the EU – more secure than France, Germany, Italy, Spain.
In fact, we’re the 4th most energy secure country in the whole world according to the US Chamber of Commerce – ahead of the US. Canada. Japan.
And I am supremely confident we will stay high in that energy security league in the future.
Why?
Well, because of the tens of billions of pounds of investment that have already flooded into the UK’s energy system since 2010 – and the even larger sums already set to come here in the next ten years.
Investment
Perhaps you are surprised at such bold statements on our energy security and energy investment record.
But frankly, given what you read in parts of our press, I’d be surprised if you weren’t surprised.
And it’s because Britain’s energy success story is not as well known as it should be that I am publishing today this document - the first annual Energy Investment Report.
For each energy sector it examines in detail the progress made to date - investment, installed capacity, employment - and the opportunities ahead in the known energy investment pipeline to 2020, and beyond.
And what does the report show?
Well, ladies and gentlemen, a few statistics.
Between 2010 and 2013 – we estimate more than £45bn was invested in electricity generation and networks.
In four years under this Coalition, we have surpassed the total electricity investment in thirteen years under the last Government.
In renewables, almost £29bn of investment since 2010. Delivered.
An average of £7bn a year, compared to just £3bn a year in the previous parliament.
2013, was a record year - with £8bn invested across the range of renewables technologies.
And going forward we estimate up to £50bn of further renewables investment by 2020.
Only China and the US recorded more new-build renewables asset finance in 2013 than the UK.
Electricity generation from renewable sources has doubled since 2010 and now supplies over 15% of the UK’s electricity.
We’re now a world leader in offshore wind – with more installed offshore wind capacity than the rest of the world combined.
A world leader in wave and tidal technology – with real opportunities for tidal stream and tidal lagoon power to come on stream over the next decade.
And as for onshore wind, despite all the political noise from the Conservative backbenches, 5% of our electricity is generated from onshore wind – and I’m pleased to report we have a strong onshore wind investment pipeline.
Look at solar. Thanks to the cost of solar PV falling by almost half since 2010, we have slashed subsidies and yet seen massive growth.
The Renewable Heat Incentive could unlock around £13bn of investment in lower-carbon heating systems by 2020.
This all adds up to a bright future for the UK’s renewables industry – and clean, secure home-grown energy.
With growing job opportunities in the supply chain too – as Siemens investment in turbine factories in Hull shows so brilliantly.
But on low carbon electricity, it’s also nuclear. With a planning consent for Britain’s first new power station in almost 20 years – the £16bn project at Hinkley Point.
And while all the focus has been on EDF and Hinkley, Toshiba Westinghouse and GDF Suez have committed the first £200m of the £10bn project to develop a new nuclear power station at Moorside in the North West.
And Hitachi has invested over £700 million to join in the UK’s nuclear new build programme, and is looking to invest £20bn across Wyfla and Oldbury to build new reactors there.
So we are building for the future strongly. For a safe, secure, low-carbon future – meeting our responsibilities to the planet –in the most cost-effective way, thanks to the Energy Act 2013.
But that is not the whole picture.
Over £16bn has been invested in onshore and offshore electricity networks since 2010.
Interconnection projects worth £1bn have been delivered. And there are at least 6 more interconnector projects maturing fast, that will increase our linked capacity by over 150%. Including a cable through the Channel Tunnel. And a cable to Norway’s hydropower capacity.
Between 2010-2014 over £3.8bn has been invested in gas transmission and distribution networks. £2.5bn in new gas-fired power stations.
Look at oil and gas in the North Sea. Over £40 billion since 2010. That’s a doubling of private investment on the UK’s continental shelf since 2010, with development capital expenditure higher in 2013 than at any point in the last decade.
So we are on course. But there can be absolutely no complacency.
I am determined we act on all fronts. And I am determined that we remove any unnecessary barriers to investment and growth that we can.
Current rules, for example, prohibit the same company from investing in both generation and transmission networks at the same time.
These unbundling rules were designed for good competition reasons – but over-rigid interpretation is stopping infrastructure investment that could not possibly result in any discriminatory behaviour.
That is why I have today written to Ofgem informing them that we will be reviewing the implementation and enforcement of the transmission ownership unbundling requirements in Great Britain.
We will consult on rule changes, to give Ofgem the flexibility to decide on a case by case basis, whether problems would actually arise from a particular investment - based on the facts - rather than having their hands tied, for no good reason.
We want better regulations that continue to stop anti-competitive behaviour but do not unduly restrict ownership arrangements and thereby investment - when there is simply no prospect or likelihood of economic discrimination.
Conclusion
Ladies and Gentlemen.
As I have demonstrated today, on the markets, on decarbonisation and on energy security, the Coalition has been turning round the energy legacy we inherited.
We are not acting alone.
This has been government, regulators, industry, investors, and many others working in partnership.
The scientists and engineers developing new technology.
The businesses pioneering new industrial techniques.
The households of Britain embracing the power we are putting into their hands, demanding change – and changing the way they use energy themselves – something our smart meter rollout from next year will only further encourage.
Energy investment in the UK is a great economic success story.
And we should be talking it up.
Because this is about real money, real jobs and a real energy secure future.
But having, I hope, given you more optimism on energy and climate, let me leave you with a warning.
As Katjia Hall and the CBI made clear in their press statement this morning.
“Long-term certainty is needed…and careless comment or populist proposal….can make businesses feel like they are back to square one.”
And while the framework we have put in place has been the product of agreement between the Liberal Democrats and the Conservatives.
And has been supported by Labour, both in word and deed, voting with the Government on the 2013 Energy Act.
There are worrying signs that in the next Parliament we could see this progress reversed.
If UKIP and those on the climate change denying, Europhobic right are able to hold the next Government hostage, and Britain turns away from the low-carbon path and turns away from the European Union, we could see investment melt away.
Not just in energy, but across the piece. Because who will want to invest in a back-ward looking, isolated country in denial of global truths. Inconvenient though such truths may be.
And if the next Government were to fall prey to the populist siren call of micromanaging purchasing and prices, without any regard for the reality of the international markets, the result could be the same.
When you introduce this kind of political uncertainty – the costs go up. And it is consumers – the households and businesses of Britain – who end up paying the price for political populism.
This Coalition was formed to bring order to the country’s finances and growth to the economy. To take unpopular decisions.
And we have done so by remaining open, awake to the realities of the world, understanding the correct balance between competition and regulation.
And the course we have set is working. Energy investment is booming. Affordable and sustainable energy security is within our grasp.
So let us embrace the investment opportunity ahead. Let’s create a new balanced sustainable economy. Let’s build on the strong foundations laid by our hi-tech, low carbon energy transformation of the last four years.
Thank you.