Speech

Speech to the Renewable Energy Finance Forum

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

Michael Fallon speaks at the 15th Renewable Energy Finance Forum - Europe.

Good morning ladies and gentlemen. I’m pleased to be here with you at this landmark occasion of the 15th anniversary year of this important conference. It is impressive to reflect on how far the sector has come in those fifteen years – when this conference started there was just a nascent UK based renewables sector – no offshore wind farms or Renewables Obligation.

We now have over 14.8 GW of renewables on the grid, and 2011 saw 9.4% of overall electricity generation from renewables - up from 6.8% in 2010 – the most we’ve ever generated.

And so as the renewables sector have grown up, so the incentive system which government provides must mature – and this is in part why this we’ve embarked on EMR which I want to update you on today.

Context

The energy sector is one of our largest infrastructure programmes and one of the biggest opportunities in the UK.

Energy makes up over half the total infrastructure investment pipeline in the UK and close to double the amount for transport.

Around a fifth of our existing generating capacity will shut down over the next decade, and some is shutting at the moment. While demand is expected to rise: by 2050 it may even double, as heat and transport is electrified.

And, as we make vital progress in decarbonising the electricity supply, the grid will need to adapt to handle new patterns of generation.

To tackle this by 2020, by the end of the next parliament we are likely to need an around £110bn of investment in the electricity sector. That would represent a doubling of the rate of investment from its current level. This is a significant opportunity.

However, we recognise that these are difficult times for investors with a landscape of uncertainties and competition with other sectors.

Finance is constrained and there are lower levels of liquidity since the financial crisis. Traditional funders of power generation, utilities, face strained balance sheets and new challenges to accessing finance leading to asset disposals and reduced capex.

However this is creating opportunities for independents, different types of investors and new sources of capital to enter the market.

And the UK must compete with these markets for limited resources and capital; we are doing this by providing a long term, transparent and stable regulatory regime, by providing the right conditions for investment.

But I fully accept that without government support and clarity, and the right incentives; investment in low carbon will not come forward at the scale and pace we need.

We need as a government to lead by example and provide the long-term visibility that investors need.

Electricity Market Reform (EMR)

Reforming our electricity market is one of the most important pieces of work in this whole Parliament, creating the transparent and stable framework that the investors need to attract into the UK billions of pounds of private investment into low carbon assets.

The Electricity Market Reform has been introduced through the Energy Bill, which is currently around three-quarters of the way through Parliament. The Bill has received strong, all party support and engagement throughout the Parliamentary timetable and we are on track to secure Royal Assent by the end of 2013.

As part of the package, the government has pledged the £7.6 billion levy control framework to support investment and provide certainty to 2020 for low-carbon investors. This provides certainty to the end of the next parliament. With many countries making retroactive changes and reducing their subsidies, our move is unparalleled.

Earlier this summer we provided potential investors with early certainty of the draft strike prices the UK Government will offer to renewable energy projects under Contracts for Difference (CfDs).

Recognising that final investment decisions need to be taken before the legislation is in place we are offering investment certainty and support through early CfDs.

Final Investment Decision Enabling for Renewables will provide real value to eligible developers by it will enable successful applicants to take final investment decisions ahead of the implementation of the enduring CfD regime.

On 6 September we received 23 applications for Phase 2 which we are now evaluating. We will inform applicants in November if they are above the minimum evaluation threshold. Those that are will receive a draft Investment Contract in December and will need to submit binding applications for Investment Contracts in February 2014. Following an assessment of these binding applications for affordability, final investment contracts will be awarded and laid in Parliament in March 2014.

As I’m sure many of you will be aware, we have also published our draft Electricity Market Reform Delivery Plan, a detailed draft of the CfD contract terms and the CfD allocation policy.

Recognising the pent up demand in the system, we have designed a three phase allocation policy – the initial stage is first come first served, once 50% of the budget has been allocated, the system moves to an allocation round and then a constrained allocation phase. Movement through the phases is linked to budget allocation for new build rather than any specific time period inside the levy control framework.

Right now we are now fine tuning the detail of how we will implement these reforms with the help of representatives from the electricity industry and investors, thank you to those of you in the room who are helping the Department to ensure that the reforms we put in place are robust and right first time.

The next milestone is next month. From October 2013 we plan to consult on the further detail regarding the implementation of EMR, including secondary legislation, and aim to publish our final delivery plan this winter, when the final allocation policy will be determined. We will then confirm final strike prices.

In response to the clear arguments put forward by many of you in this room, we are also taking complementary measures to ensure that independent generators can compete effectively.

The Energy Regulator is introducing greater liquidity to the electricity wholesale market and we are looking to improve the market for power purchase agreements so that independent generators have a secure route to sell their power.

To maintain investor certainty and confidence as we take forward these reforms – we have put in place transitional arrangements and set out a clear implementation timetable.

Affordably is absolutely critical. We are all energy consumers and we understand the pressures of bill increases – I want to ensure these remain as low as possible.

And EMR will ensure that the UK remains a leading destination for investment in low carbon electricity – boosting our economy by generating skills, expertise and jobs in your sector.

This financial year the level of capital investment in the energy sector is expected to exceed £16.5 billion. This demonstrates the UK and its attractiveness to the global market.

To reiterate Shaun’s comments, the Green Investment Bank is absolutely central to supporting this agenda through establishing the credibility of new low carbon investment products and markets.

With £3.8 billion of Government funding through to 2015 – it is a key part of the Government’s approach to stimulating the investment required to finance UK transition to a more green economy.

GIB is already having a real impact in improving the overall financing environment and attracting private capital into green sectors.

With the opportunity here and I hope to see GIB’s contribution to delivering green outcomes continue to grow as more and more GIB supported projects become operational.

So I will finish by saying the government is absolutely committed to supporting this sector as renewables become mainstream, we’re reforming the market to ensure low carbon investments have the certainty to invest and clear routes to market, we need you to play your part and welcome the support you have already given.

It is good to see that as a result of the EMR reforms that are underway, the UK is now in the top five most attractive countries to invest in renewable energy and the world’s most attractive destination for offshore wind investment.