The energy security challenge
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by Edward Davey, Secretary of State for Energy and Climate Change to the Economist UK Energy Conference.
It’s a great pleasure to be with you here this morning.
This summit is taking place at a crucial moment because the Government has embarked on the most radical overhaul of the United Kingdom’s energy infrastructure and markets since the 1980s and privatisation.
A radical transformation that is not optional, but necessary.
Necessary to meet the three objectives of our energy policy.
First – to ensure the security of energy supplies.
Second – to ensure that energy is affordable for both domestic consumers and for our businesses.
Third – to ensure we reduce greenhouse gas emissions – keeping to our legal responsibilities as part of the Climate Change Act - and to our moral responsibilities to future generations.
These three objectives – security, affordability and decarbonisation - come together in the Energy Bill currently going through Parliament.
This will put in place the reforms necessary to harness the transformative change to get the market to drive investment in the decarbonisation of electricity generation.
And in good news for investors, this is a vision that has attracted a wide political consensus.
The Bill passed its third reading with the largest majority enjoyed by any Bill introduced by this coalition Government – 396 for with just 8 votes against.
Over the course of today I am sure you’ll discuss many of the different challenges the Bill is designed to address.
Securing capital investment.
Incentivising low-carbon generation.
And maximising the opportunity for job creation and economic growth through our energy and climate change policies.
But today, I want to concentrate on how the changes we are making will meet the first of those objectives I set out – energy security – keeping the lights on as electricity margins tighten.
And I want to set out how we are restructuring the Department of Energy and Climate Change itself to deliver on our objectives.
We are abolishing the last remaining vestiges of the artificial distinction between our energy work and our climate change work.
And, for the first time, we are creating a new policy directorate for Consumers and Households, to make sure that we are focussed on delivering for the people who ultimately pay the bills.
But let me start with that challenge of Energy Security.
THE ENERGY SECURITY CHALLENGE
Over the last few decades, we in the UK have enjoyed a relatively high level of energy security, but it has not always been like this.
One of my early memories of childhood in the 1970s is being allowed to light the household candles during one of the power cuts that were much more common then.
The blackouts that I, as a child, found so exciting had, of course, serious consequences for the country.
This was the era of the three day week – as Time magazine described it – “Britons bundled up in sweaters inside their chill homes and offices scurrying at night through streets in a curiously darkened country”.
But thankfully, this is a picture of Britain that is a picture of the past.
There have been no major interruptions to fuel supply in recent history.
Electricity capacity margins have been high.
And the network resilience systems we have in place mean that power interruptions due to weather or technical failure are dealt with very swiftly.
This energy security has been built on a framework of competitive market structures that incentivise reliable supply, are regulated robustly, and are supported by indigenous resources such as oil and gas from the North Sea.
But we cannot afford to be complacent.
Because in the years ahead, we face significant challenges to maintain this level of resilience and security.
Globally we have a more competitive, energy hungry world.
The global population is set to grow by over a quarter by 2040 – two billion more people requiring access to water, food, fuel.
And as this happens, the emerging super economies of China, India, Brazil are becoming ever-more energy intensive, just like the established economies in Europe, North America and the Pacific Rim.
Global energy demand is already twice as high as it was 30 years ago.
And the International Energy Agency estimates that it will grow by over a third again by 2035.
If, as is likely, global energy supply struggles at times to meet growing demand, we can expect upward pressure on prices.
And, if we see rapid increases in demand to which supply cannot react quickly, or disruptions in supply to which demand cannot react quickly, we will see price spikes and wider market instability.
As the oil and gas reserves of the North Sea are declining, the UK is increasingly dependent on imports, and more at the mercy of those volatile markets.
And at the same time, here in the UK, we face a decade or more of structural transition as 20% of our old or polluting power stations go off line.
This is a significant infrastructure investment challenge in itself requiring around £110bn of capital investment this decade alone.
Energy is the largest infrastructure programme across government.
That is why Danny Alexander, the Chief Secretary to the Treasury, will be announcing plans this morning to put energy infrastructure front and centre.
Nearly half the infrastructure investment pipeline in the UK.
30% greater than that for transport.
The capital costs will be the equivalent of building 10 more tunnels to France.
Making sure that we have sufficient power capability at all points during this transition, that is our priority.
That is why, being prepared for this more volatile and challenging future – making sure we have secure and affordable energy supplies - is right at the heart of Government energy policy – and at the heart of the Energy Bill going through Parliament.
MEETING THE CHALLENGE
The Energy Security Strategy I set out last November is designed to meet both the physical challenge and the price challenge.
The physical challenge – of power stations and grid infrastructure.
The price challenge – balancing risk with affordability.
Of course we have extensive resilience measures in place to minimise the impacts of disruptions on everyone in the UK already.
But this strategy is not designed just to get us through any particular power crisis - or even the few tight years ahead where electricity margins are expected to fall.
The solutions are designed to be lasting - looking out to 2050 and beyond – alongside the timescales we are working with respect to decarbonisation.
Key to delivering energy security in the long-term is making sure we have a diverse energy mix, not over-reliant on any one source or fuel.
By increasing indigenous, home-grown, energy production through renewables, new nuclear and lower carbon fossil fuels such as shale gas, we are seeking to cushion the country as far as possible from volatile global fossil fuel prices.
And we will need to continue to maximise production from the UK continental shelf, so we can continue to reap the security as well as economic benefits from the resources on our doorstep.
It is great to see record investment in the North Sea.
But we will still need to import energy for the foreseeable future, so we are working internationally to ensure we continue to have access to the fuel we need.
This includes assisting the delivery of further interconnection with other parts of the EU, so we can import electricity more easily from our closest neighbours.
On the demand side we are making the energy we use go further.
Energy Efficiency is a core to our strategy on energy security.
By empowering consumers, through initiatives like the smart meters programme, people can become more aware of how much energy they are using and what it costs, helping them to manage their energy use, save money and reduce emissions.
Smart meters will set a platform for easier switching and new products and services which enable consumers to better manage their energy.
This could include time of use tariffs, allowing consumers to choose to use energy when it is most abundant and cheap.
So resilience, efficiency, diversity.
Maximising production at home, improving the reliable flow of energy from oversees.
Together this adds up to comprehensive approach to energy security.
But underpinning this whole approach is the understanding that our energy needs and our security needs are best delivered through a robust and competitive market.
So let me turn to what we are doing to ensure a robust competitive market in electricity generation.
ELECTRICITY MARKET REFORM
Electricity Market Reform is ultimately a market-based means of bringing forward transition to low carbon economy – but it does not and cannot exclude the State.
The statist approach has been rejected in the power sector since the 1980s and rightly so.
But the State has always retained direct interest, particularly when issues such as energy security and decarbonisation cannot be entrusted to the market alone.
Only the State can structure the market and the affordable transition to low carbon technology at a cost consumers can bear – providing the right legislative framework.
And only State involvement can leverage the huge capital infrastructure investment in timescale needed – by providing the right incentives.
That is why electricity market reform will proceed in four phases, from the price-setting model to the market-based model.
Phase one – from next year - providing reliable contracts to attract investment in low carbon technology – this is what Contracts for Difference will be all about over the next few years.
Phase two – from as early as 2017 - technology-specific auctions as different technologies mature and become more widely deployed – to move from administered prices to price discovery in the market.
Phase three – in the 2020s - technology-neutral auctions - with low-carbon technologies competing with each other in a true low-carbon electricity market.
Phase four - all generators competing on cost, with no intervention.
This is a long transition – well set out and well debated.
While this transition takes place, the Government will be putting a capacity market in place to ensure the future security of supply.
Later this morning the Chief Secretary to the Treasury will be making a statement to Parliament including announcements on Government’s plans for investment in energy infrastructure.
And therefore you will understand that propriety restrains what I can say on some of the detail of EMR here this morning.
But taken together, these measures will provide for energy security in the medium and long-term as we transition.
It will do so in a cost-effective way, keeping the impact on consumer bills to a minimum.
The capacity market itself will have a limited impact on bills – potentially costing households as little as 30p a week.
This is a small price to pay for protection against power cuts.
Although Electricity Market Reform and the Capacity Market will drive investment, and play a key role in the medium term, they do not tackle the immediate situation – the crunch over the next 5 years.
The Government has been working with Ofgem and the National Grid to explore options that would provide consumers with greater insurance against the increased risk to electricity security in the middle of this decade.
So let me be clear, barring a natural disaster or a technical failure that could mean brief power outages - the lights of the country will stay on.
We will not allow a large shortfall in energy generation to trip the switch.
The country’s electricity system will remain secure.
And in the medium and long-term, the policy objectives of the Government, for security, for affordability, and for sustainability of energy will be met by the framework we are putting in place.
With the Energy Bill setting overarching structure of the market and with policies such as the Green Deal for energy efficiency now live, the Department of Energy and Climate Change is moving from a period policy formulation to a sustained period of delivery.
But to help deliver, the Permanent Secretary Stephen Lovegrove and I have concluded that the Department needs to be restructured and refocused.
Since its creation in 2008, when energy policy from the Business Department was brought together with climate change policy from the Environment, DECC has slowly integrated these policy areas into a coherent whole.
But in some ways the old divisions remain, particularly the bicameral structure of the policy directorates in DECC – one directed towards energy policy and the other towards climate change.
This structure reinforces stereo types of cold-hearted economists on the one hand and tree hugging environmentalists on the other.
But neither of these stereo types hold true.
It may shock you to hear this, but it has been known for the Department’s economists to turn up to meetings with the Secretary of State without their jackets on.
And I once saw a pin-striped environmentalist quickly hiding his sandaled feet under the desk as I walked by.
In reality, the business of the Department requires our objectives to be met through integrated policy.
Emissions reduction is an economic challenge, and energy development is an environmental challenge.
There is no longer any division between emissions reducers and megawatt producers.
So Stephen and I have moved to erase any lingering vestiges of that division in the structures of the department.
So now we have restructured the organisation to reflect our delivery in three priority areas:
Delivering for consumers.
Delivering investment and growth.
And delivering internationally, because we recognise that our objectives can only be met through global engagement.
So first - a directorate focussed on all aspects on international policy, including both international energy development and international climate change action.
The science and innovation team will work within this directorate recognising the vital support they provide to our international work.
As will those who concentrate on our nuclear decommissioning, resilience and assurance work, strengthening the link they have with the international non-proliferation agenda.
Second – a directorate focussed on markets and infrastructure to deliver on the critical challenge of bringing much needed new generation capacity on stream.
This group will include those working in different energy sectors such as renewables, nuclear, and oil and gas, both conventional and unconventional.
In their work, the imperative for energy and climate change polices to act as a spur for growth and jobs will be a high priority.
Third – a newly created directorate, making sure that consumers and households receive the attention they deserve.
The Consumers and Households directorate will be focussed on delivering for the people who pay the bills.
Helping to drive down bills through energy efficiency, through the Green Deal, through smart meters, through new approaches to heat and industrial use.
This directorate will also take on the crucial work the Department does on fuel poverty – and I will make sure the most vulnerable in society have an energy champion in Government.
This restructuring of the Department, to be completed by the Autumn, will ensure that we are prepared for the delivery of the policy framework so assiduously created.
So Ladies and Gentlemen, let me conclude by saying this.
I have come under some attack over the last few months from a very vocal but very, very small minority for stating the simple truth that climate change is real, it’s already happening and will get worse if we don’t act.
But I will not be deflected from the urgent action we need to take by the cries of debunked conspiracy theorists.
My focus will be on the reality.
As President Obama said this week:
“We don’t have time for a meeting of the Flat Earth Society. Sticking your head in the sand might make you feel safer, but it’s not going to protect you from the coming storm.”
Today I have set out how the UK energy system will be secured in the face of that storm.
This Government has set out to provide the political, legal and financial; framework to meet the energy security requirements of the country and our climate change responsibilities at a cost that people can afford.
Using the market to transition.
Making the best use of indigenous resources.
Incentivising efficiency and smart energy use.
The test, over the next few years, will be seeing the unlocking of investment in our energy infrastructure – helping to bring growth to the economy.
It will be seeing a burgeoning market in energy efficiency, contributing to new jobs and lower bills.
It will be seeing a simplified and clear system for consumers, empowering them to get the best deal possible on the energy they use.
It will be seeing carbon emissions continue to fall.
This is our vision for energy in the UK.
Overcoming the challenges.
Unlocking the opportunities.
Securing the energy needs of our country in the years to come.