The Rt Hon Chris Huhne MP's speech to the Economist UK Energy Summit
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Introduction This is the first coalition in sixty five years. The last coalition won a world war. This one must tame our biggest ever peacetime…
This is the first coalition in sixty five years. The last coalition won a world war. This one must tame our biggest ever peacetime deficit.
Coalitions can provide strong and decisive government because of their broad support. Indeed, seven of the ten biggest fiscal consolidations in the developed world since 1970 were under coalitions.
But it is not just a question of recovery from recession, difficult enough though that will be. The real challenge is to build a different kind of economy. One that cuts our carbon emissions to tackle climate change and which makes our energy secure in a volatile world.
In this challenge lies a tremendous opportunity. By putting in place the right incentives for low-carbon growth, we can help create the investment, exports and jobs we need to bring back economic prosperity.
This is what I would like to talk about to you today. I aim to show you how our approach will be different from that of the last thirteen years; and how we intend to make a reality of our pledge to make this the greenest government ever.
A stable framework for business
I understand the role that business has played in so much of the progress made in the last few years on infrastructure, investment and new technology. We need to build on this progress to create a new partnership between business and Government. You need clarity, certainty and stability from Government to deliver the investment we all need.
We’ve inherited bad habits. For too long we heard about knee-jerk reactions that had no real understanding of finances, and indeed, the business world. But the absolute necessity of dealing with the public spending deficit means that we can’t lurch back into a patchwork of solutions, initiatives and agencies, doling out grants. Those days are gone.
The imperatives of economic recovery, energy security and climate stabilisation all march hand in hand. All require a commitment to a consistent policy set for the long term.
I look at these challenges in the same terms as businesses and investors - in terms of risk and reward.
My business background was starting and running one of the biggest groups of economists looking at country risk. Helping to run a successful ratings agency taught me a lot about risk. In particular, I learned the need to take decisions yourself - or the decisions get taken for you. I learned that business needs firm frameworks from policy-makers - just as much in energy as in banking. And I learned that short term headline-grabbing gimmicks from government are worse than useless.
This coalition aims to provide stability and predictability - not least, a fixed-term five-year parliament.
Given the tough decisions we have to take - starting with this week’s budget - we are determined to see the country through to growth and prosperity again.
But the type of growth is crucial. Simply going back to dependence on fossil fuels would be folly. It would make us vulnerable to oil price spikes and volatility. It would deny us opportunities for green growth rich in jobs and export chances in the low-carbon markets that are expanding around the world.
The case, to me, is clear - we must fix ourselves on a path to a decarbonised society and economy, stimulating growth while meeting the twin challenges of climate change and energy security.
The challenge of climate change
Let me turn to the first of those challenges: climate change. Science tells us the probability of climate change being man made is 90 per cent. If someone told us that there was a nine in ten chance of your house being burned down, I suspect most of us would take care to renew the fire insurance.
And that is the calculus that most Governments are making despite the disappointments of Copenhagen.
It is simply not true that others are doing nothing, as some have argued. Even as we continue to seek a legally binding global agreement, there is rapid action in China and Japan. Even in the United States, where prospects of early cap and trade legislation are slim, the administration is planning on pushing business hard through the Environmental Protection Agency.
In turn this means that Europe’s lead in low-carbon technologies is now at risk. Our industrial future - our competitiveness and our prosperity - depends on being a pioneer of the new green industries that will decarbonise our economies, and we need to be ahead of the international game.
The challenge of energy security
The impacts of the changing climate by themselves give adequate cause for radical action. But they go hand in hand with the second challenge - that of ensuring energy security. In an uncertain world, we need security of supply at home and abroad. So it is vital we make the most of our domestic oil and gas assets. There is still potentially 20 billion barrels of oil equivalent, possibly more, left to produce.
We must continue to invest in exploration, development and production - whilst at the same time maintaining high standards of management and minimising environmental impacts.
The events in the Gulf of Mexico are devastating. The impacts of the explosion on the Deepwater Horizon give us pause for thought, particularly given the beginning of exploration in deeper UK waters West of Shetland.
I am confident that the UK’s regulatory regime is in good shape to manage the risks of deep-water drilling. But as oil becomes ever more difficult to extract, and as demand for oil surges in the emerging economies, we need to recognise the dangers inherent in our history of fossil fuel addiction.
Look at the long term forecasts for fossil fuel demand. Note the new constraints on marginal exploration. And see what’s happened with energy price spikes as global recovery gets under way.
We therefore need to take action on two fronts: to stimulate the expansion of low-carbon technologies, particularly in power generation, and improve the energy efficiency of our economy.
The UK faces a massive challenge. No less than £200 billion of investment is needed in our energy infrastructure over the coming decade.
In setting the framework to encourage and steer this investment in the right directions, we recognise our responsibility to support infant and emerging technologies - like renewables and carbon capture and storage - while removing unnecessary barriers to investment, like planning, offshore connections and grid bottlenecks.
We have enormous potential in renewables. Thanks to the Renewables Obligation, onshore wind has become cost competitive. The UK is already the world leader in offshore wind and we are also supporting wave and tidal stream. The prospects for growth in all these areas is excellent.
And with the new feed-in tariff, and support for renewable heat, community and micro-generation can also play a part.
But substantial investment in low carbon technologies such as these will not happen quickly enough unless we strengthen the incentives. We need a meaningful carbon price to underpin investment decisions. The current price is simply not doing this. It is not yet driving our economy towards the green technologies of the future anywhere near quickly enough.
A 30 per cent cut in EU emissions by 2020 - up from the existing 20 per cent target - would push the price higher, create business opportunities in the domestic market, and put the EU at the forefront of the international race. And, in light of the recession, it is not expensive to achieve. It would cost just 0.1 per cent of EU gross domestic product more than the original pre-recession estimate of achieving 20 per cent. And those cost estimates fall even further if oil prices rise.
We are arguing for the 30 per cent target within the EU. But we are also taking action in the UK. On Tuesday the Chancellor announced that we will reshape the Climate Change Levy as the way of delivering our coalition commitment to a carbon price floor. That will support new investment across low-carbon generation.
Including, of course, nuclear. The coalition agreement is clear that new nuclear can and will go ahead - but only so long as there is no public subsidy, a pledge robustly guaranteed by the state of the public finances. We will learn from past mistakes. Streamlining planning. Dealing with waste, reprocessing and decommissioning. And a clear policy framework.
The third low carbon energy source is of course fossil fuels with carbon capture and storage, giving us the potential to provide the flexible response needed to complement intermittent wind. We are committed to four demonstration projects that will enable production at commercial scale. This is a technology that can also provide us with enormous export opportunities as we decarbonise electricity generation.
The Government will shortly make a statement setting out our plans for major infrastructure development which will include details on National Policy Statements.
The abolition of the Infrastructure Planning Commission (IPC) is a coalition agreement. I understand your need for clarity, stability and speed in planning approval, but I am quite clear that the new system will not slow down planning decisions.
If we are to generate that £200 billion of investment in energy infrastructure, we have to create an enabling environment. We need to bring down the cost of borrowing - and Tuesday’s budget has set out our intentions.
But we also need to leverage private sector investment in energy infrastructure and low carbon technology through a Green Investment Bank. As announced we are working on a wide range of options for the scope and structure of the Bank and will bring forward detailed proposals in the Autumn.
Energy efficiency - the Green Deal
Alongside investment in new energy infrastructure, we need to reduce overall energy demand. So let me now turn to the Green Deal - our way of expanding the energy mix to a fourth resource.
Energy saving is the cheapest way of closing the gap between demand and supply, yet it is the Cinderella of the energy ball. On the near horizon, energy saving will mean smart meters and smart grids that can give consumers control over their appliances - for example ensuring that fridges power down during temporary price surges.
This will take time to develop. But there is also much we can do now. To date we have heard too much talk and too little action.
Britain has on average some of the oldest housing stock in Europe, much of it built in the era of cheap coal - but that’s no excuse. Why have we kept building inefficient homes? We have been locking in waste, which is why my colleague Grant Shapps, the Housing Minister, is moving quickly to toughen building standards.
Most of the homes we will use in 2050 have of course already been built. That is why we have big plans for the Green Deal. It will be my department’s flagship bill for this first session. Its aim is a radical overhaul of our existing homes to save energy, carbon and costs.
At the moment, we may as well be burning £50 notes outside our front doors. We use more energy per home than does Sweden. And this waste cannot be ignored, because households account for a quarter of all carbon emissions.
This is another area which can help drive economic recovery. The market is big. There are currently up to 14 million homes in the UK which could benefit from insulation under the Green Deal. We are working on the package for each home, which could unlock tens of billions of spending in the coming years.
The Green Deal is a completely new and ambitious approach to home insulation. The aim is that every participating householder will save money by insulating their home.
Energy companies and high street stores will help guide customers through a simplified process and pay for the work upfront. Householders will then pay back over time on their energy bills from the energy savings they make.
Some people - such as the fuel-poor, and those in hard-to-heat homes lacking cavity walls - will need extra help because energy savings alone will not be enough. We intend to provide that help by refocusing the obligations on energy companies. Local authorities could also join with energy companies to reach those who live in houses that need it most. Insulation measures are often cheaper if implemented a street at a time. And we are planning to strengthen the Government’s powers to target energy insulation measures on the highest priority cases.
A competitive market will provide best value and confidence in products for the customer. With professional marketing from trusted brands, we ought to make energy efficiency as attractive as broadband or satellite TV.
And the Green Deal - by tying energy saving to the people who pay the energy bills - will be a breakthrough not just for owners but for tenants as well. We are also looking at whether it could apply to businesses. To sustain the market on the long march to a comprehensive refit of our housing stock, we are also looking at triggers and incentives to encourage demand.
All in all, this will send the right signal to the energy efficiency industry, providing investment confidence and job opportunities. Indeed, this green growth sector can provide a big fillip to the economic recovery.
We’ve already said we want this to be the greenest government ever, and that means that we must practice what we preach. The Prime Minister in his second day of office committed himself and the Government to cutting 10 per cent from Whitehall carbon emissions in the next twelve months.
This is vital because we must lead by example. We have no business encouraging people to change their lifestyles if we can’t do as we say. And the same argument applies just as much to the international arena - we can’t argue for an ambitious global deal if we can’t demonstrate how to do it at home.
We intend to set high standards for the energy sector too. We need strong regulation and zero tolerance of market abuse and poor service to protect those who are most vulnerable.
Because there are those who need protecting. The era of cheap energy is over. Today’s consumers know that. Tomorrow’s bills will undoubtedly be higher, and I do not want to see the energy challenge as an excuse to inflate our energy bills unnecessarily. Consumers must be respected and treated fairly. Energy companies must take full responsibility for their actions.
I hope I have given a taste of the coalition’s strategy. To set a demanding policy framework, ideally along with our EU partners. To create the long-term incentives to invest in low carbon energy sources so that we can make the shift to an increasingly electric economy. To save energy as well as produce it. And all in a package which will improve energy assurance and security whether our supplies come from home or abroad.
Labour claimed to have 2020 vision. We need to have 2050 vision. Our 2050 pathways project shows us the scale of the challenge. We will not hide it. We will publish detailed analysis and underpinning data alongside our first annual statement on energy in July, and we will welcome comments and feedback.
I want Britain to be the best place in the world to do energy business. To lead the world in decarbonising the economy. To develop the unique products and processes that will power the second industrial revolution - the green revolution - just as steam, coal and iron drove the first.
Britain has a proud history as the pioneer of industry and development. Let us rediscover that spirit now as we face the challenges of a green future.