The Economist Insights UK Energy event took place on Tuesday 10th June. At the event key stakeholders from across the energy sector called for greater investment, better communication and a renewed focus on sustainable development to ensure the UK is able to keep the lights on for years to come.
Text of Transforming the UK energy system
TRANSFORMING THE UK ENERGY SYSTEM Economist Energy summit UK Energy 2014:Will the lights stay on? 10 June 2014 Prepared by: Steve Holliday
3| Challenges and opportunities There are many challenges facing the UK Energy sector. From the scale of investment needed in the countrys energy sector, to the opportunity for interconnection with our European counterparts; From managing the changing and more challenging weather patterns, to the adaption and investment required to maintain the resilience of the energy system; From the worry about the security of supply, customer bills, to the skills challenge of inspiring the future generation of engineers. Today it is clear. Some elements of the energy industry structure are working for consumers, and some are not. We need to choose interventions with great care.
4| Delivering transparency and certainty I am confident that EMR will happen. It is the right intervention for this time and it will provide certainty for investors. Im certain that we have the right regulatory regime in place under RIIO, also providing long-term certainty to investors keeping costs down for consumers. RIIO is a clever regime that incentivises new ways of working, innovation and focuses on outputs that benefits customers while also delivering a significant share of the 100bn we need to spend in our energy infrastructure. After more than two years of intense scrutiny from stakeholders, customers and the regulator, this regime provides a high level of transparency that should reassure hard-pressed customers.
5| The need for intervention I understand and share the concerns about any body that wants to minimise competitive and market forces and take steps to intervene. However, there are circumstances where, to some extent, this is the right thing to do. And we are facing these circumstances today. It could be argued that todays crossroads for the energy sector is partly a hangover of a legacy of massive investment, under what people would now describe as a centrally planned model. Coupled with the decline in demand that we have seen since 2008, we have had to build little new power generation. This paradigm has now broken and we all know the UK has to build new power plants. Yet we want a new kind of generation fleet we want a low-carbon energy system to power our economy., sustainably and affordably. The GB liberalised energy market was sometimes held up as a benchmark. Its clear that today, some parts of that market are not working. Given the countrys previous commitment to a competitive energy market, market interventions may seem counterintuitive.
6| The twofold challenge 1.The energy market does not currently effectively value low carbon. An effective EU ETS would solve this problem but today it is not working. 2. It is clear that the market does not put the same value on security of supply that our government, our customers and the industry do. By that, I mean that incentives on power generation investors do not push them to build enough plant to give us a surplus capacity.They are not incentivised to over-supply generation compared with demand, which is what we need to maintain secure supplies.
7| Energy Market Reform The contracts for difference and the capacity mechanism are two interventions for two market failures. And government has been clear in its aim to maintain and support market forces, wherever possible, to deliver against these new parameters. The long term, the goal should be for the market, working within those parameters, to drive the choice of technology.
8| Competition But we know that we are some way from this point. So until the market is driving investment choice from a capacity standpoint, we need to create a mechanism where gas plants will compete against hydro; against storage; against CCS and others. The best solution, for security of supply and environmental targets, would be for all technologies to compete against each other tomorrow. That cant happen we have to encourage new technologies to get to market, the pool of expertise and resource for wave and tidal is so much smaller than it is for onshore wind or large scale solar. Therein lies our challenge. For example, wave and tidal may have potential, but if we ran a simple price only auction tomorrow, they wouldnt be able to compete. So, we need to address this now. But the question remains when can we expect all of these different technologies to be competing on a level playing field?
9| Innovation One of my concerns is how we make sure new technologies, some which might not even have been invented yet, will be encouraged and appropriately funded or coordinated. Today, timescales to commercialisation in the energy sector are long and very dependent on long-term policy certainty. There is great energy technology innovation underway, but our industry needs to play a leading role in pulling new technologies through the development lifecycle. Its vital that entrepreneurs and innovative technologies are given access to the capital and industry support they need. I don't think leaving technology development to the market is the right approach. It needs a much stronger guiding hand from industry and government. Demand in the UK last year was down almost 1.6% yet I remain concerned about how we are going to effectively encourage energy efficiency, when prices clearly dont have that effect. Energy efficiency has a crucial role to play, but EMR will not resolve it. And we have some way to go to bring our housing stock and business energy efficiency in line with the best in Europe.
10| AEuropean Market And possibly most perplexing and challenging of all, is how we get to a world where the unilateral interventions of EU member states can ultimately evolve into a harmonised single energy market, with a single set of incentives and subsidies. We all know that the European Commission are grappling with the issue of how they balance their objective of avoiding market distortions created by member state subsidies, with the other EU objective of ensuring member states can secure their energy supplies. In the longer-term, like in the UK, the EU must consider how it can evolve from the current more interventionist approach, towards an approach which allows a European market to operate within a single set of parameters and incentives that create a level playing field for all technologies. In both the medium and long-term, an Emissions Trading Scheme with an investable carbon price will play a central role into this. The steps being taken under EMR, that will hopefully be supported by the appropriate State Aid decisions by the European Commission, are the right steps. The opportunity now is to make sure we get on with those and the investments they will drive we can then look to evolve.
11| Public trust The other reason that I think we need to be clear about the need to intervene in the market, is because we need to explain our plan to the public. Trust in this industry is at all-time low it is likely that improvements can be made to bring greater transparency and liquidity. But the Competition and Markets Authority review of the retail market will not resolve all the challenges we face around rebuilding trust. Its crystal clear that the public does not currently understand or accept the direction of travel on energy policy. As long as this remains true, then political risk increases, pushing up the cost of capital, which in turn raises costs to consumers. As network operators, we are investing in assets that last 30, 40, or maybe 50 years. How many changes in government policy could we see over that time if we don't have public support for our chosen path on energy policy?
12| Communication So in my view, one of the biggest challenges the whole industry now faces is communication. This isnt an issue isolated to the supply companies, we need an open and honest public conversation about direction of travel, so that we can achieve a common understanding with the public on a long-term plan on the countrys energy future. We need to talk about the benefits that investment brings and how it will underpin continued growth in UK economy. We also need to explain how we will protect our energy intensive industries and demonstrate how we will protect our fuel poor. And we need to highlight how regions around the country will be impacted by new infrastructure and how ultimately they will benefit. This isnt easy. But without these explanations being made in a clear and understandable way, it is all too easy to criticise policy.Government and industry has a joint responsibility to clearly explain where we are headed and why.
13| Inspiring future engineers All of us have another responsibility one which is close to my heart and which presents an opportunity for our economy.That is a responsibility to develop the right skills The UK Commission for Employment and Skills studies