Charles Henry?s speech at the Energy and Utility Forum

Delivering the New Energy Economy

22 February 2012

Check against delivery

Introduction

• Thank you for inviting me to take part in this event. 
• The current energy market has served us well in recent years.
• But we now face a number of unprecedented challenges which the market will struggle to address.
• Around 20GW, or one fifth, of existing electricity plant are to close over next decade. 
• Demand for electricity is on increase as we turn to electricity for heat and transport. Demand is likely to double over the next 40 years.
• This could mean tight capacity margins, compared to the relatively ample of supply of recent times.
• Also firmly committed to ambitious climate and renewable targets to build a cleaner energy future for Britain and the world.
• This includes statutory targets to :
  • reduce green house gas emissions by 34% by 2020; and,
  • 80% by 2050; and,
  • an EU requirement to deliver 15% of all UK energy from renewable sources by 2020.
• To meet these challenges we need to see broad changes to the way that we generate energy and the way we handle demand and supply. 
• And we must deliver this at the lowest cost to the tax-payer and to consumers in a world of unstable fossil fuel prices. 
• This is why we are working towards a market framework that encourages the right kind of investment, and the growth of the new energy economy. 
• An economy in which:
  • security of supply is achieved by diversity of generation technologies;
  • in which affordability is ensured by competition between generators; and,
  • in which climate change is tackled by reducing carbon emissions.

Making it happen

• We want to develop a diverse energy mix by encouraging new investment. We are establishing a stable and long-term framework to mobilise private-sector capital.
• According to a recent poll of more than 150 investor by Credit Suisse, the UK is overwhelmingly perceived as the favourite region in terms of regulation, ahead of all other countries.
• And the UK has the best wind, wave and tidal resources in Europe.
• So there is good reason to believe we can achieve the kind of investment we need, provided that we get policy right as we go forward.
• Partly about finding innovative ways to leverage private sector investment.
• For example, the Green Investment Bank – the first of its type in the world – plans to leverage £15bn of private sector capital in low carbon infrastructure by 2015.
• Partly about getting the market framework right – need to make sure that the parameters within which the market operates send the right price signals. 
• This is why we are reforming our electricity market.
• The vision of EMR is for low-carbon technologies to compete on cost in the 2020s and beyond, so that we can use whatever clean energy mix turns out to be the cheapest.
• It will be the biggest change to the electricity market since privatisation. It will transform the UK’s electricity sector.
• Aims to attract the huge amount of investment that is needed – up to £110bn by 2020
• Policy set out in the EMR White Paper of July 2011. Strategic framework completed in the Technical Update in December last year.

Several policy elements to EMR...

• Firstly, Feed in Tariffs with Contracts for Difference (FiTs CfD).
• Long-term contracts which will provide clear, stable and predictable revenue streams for investors in all forms of low-carbon electricity generation.
• We will tailor the design of the contracts to the needs of different generation types. Each technology is to have an appropriate contract to properly incentivise investment.
• We will be publishing details of how these will work very shortly (Q1 2012).
• EMR will also introduce a Carbon Price Floor (CPF) and an Emissions Performance Standard (EPS) to further to encourage investment in low carbon technology.
• These measures will ensure that a fair price is put upon carbon and will act as a backstop against new unabated coal plant.
• Finally, a Capacity Mechanism will ensure sufficient reliable capacity in the long-term. 
• Without action, we face a significant fall in projected capacity margins around the end of this decade.  
• To address this, we have chosen a Capacity Market to perform the role of a Capacity Mechanism.
• It is the most effective way to ensure security of supply and provides an insurance policy against future blackouts.
• The Capacity Market will make sure that sufficient reliable capacity is available by providing incentives to invest in new capacity or for existing capacity to remain open. 
• In the Technical Update, we also set out our decision that the System Operator, National Grid, is the appropriate body to be responsible for delivery of both the contracts for difference and the Capacity Market.
• It will be positioned to give independent expert advice to Government on the parameters of the contracts including how much low-carbon generation is needed, what prices should be offered, whether to run the capacity auctions, and how much capacity is needed.
• These policy elements demonstrate commitment to seeking long term investment in low carbon energy that will build and maintain investor confidence.

Balance and competition

• But delivering the new energy economy is not about going green at all cost; it is about balance. We recognise that a diverse energy supply is a secure one.
• We are committed to allowing the construction of new nuclear power stations without public subsidy. As the cheapest low-carbon source of electricity around, nuclear power is a vital part of our energy portfolio.  
• Coal and gas will have a role to play in our energy mix in coming years, but we must manage their carbon emissions.
• We are firmly committed to working with industry to enable cost-competitive deployment of CCS in the 2020s.  
• There are a number of promising projects proposed in the UK and later today I’ll be speaking to industry [CCS Industry Event] about our latest plans for our new competition, before finalising our approach and launching the competition next month.  
• Natural gas is an essential part of our energy mix.
  • Will remain so in the future and beyond 2030
  •  Particularly if the reported Shale Gas reserves beneath Lancashire turn out to be proven and safely accessible.
• The aim of our policy is to work with the existing market to lead the way for green, low-carbon eneration to compete fairly on cost, to encourage competitive tension between all forms of generation.

Planning

• To allow such a competitive market to flourish, we also recognise the importance of ensuring that the major infrastructure planning regime is effective, efficient and transparent.  
• Government is taking forward the Major Infrastructure Planning Reform Work Plan published in December 2010 which made specific proposals for the major infrastructure planning regime.
• Progress has been made in this area:
• We have decided on transitional arrangements for the abolition of the Infrastructure Planning Commission when the Localism Act provisions commence in April. 
• We are creating a new National Infrastructure Directorate within the Planning Inspectorate; 
• The DECC SoS will take decisions on energy infrastructure and we have established an informal ministerial group to monitor progress on pre-Planning Act applications.
• Finally, we have committed to reviewing the regime’s effectiveness after the new (National Infrastructure) Directorate is established and a number of varied cases have been through the process.
• The National Policy Statements are a further important milestone in the Government’s programme to secure affordable low carbon energy. They will help ensure that the UK is a truly attractive market for investors in energy infrastructure by ensuring that we have a planning system that is rapid, predicable and accountable.
• The House of Commons approved the six National Policy Statements for Energy on 18 July 2011. 
• Planning decisions will be taken within the clear policy framework set out in the NPSs, making these decisions as transparent as possible.

Investment Progress

• These initiatives will increasingly deliver the changes to our energy economy that we need to respond to the challenges of security, affordability and climate change.
• And we are already seeing successes in attracting investment in key technologies.
• There has been significant progress in the deployment of renewables and the rate of growth will increase further in 2012.
• At the end of December 2011, the UK provisionally had 11GW of installed renewable electricity capacity. This includes 6.2 GW of wind and just under 2.6 GW of biomass. There is also 6GW more under construction.
• The UK is number one in the world for installed offshore wind capacity and will remain so for the foreseeable future, with over 1.5GW of capacity at the end of 2011. 
• Walney offshore wind farm, officially opened two weeks ago by the Secretary of State, is the largest offshore wind farm in the world.
• SSE’s Clyde wind farm started exporting electricity to the grid in June 2011. Once fully completed it will be Europe’s largest onshore wind farm, with over 150 turbines generating 350MW.
• Tilbury power station, which is due to start generation shortly, will be the first UK conversion from fossil fuel to biomass fuel.  At 750MW it will be the largest project of its kind in the world - 15 times larger than the biggest existing UK biomass plant.
• In nuclear,  three consortia of European energy companies have come forward with plans to build 16GW of new nuclear capacity. 
• This equates to investment of around £50 billion with the construction of each reactor delivering investment equivalent to that for the 2012 Olympics.
• Up to 5,000 jobs could be on offer at each site at which a new nuclear power station is built.
• EDF intends to build four new EPR reactors, totalling 6.4GW, at Hinkley Point and Sizewell.  Approval has been given to begin preliminary works at Hinkley Point. The planning application was formally accepted by the Infrastructure Planning Commission in November 2011. 
• Horizon Nuclear Power (a joint venture between RWE and E.ON) intends to build at least 6GW of new nuclear capacity at Wylfa and Oldbury. Horizon has successfully completed its purchase of land at the site of the Wylfa B nuclear power station in October and at the proposed site of the Oldbury B nuclear power station last month.
• And NuGeneration have begun site characterisation work on land which will be developed as part of their plans to build 3.6GW new nuclear at Moorside. 
• We are currently tracking between 60 - 70 new oil and gas projects, coming forward over the next 5 years, comprising of new developments and incremental projects.
• For example, in August last year, approval was given to InterGen for a 900 MW gas power plant in Coryton, Essex, representing an investment of £600 million.
• At the end of the year, ministers gave go-ahead for a 1,500 MW Gas power plant in Thorpe Marsh, representing up to £984 million of investment from Acorn Power Developments, as well as up to 800 new job created during its construction.

Consumers and Affordability

• I recognise that consumers have concerns about the costs of bills, both from day to day and in the long term. 
• The policies we are putting in place will mean that in years to come we will be able to use whatever blend of low-carbon technology turns out to be the cheapest.
• Energy prices are expected to rise in coming years.
• Without reform, we estimate electricity bills will be around £200 higher in 2030 compared with today’s average annual household bill. 
• With EMR we estimate we can limit this increase to £160. 
• Compared to continuing with current policies, EMR could lead to a net gain to the economy of around £9bn over the period to 2030.
• The Government is engaged in the biggest reform of the electricity market in a generation precisely to drive competition and attract the investment in the clean, home-grown energy sources we need to keep the lights on and reduce our reliance on fossil fuel imports.
• The costs of renewable energy are often overstated and need to be set against the need for a diverse energy mix for security of supply.
• Renewable energy will stem the rise in our use of imported fossil fuels, with the need for gas imports projected to be 20-30% lower than they would have been in 2020. And we will be less exposed to volatile international fossil fuel prices.   
• We can also expect to enjoy the benefits of being a world leader in this sector to business growth and job creation.
• From April 2011 to January 2012 we are aware of a total of £3.8bn announced and planned investments, with the potential support of over 13,800 temporary and permanent jobs.
• In the short term, too, consumers have concerns about the price they pay for energy.
• Energy companies are private companies operating in a market – one that, for now, is dominated by unstable fossil fuel prices. 
• They need to make a profit and invest in things like the new power plants we will need in future, as well as making a return for their shareholders. 
• That said, helping consumers with their energy bills the Government – in October the PM held a Consumer Summit at which Government, consumer groups, energy suppliers and Ofgem agreed measures to keep consumer prices down.
• Ofgem is looking at this issue carefully as the independent regulator and we look forward to seeing their next steps. 
• The fact is we need to see much clearer pricing and much more competition in the energy market and both the Government and Ofgem are working to bring this about.
• Since the beginning of this year some of the smaller energy companies and all of the larger energy suppliers have announced price energy cuts.
• Despite these welcome developments, we know households across the country are facing a tough winter and while we can't control volatile world energy prices we can still help people get their bills down. 
• The easiest ways to get energy bills down quickly are to get people paying the lowest possible tariffs and to reduce the amount of energy that is wasted.
• To achieve this, the Government, consumer groups, the Regulator and suppliers are working together to help consumers Check, Switch, Insulate to Save money.
• Collective purchasing and switching also has huge potential to increase engagement in energy markets and ensure consumers get a fair deal.
• Last week we saw an announcement from Which? That more than 75,000 consumers have signed up to a pioneering campaign of collective purchasing. 
• DECC are continuing to look at how we can encourage consumers to harness their collective purchasing power.
• We are also making sure there is more support for most vulnerable households to get them through the worst of the winter. The Government has increased the money available to help fuel poor consumers this winter to £250 million, up two thirds compared to the previous year.
• The new Warm Home Discount scheme will provide help to around 2 million low income and vulnerable customers this year – including 600,000 of the poorest pensioners who will get energy bill rebates worth £120 this winter. The most vulnerable are also being urged to take advantage of Warm Front, a government grant scheme to help make homes warmer.
• The Government is also backing moves by Ofgem, following their Retail Market Review, to make energy tariffs easier to understand and tackle poor practices to help consumers engage with the market.

Conclusion

• Delivering a new energy economy that can provide us with secure, clean, affordable energy is a huge policy challenge, but one which we have made great progress on.
• But as our plans begin to be implemented and we anticipate the introduction of the Energy Bill, it falls to the private sector to take advantage of the framework and to provide the level of investment  whether in renewables, nuclear or CCS, and to continue to drive the transformation of the UK’s energy supply.

Source: http://www.decc.gov.uk/en/content/cms/news/ch_energyforum/ch_energyforum.aspx

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