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The Future of Utilities

Lord Truscott,  Former Parliamentary Under Secretary of State for Energy
Adam Smith Institute 12th Annual Conference, London,  27 March 2007

Introduction

Thank you Iain, and good morning everyone.   I’m delighted to be here today – especially under the auspices of the famed Adam Smith Institute.

I have had the pleasure of speaking with many of you at recent events, but as energy and climate change now sit so far up the political agenda, there is always something new to discuss.

In the last few weeks, we’ve had the Spring European Council and the Budget, and looking forward, I can confirm that we will be publishing the Energy White Paper in May. 

But today, I’ve been asked to talk about the energy challenge we all face.

And I will try and cover the salient points for utilities as a whole, looking at our progress to date; how factors like renewables will affect the sector; options for large scale generation; and, what we are doing to help the utilities industry and its consumers.

Our UK Energy Strategy

We are all now well versed on the twin challenges facing UK energy policy:

• the need to tackle climate change by reducing carbon dioxide emissions; and
• the need to deliver secure, clean energy at affordable prices.

To put these in context, the Stern Review stated that we need urgent global collaborative action to avoid losing the equivalent of 5 - 20% of GDP per annum, now, and forever.  And the Spring Council reiterated the need for effective diversification of energy sources and transport routes.

The UK’s energy strategy is based around the need to tackle these challenges: on one hand the need to diversify supply, on the other the need to save energy and reduce demand.  At the heart of this is providing businesses and consumers with the incentives to save energy and increase energy efficiency. 

For the most energy intensive businesses, the EU ETS is the key mechanism.  By placing a value on carbon, it incentivises these businesses to make investments consistent with our goals, whether by saving energy or investing in low-carbon technologies.

And for consumers, the key to reducing demand and improving energy efficiency is raising awareness and changing behaviours.  So our energy strategy seeks to increase energy efficiency by driving up standards of the products we buy, and the buildings we use and giving consumers the information they need to make informed choices.

But we also need to ensure the energy we use is cleaner and more sustainable.  So, there is a real drive towards more low-carbon technologies and a strong commitment to renewables generation.  But I’ll come back to that later.

And finally, our strategy looks at securing enough energy to meet our daily needs in the long term.  It seeks to ensure our investment and regulatory frameworks incentivise timely investment in new energy infrastructure – something that’s particularly important at a time when so much of our large scale generating capacity is set to close, and we become increasingly reliant on imported gas.

International context

But as the circumstances within which our energy policy operates evolves, and the challenges we face are increasingly recognised as global – our energy strategy must be translated to the international stage.

Sir John Mogg spoke earlier about the importance of competitiveness in Europe.  We wholeheartedly agree with this and we believe in open, transparent and liberalised markets as the most cost effective and efficient way of delivering our energy needs.

It was only the beginning of this month that the International Energy Agency’s In-Depth Review held up the UK framework as a role-model to its members.

Progress to date

And whilst we are not complacent, this does demonstrate how far we have come in meeting our goals. On greenhouse gases for example, our latest figures show total UK emissions in 2006 had fallen about 17% below 1990 levels.  

And looking at current projections – they should also be about 24% below 1990 by 2010.  That means we will have met our Kyoto target twice over.

However, meeting our goal of reducing carbon dioxide emissions by 20% on 1990 levels by 2010, is proving challenging. Recent changes in global energy prices have had an affect on the relative price of coal and gas.  This, in turn, has led to increases in our carbon emissions in recent years due to higher a higher level of coal burn in the electricity sector.

Latest projections suggest that the UK will have reduced carbon emissions by around 11% below 1990 levels by 2010.

This proves we have some way to go, particularly if we are to meet our goal of cutting the UK’s carbon dioxide emissions by some 60% by 2050.   But I believe we can and will rise to the challenge.

The Climate Change Bill, announced by the Environment Secretary David Miliband a few weeks ago, makes the UK the very first country in the world to legislate to manage carbon dioxide emissions – underlining our commitment to tackle climate change.  So as well as setting ambitious carbon reduction targets at home, we are also providing the national framework within which to achieve them.

Future targets

That brings me on to our long-term targets and one of the more recent developments in international energy policy.  This month’s Spring Council saw EU leaders approve an ambitious climate change and energy package, based on the Commission’s Strategic Energy Review.

The package includes:   

• an ambitious target to cut greenhouse gas emissions by 20% by 2020 on 19990 levels, or 30% if other countries also play their part;
• a binding target of a 20% share of renewable energies in overall EU consumption by 2020; and,
• an agreement to implement the EU’s energy efficiency action plan as the means of reducing the EU’s energy consumption by 20% by 2020.

I’m sure you will agree that these are tough targets.  But through this package, the EU is sending a powerful message to the rest of the world that we are serious about tackling climate change and ensuring security of supply. 

We will be looking for further success through the G8 and the UN later in the year, but there is still work to be done to understand the detail of these proposals and their specific implications for the UK – not least around renewables.

Renewables

On that point, we know that this stretching new target will give renewables deployment a huge boost in the EU. 

It is a clear signal to investors that the EU wants more renewables in our energy mix.  And it should also create greater incentives for new and innovative energy technologies.

The Commission will now start work on designing a burden-sharing arrangement across member states.  Once complete we can expect to begin working with the Commission to set an appropriate target for UK.

There is little point in speculating now on the UK target until the Commission establishes its burden sharing criteria. However, we are clear that targets will not be set without all member states’ agreement.

Reflecting the strength of the targets being set at international level – we have a strong commitment to renewables and particularly renewable electricity at home.

Following the Energy Review report, we have already consulted widely on strengthening the Renewables Obligation, receiving over 200 responses.  I would like to take this opportunity to thank all of those who commented.

We will be able to say more on this in the White Paper, but the RO is immensely important for the sector.  It has already helped us successfully double the amount of renewables generation in the UK.  And we stand by the RO as the long term instrument to maintain investor confidence in renewables and drive their deployment.

You will all be aware of our aspiration for 20% of electricity generation to come from renewable sources by 2020, but overall across other sectors of energy, renewables play a relatively small role.

For example, much of our heating comes from gas and oil continues to dominate as the main fuel to power our cars.

Against this, there have been many successes.  The opening of the Braes of Doune wind farm in February took the UK above the 2 GW of wind generation threshold – making us only the 7th country in the world to do so.

And we have seen planning approval for 37 small and large Renewable Obligation eligible projects, providing a total generating capacity of 2676MW and including 15MW of landfill gas and 9MW of biomass.

Large Scale Electricity Generation

But renewables cannot be the only answer – indeed there is no one solution to the challenges we face.

We have known for some time, that in electricity markets alone, we need around 25-30GW of investment in new plant in the next two decades, to replace retiring power stations and meet rising electricity demand.

And whilst it will always be for the market to set the mix – if we are to make progress against our carbon goals, we need as much of this investment as possible to be in low-carbon forms of generation. 

But with bold and exciting announcements like the one made by the Chancellor in his budget speech last week, the options open to investors are increasing all the time.

The Chancellor of the Exchequer outlined our plans to launch a competition to develop the world’s first full scale demonstration of carbon capture and storage. 

The potential benefits are huge – with the possibility of capturing 90% of carbon emissions.  As China builds a new coal fired power station every 4 days, it is imperative that we find clean ways to use coal in electricity generation.  The results of this competition will be announced next year and there will be further details in the Energy White Paper.

Our energy strategy has always had a place for coal, and convening the Coal Forum is an important step to help find solutions to secure the long-term future of coal-fired power generation and UK coal production.  CCS could be an important part of this.

And, looking at other forms of generation, we’re consulting further on the issue of whether nuclear power should be part of the future energy generation mix, a document that will also accompany the White Paper. Our view remains that subject to consultation, nuclear has a role to play.

And – linking to comprehensive work around the forthcoming Planning White Paper, we are setting the proper strategic context for major energy developments.  This includes introduction of new procedures for quicker and more focussed inquiries and taking steps to streamline gas consenting regimes.

Clarity and certainty for investors

In our liberalised market framework, it will always be a commercial decision for developers as to where they choose to invest.

The Government has always been clear that it is our responsibility to put in place the right regulatory framework to allow developers to make informed decisions. 

And open, transparent and liberalised markets – again, as discussed by Sir John earlier – are key to clarity and certainty.  We therefore welcome the strong action the Commission is taking to enforce the 2003 EU legislation, and further support the proposals set out in the Commission’s Strategic Energy Review. 

As I have already mentioned, we have always maintained that a strong commitment to a robust international price for carbon is essential for providing certainty to investors, and giving them the necessary incentives to invest in low carbon technologies.  And we are focussed on the review of the Directive to set the EU ETS framework post 2013.  We believe it should be further strengthened.

Closing remarks

But whilst I know there remain many uncertainties for the utilities sector as a whole – I hope that with the package of past and future work I have outlined today, you will agree we have come an exceptionally long way.

I am always proud to say that our consumers have enjoyed some of the lowest energy prices in Europe – long may that continue - and while we face many challenges, the potential benefits are huge.

Climate change could be the biggest business opportunity of the 21st century, with the potential to create 100,000 new jobs in the next decade.  Worth £25 billion in the UK alone, the environmental industries sector is as big as the pharmaceutical and aerospace industries combined – and globally is predicted to rise to 800 billion dollars by 2015. 

The White Paper will set out how our policies fit within our overall strategy for addressing the long term energy challenge – and I look forward to hearing your response on its publication.

Thank you.