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The Rt. Hon. John Hutton MP, Secretary of State for Business, Enterprise & Regulatory Reform
Launch of UKTI's UK Energy Technology Strategy, Millbank Towers, London, 17 December 2007
I am delighted to be here this morning to launch UKTI’s UK Energy Technology Strategy.
It is clear to me that over the past decade the combination of intense economic change, advancement of new technology and opening of substantial markets has created an accelerated form of globalisation.
And there is no sign of this trend slowing down. New markets are opening up as barriers break down. New technology is coming on-stream before even today’s products have been consumed. Business cycles, as all of you know, are shortening.
None of this is without consequence. Many individuals and communities are struggling to contend with the pressures as well as the opportunities of this accelerated form of globalisation.
But front and centre of the consequence of this economic change is the unambiguous challenge of climate change.
We are draining the planet’s natural resources. Most economic growth continues to be powered by oil, coal and gas. The IEA estimates fossil fuels share of world demand to have been 81% in 2005.
Global energy demand is soaring, and shows no signs of slowing down.
The International Energy Agency predicts that if we carry on as we are, world energy needs will be over 50% higher in 2030 compared with today. And fossil fuels will account for 84% of this growth in demand.
No one who has been exposed to the science of climate change could be in any doubt today that this continued reliance on unabated fossil fuels to power the economies of the world could have a potentially lethal effect on our planet.
Without credible action, sustained over time, this growing use of fossil fuels threatens to displace millions, destroy eco-systems and turn back the tide of economic prosperity. The one thing people of my generation took for granted – an inexorable rise in living standards from one generation to the next – could itself now be under threat.
Climate change and soaring energy demand are combining to create literally a ‘perfect storm’ during the next half century. A storm in which access to secure and competitively priced energy is likely to become a major political headache in every capital city across the world.
Hydrocarbon resources – particularly gas and oil are concentrated in regions, which as we know include some of the least stable parts of the world.
Also supply lines are becoming longer, more complex. International trade in energy is increasing. The IEA forecasts inter-regional trade in gas to more than double by 2030.
Now markets are far from perfect. We all accept that. But the development of a global free market in energy gives us the best way to allocate scarce resources in the most cost effective and rationale way.
As a country we must now decide how we respond to the inevitable politicisation of energy in the coming half century. And there’s a few things I want to say about that.
First, we should avoid the obvious pitfall – our strategy shouldn’t be based on an attempt to somehow reverse the process of globalisation. We can’t and it would fail.
Economic growth has its foundations rooted not in Government inspired systems of regulation but in fact in human creativity, ambition and optimism. Something that you can not keep a lid on or try to artificially suppress for any indefinite period of time. That is why I have always drawn a distinction between the fiscal limits of suppressing energy demand and the technological opportunities to maximise energy efficiency.
Second, we must meet the challenge of climate change through nothing less than a fundamental overhaul of energy use and supply. Ultimately the planet will need to find the political courage to address climate change in the most efficient way open to us.
The question is how and when rather than whether. And the effectiveness with which economies make this transition over the next 50 years will ultimately determine the living standards of their people for centuries beyond. The magnitude of the challenge and the scale of the prize is simply that great.
Now, I believe the agreement reached in Bali is an important step forward. It gives the world a roadmap for the next stage in the global low carbon revolution, and includes a two year deadline to speed up the transfer of low carbon technologies to developing countries. The agenda for negotiations - although it is going to be challenging – is now set and the clock is ticking.
But thirdly, we should also be clear about the principles that must govern UK energy policy as we make the transition to a low carbon economy over the next 50 years. In particular, in the face of the challenge of climate change and the risks of energy insecurity, more should be done to create a modern form of energy independence for the UK in the 21st century.
And it is on that issue that I want to focus my remarks today.
Global competition for energy is intensifying. The process of production and supply is becoming increasingly politicised.
Resource nationalism, state-owned monopolies and closed off markets all present a growing risk to the global energy system. Potentially removing incentives to exploit resource in the most efficient manner, or make the same levels of investment. As a result, international markets are unnecessarily tight.
The huge growth of Sovereign Wealth Funds – now valued by the IMF at between $2 trillion to $3 trillion and set to grow perhaps by $800 to 900 billion a year – is increasing fears that these funds could be used to exercise political leverage.
These threats and heightened risks challenge the competitive nature and effectiveness of the world’s energy markets.
They limit investor certainty and confidence and business opportunity in the global energy system, at a time when a massive investment – around $20 trillion by 2030 – is needed to meet the challenges of climate change and energy security.
So I believe without a fundamental shift in the way the world produces and uses its energy, we will be unable to meet the costs of escalating climate change.
Now the UK has been going through its own transition – from a net exporter to net importer of energy within this generation.
Many of the UK’s traditional domestic fuel sources are declining.
In 2006, net imports from all sources accounted for 9% of the UK’s crude oil consumption, 12% of gas demand and 74% of our coal demand.
By 2020, net imports will account for over half of the UK’s oil and gas consumption. Though obviously a great deal will depend on how successfully we maximise our remaining North Sea reserves.
Such a trend potentially makes the UK more vulnerable to the intense pressures now building in the global energy system.
Almost a third of our coal and oil fired power stations will probably close during the next twenty years and all but one of our nuclear power stations will shut down by 2023.
Over the next two decades just to maintain our existing capacity, we will need to develop approximately 30 – 35 GW of new electricity generation capacity to power UK homes and business. Around two thirds of that capacity will need to be available by 2020.
The UK is experiencing a multiple energy challenge that needs to be managed both nationally and internationally: of climate change and the adoption of a low carbon economy; the transition from net exporter to importer; and the need for substantial new investment in our energy infrastructure.
Combined, it leads me to conclude that our ability to secure competitively priced, readily available clean energy supplies will be one of the most important economic differentiators for the UK in the years ahead. Influencing the growth of our economy and therefore our society in a profound way.
In the context of the energy landscape of the next 50 years, the step change required to deliver nothing short of a re-configuration of our economy to adapt to the twin threats of climate change and energy insecurity, cannot be exaggerated.
From a transformational shift away from a century’s old technology now to clean energy vehicles – with all, the complex supply infrastructure issues that flow from such a change, or, as I announced last week, the assessment of the potential for up to 33 GW of offshore wind to power the equivalent of every home in the UK.
Hopefully these are some energy ‘answers’ to the climate change and economic growth ‘questions’.
But there is another dimension to this challenge: energy security.
Now, more than at any other point in our history, the challenge of energy security is likely to be one of the most important political and economic challenges we face as a country. The public agrees. Around 95% of people who took part in our recent consultation events agreed that ensuring a secure and reliable supply of energy is a critical challenge for the UK.
If we get it right, not only will we have succeeded in making our contribution to tackling climate change but equally importantly we will have stimulated new wealth creation that could match many of our established industries.
But how do we manage this transition against the backdrop of what is likely to become an increasingly political international energy scene? And how do we do it at a time when the UK itself is becoming more, not less reliant on overseas sources of energy production?
I believe that over the coming half century it will be essential for the United Kingdom to strive for energy independence.
We will always need energy sources from other countries. That is obvious. Our strategy for the UK in the 21st century should focus on ensuring we do not become dependent on any one supplier, country or technology.
We must deal with energy uncertainties, by diversifying the risks and enabling us to source secure, sustainable clean energy supplies effectively in an increasingly interdependent world.
This modern form of energy independence based, I think, upon three key principles: maximising efficient domestic energy production, using energy from international markets that are free from political interference and finally strong bi- and multi-lateral energy relationships.
First, maximising economic domestic energy production.
In an increasingly competitive, open, global economy, I think it is right for people to ask whether ‘where’ our energy comes from matters. I believe it does matter. We are not ‘indifferent’ to cost-effective domestic production. A strong market based approach to domestic production to help ensure a diverse supply of competitively priced energy should be our aim.
That’s means developing new technologies, but also making the most of our traditional indigenous resources. Let’s not forget the UK still meets around two-thirds of its energy needs from the UK Continental Shelf. 37 billion barrels of our oil and gas reserves have been produced so far, but there is still a possible 16 to 25 billion barrels waiting to be produced. And we’re working on a number of fronts to fully realise this remaining potential.
A good example is our work with the industry to try to unlock gas reserves to the West of Shetland, where we estimate around 15% of the UK’s remaining oil and gas reserves exist.
Maximising domestic production economically enhances our ability to influence security of supply. This in turn will depend on how we manage the regulatory framework to incentivise production.
It is also important – not just because it is likely to represent some of the most highly skilled and valuable parts of the economy. But because it is vital we make full use of the UK’s indigenous supply of clean natural energy resources as well to support the reduction of greenhouse gas emissions.
I believe it is possible for the UK to source more of its electricity production domestically if we take the right decisions as we transit towards a low carbon economy.
We’ve already committed to reform the obligation we place on electricity suppliers to secure a specified amount of their electricity from renewable sources - energy that can come from the wind and the waves that surround our island nation.
We plan to raise the level of obligation up to 20%, and target greater support to technologies which are further from market, so that by 2015, renewable electricity generation will grow to around 15%.
Following agreement earlier this year to an ambitious target of a 20% renewables share in all EU energy consumption by 2020, I am clear that this can only be the start of a major shift towards the use of renewable resources.
This support will, I think in future, help the industry grow. But it's innovation that will truly drive it forward. Today, the Energy Technologies Institute announces its first Invitation for Expressions of Interest to participate in development programmes for new technologies in Offshore Wind and Marine, Tidal and Wave energy.
In Offshore Wind, the ETI has joined forces with the Carbon Trust, and the organisations will together be allocating £40 million to an initiative that aims to cut the costs of offshore wind power and accelerate its deployment around the UK.
But, of course, renewables on their own cannot give us the energy security we need. We must seriously consider not just one, but a range of options to call on.
A substantial contribution to our electricity supplies is made by our nuclear power stations – about 18%.
But the vast majority of UK nuclear power stations will close in the next 15 years. It’s time to make the decision on whether nuclear should continue to be an option in the mix.
In the summer, in our nuclear consultation document, we set out our preliminary view that it should - for public consideration.
The preliminary view put forward that:
Nuclear is a proven and cost-effective technology.
This is a very big decision for our future. It’s only right that before it’s made as many views as possible be heard and taken fully into account – both those who agreed with our preliminary view and those that didn’t.
During our twenty-week consultation, thousands of people came forward to give their views online and in person, at events and meetings across the UK. We’ve received representations from local communities and global organisations.
And the principles and the challenges I’ve outlined today of climate change, energy security and economic growth will set the context for a final decision to be taken very early on in the New Year.
A modern form of energy independence must secondly be based on an acceptance that imported energy will inevitably form a proportion of our needs. It is simply unrealistic to ever assume that we could be self-sufficient in energy production without occurring significant costs and putting our competitiveness at risk.
But it is also critical that when we source imported energy, we strive to do so within an international market based framework that allocates resources efficiently, effectively and free from the potential for political abuse.
We need to work towards the continued development of a strong international market that uses targets and incentives to diversify both the geographical and technological supply of resource.
With one of the most competitive energy markets in the world, we’ve seen for ourselves that a market-based approach provides genuine choice, higher-quality services and greater efficiency.
Domestic gas and electricity prices in the UK are below the EU average.
A stable regulatory system, gives market operators the confidence they need to manage demand and invest in infrastructure.
Between 2005 and 2010 the UK market will deliver around £10 billion in new gas import, storage and pipeline capacity to enable a significant diversification of gas import source supplier and route.
Investment in UK electricity transmission is 40% higher than the rest of the EU, and three times higher than the US.
Government intervention should support fair access to markets, not prevent it.
Promote transparency, not restrict information to operate efficiently. Should eradicate not erect barriers to choice and innovation.
This is the most cost-effective way to ensure a diverse mix of secure affordable, sustainable supplies. And we will work closely with the EU and others, to build more open, liberalised energy markets in Europe and beyond.
Markets that will also establish a meaningful price for carbon, bring forward the best low-carbon technologies quicker and present millions of pounds worth of opportunity for UK business.
In just over thirty years, if we adopt the right approach – a pro-market approach, the low carbon industry alone could be worth £3 trillion per year and employing more than 25 million people world-wide.
UKTI’s UK Energy Technology Strategy published today aims to ensure UK companies can make the most of this and other powerful opportunities - building the UK's competitive position across the energy sector as a world class centre of energy expertise and no 1 location for inward investment across all energy sectors.
UK Energy companies currently generate revenues of more than £90 billion from domestic and international business, and employ 600,000 staff. I think, this has the potential to rise to £200 billion and one million employees by 2030
The UK is already taking a lead on carbon capture and storage technologies. It’s a fact that fossil fuels will continue to dominate our energy mix for decades to come.
Global emissions from coal are set to rise by 73% by 2030. With around half of the increase in global emissions driven by growth in China and India, work with these and other major CO2 emitters to develop low-carbon technologies have got to be a priority.
A competition to build one of the world’s first carbon capture and storage plants in the UK has already been launched. And we’re leading on an EU initiative with the Chinese Government, to demonstrate coal-fired power generation in China. Critical work in a country that builds one to two coal-power plants every week.
Maximising domestic energy production, where economic, or optimising robust international market-based frameworks will both take time. It cannot be achieved overnight.
The third key component of 21st century energy independence must be the development of strong bi- and multi-lateral relationships with the key energy producing and transit nations.
We’ve developed strong relationships with Qatar and Saudi Arabia. And we want to develop stronger relationships with other countries, such as Russia.
The aim is establish a consensus about the main barriers to investment, and attempt to resolve uncertainties about future energy demand and supply from different regions of the world.
UK oil and gas companies are also already contributing a very great deal to the economic development of energy resources in Turkey, Turkmenistan and Azerbaijan.
And the British Government recently signed a protocol of cooperation to share experience with the Turkmens and promote British business in contributing to the development of the energy sector in Turkmenistan.
In addition, we’re working with the Turkish Government to help them build a liberalised energy market there, with transparent and stable regulation and facilitate the flow of oil and gas to Europe through their country.
Together with maximising cost-effective domestic energy production and developing international markets, our work with these countries and others such as Norway will help mitigate the risks of an uncertain and challenging energy future - maintaining reliable, affordable and sustainable supplies through securing a strong mix of energy sources, suppliers and transit routes both at home and abroad.
In May 2007, the Government published its Energy White Paper – our strategy for both international and domestic action to begin to make that ambition a reality.
At home, we must take the tough decisions and credible, cost-effective action necessary to become an energy efficient low carbon economy, as quickly as possible.
Boosting investment in infrastructure and the development and deployment of low carbon technologies.
Internationally, it demands strong partnerships - with the EU, who have also pledged to take a global lead, and of course other countries.
That will deliver open, competitive international markets and coherent, pragmatic policies to meet ambitious, but fair and equitable targets for energy security and climate change.
We’re now putting in place a package of legislation, measures and relationships to ensure the UK relies on the most diverse mix of energy sources, providers and supply routes.
And in three important pieces of legislation – the Planning, Climate Change and shortly the Energy Bill will set the linked legal frameworks for how we will achieve our goals.
It is obviously true to say that we can never be fully certain of just how much energy we’ll need in the future, or how supplies could be affected in the next ten or hundred years.
So, the best, most sensible, way to deal with that uncertainty is to diversify the risk. That is what I think is a modern definition of “energy independence” in an interdependent world.
We must recognise the political pressures inherent in the global energy system and design a balanced approach to ensure an energy resilient UK.
Such an approach must be based on maximising cost-effective domestic energy production, developing open, competitive international markets and strong bi- and multi-lateral relationships. An approach that enables business to bring forward the investment and technologies we need, the UK Government to ensure our energy security now and in the future, and for all of us to tackle the global issues of climate change.
Thank you.