Main Menu
- Other links
- Sections
- About
This snapshot taken on 26/07/2008, shows web content selected for preservation by The National Archives. External links, forms and search boxes may not work in archived websites.
The Rt. Hon. John Hutton MP, Secretary of State for Business, Enterprise & Regulatory Reform
Marriott Hotel, Grosvenor Square, London, 10 March 2008
We can never overstate the impact of Adam Smith on modern economics. As your director Eamonn Butler has rightly noted, Adam Smith’s arguments “not only provided the world with a new understanding of the wealth-creating process; they laid the intellectual foundation for the great era of free trade and economic expansion that dominated the Nineteenth Century.”
And I believe Adam Smith’s example, demonstrating both a forensic approach and a global perspective, is extremely pertinent to the history of the utilities sector of the economy.
As with many sectors, utilities have probably come full circle in terms of private and public ownership. They started as private enterprises, moved to state ownership in the post-war era, were reprivatised in the 1980s, and experienced substantial further market reforms throughout the last decade.
Take gas as an example. For over a hundred years prior to nationalisation, gas was sourced and supplied by a series of private and municipally operated companies. Under the 1948 Gas Act, a nationalised gas industry was formed with 12 area gas boards.
Then came Sid in 1986, returning British Gas to the private sector, with greater competition introduced in the 1990s and then the start of the transition to energy service companies over the last decade.
Now we need to apply the same forensic rigour that Adam Smith demonstrated in his understanding of markets, to ensure that we have a stable environment in which companies can invest with confidence to meet Britain’s 21st Century energy requirements.
Tackling climate change and securing our future energy supplies means that we have to be prepared to take tough decisions now. Because in meeting both of these challenges, time is of the essence.
Governments around the world are all dealing with the urgency of these issues.
In the UK we will face a massive shift in our energy market, as we move from being a net exporter to net importer of energy within this generation. And as we face the fact that over the next two decades, we will need to replace maybe at least a third of the UK’s generating capacity.
The effectiveness with which we make this transition will be a key factor in determining the living standards of the generations that will come after us.
In the UK we see properly structured, competitive, well regulated markets as a significant component of our long-term answer to all of these questions.
We know that a market-based approach achieves the most efficient outcomes. But this is not the same as laissez-faire. We have clear policy goals – energy security and tackling climate change – and we will act whenever it is necessary to correct market failures.
Today I want to address four issues around the functioning of our market system in the UK – decarbonising the economy; infrastructure and generation; ensuring the market delivers for all; and energy efficiency.
The principles behind our intervention will always be framed by asking whether the decision we face will help or hinder the market based approach we naturally prefer. To depart from a market based approach will require firstly, clear and explicit evidence of failure; secondly, the pursuit of overriding policy objectives, and finally a precise quantification of costs and benefits
Adhering to these principles will ensure predictability and continuity.
In his review of the economics of climate change, Sir Nicholas Stern was right when he described climate change as the biggest market failure of all time, and that putting a meaningful price on carbon is one of the key means of correcting this market failure.
The energy industry has made it clear to me that to invest with confidence in low-carbon energy production, it needs the long-term certainty that a strengthened EU Emissions Trading Scheme can bring to the carbon market.
A carbon price that reflects the environmental costs of energy production and consumption is the single most important pre-condition for decarbonising economies. It will send the right price signals to incentivise climate-friendly energy polices and the new low-carbon technologies we will need in the future.
To be effective, carbon trading schemes need a commitment to long term stability, greater transparency and accuracy on emissions data, and minimal political interference. All of these things the UK Government is committed to securing in the Phase 3 of the EU Emissions Trading Scheme and beyond, and I broadly welcome the Commission’s proposals for the strengthening of the scheme.
In just over thirty years, the low carbon industry could be worth as much as £3 trillion per year and employ more than 25 million people world-wide.
We must ensure that UK companies make the most of these powerful opportunities and help us become a world class centre of energy expertise and leading location for inward investment across all energy sectors.
The Energy Bill currently going through Parliament includes measures to drive greater and more rapid deployment of renewables by strengthening the Renewables Obligation.
Offshore wind, wave and tidal power will all gain from this approach, helping us achieve a tripling of renewable electricity from eligible sources by 2015. The reforms will also help us achieve our even more ambitious EU 2020 target.
And we are being bold in our encouragement of renewables – hence our feasibility study into harnessing the tidal power of the Severn estuary, which has the potential to generate as much as 5% of UK electricity requirements.
Within the UK, liberalisation has led to significant new infrastructure being delivered on time by the private sector. Between 2005 and 2010, the UK market will deliver around £10 billion in new gas import, storage and pipeline capacity.
A strong market based approach to domestic production is going to be important in this context too. That means developing new technologies, but also making the most of our traditional indigenous resources of fossil fuels. The UK still meets around two-thirds of its energy needs from the UK Continental Shelf. And we’re working on a number of fronts to fully realise this remaining assets on the shelf.
Take West of Shetland, where we estimate around 15% of the UK’s remaining oil and gas reserves exist. My department is playing what I hope people think is an important and useful role in facilitating a discussion amongst a number of potential investors about how to unlock the gas reserves there. An example of how in even the most mature of energy markets, Government still has a role to play in helping to maximise indigenous energy production.
Securing our energy needs for the future mean that Government has a very clear role in expanding the options available for investment by energy companies.
We have short to medium-term decisions to take to deliver our energy future up to 2020. And we have long-term decisions leading up to 2050 and beyond to ensure the energy future for generations to come.
The end game is to largely decarbonise our electricity mix by the middle of this century.
To do so we cannot afford to rule out options which have the potential to make a substantial contribution to meeting Britain’s energy needs. This is why the Government believes that new nuclear power stations should play a role in this country’s future energy mix. Why, indeed, I believe they have the potential to play a significantly expanded role in helping to make our electricity production both more secure and cleaner.
But over this period, as we develop low-carbon technologies, we should be under no illusion: generation from fossil fuels will continue to play a leading role.
Consider some basic arithmetic for electricity generation. Nuclear and renewables jointly account currently for just over 20% of UK electricity generation. By 2020 we may need around 15% renewable energy in order to meet our EU 2020 targets. This could mean a substantial amount of renewable electricity. And a new generation of nuclear plants might maintain or increase the nuclear contribution.
But that still leaves a significant proportion of electricity, and the majority of overall energy, coming from fossil fuels. I believe very strongly that our job as Government is not to try and dictate the exact mix. A market based approach to allocating scarce resource remains our most effective tool in the fight against climate change – provided we can secure a robust price for carbon.
As a country we have to accept the reality that, even in meeting our EU 2020 renewables target, fossil fuels will still play a major part for the next couple of decades at the very least. And there is nothing wrong with that – provided we are meeting our international obligations to reduce our carbon emissions.
For critics, there’s a belief that coal fired power stations undermine the UK’s leadership position on climate change. In fact the opposite is true. Developing economies need to be able to see by the actions that we are taking that it is possible to use indigenous energy reserves as you decarbonise your economy.
Leadership isn’t about forcing people into making binary choices. Low carbon energy production or fossil fuels. Particularly when the primary goal – substantial emission reductions – can be achieved without having to make binary choices in the short term. The world will use a mix of energy sources for the foreseeable future. Our leadership role is best served by the actions we take on capping emissions, carbon pricing and supporting the development of new CCS technology. Not by a gesture of politics.
Fossil fuels will continue to play an important role in ensuring the flexibility of the electricity generation system as well. Electricity demand fluctuates continually, but the fluctuations can be very pronounced during winter, requiring rapid short-term increases in production. Neither wind nor nuclear can fulfil that role. We therefore will continue to need this back up from fossil fuels, with coal a key source of that flexibility, as we increase the proportion of renewable energy in our country.
Gas is cleaner than coal, but an over-reliance on gas would leave us more exposed to the international gas market as our own resources decline. In winter 05/06, with pressures in gas markets, it was coal fired generation that took up the slack, consistently generating about half of our country’s electricity needs throughout the winter.
It was for these reasons that in our Energy White Paper last year we said that “coal fired generation makes an important contribution to the UK’s energy security and the flexibility of the UK’s energy system, while acknowledging that in order to have a long term future its environmental impact must be managed effectively.” I believe it can.
That’s why we are taking a global lead on clean coal power generation.
Within 7 years one of the world’s first commercial scale demonstrator plants will be up and running here in the UK, generating electricity from coal with up to 90% less carbon emitted. Through our competition, the Government is intervening in the right way to help develop this breakthrough technology.
And we’re already preparing for the technology’s rapid deployment. A Bill is before Parliament now on the regulatory regime, and we are in discussions with our EU partners. And shortly we’ll set out proposals for making carbon capture readiness a mandatory requirement for all future fossil fuel power stations.
The EU ETS places a firm cap on emissions from the power sector and I believe the energy industry is fast adapting to the emissions trading world. Any decision to invest in fossil fuel generation will be taken in full knowledge that it pays them to deliver low emissions.
The UK’s liberalised and independently regulated energy markets have been shown to deliver secure, affordable energy supplies.
Cost-reflective nature of prices is itself an indication of a competitive market within the UK. The Government firmly believes that while healthy competition is essential to protect consumers and drive innovation, it is equally essential that energy companies can operate successfully and profitably, rewarding investors, including pension funds, and making further major investments year on year.
Energy is a challenging sector now, with strong global demand for primary fuels, environmental aims to meet, and volatile margins. We need companies that can act and invest with confidence in this sector. We would all be losers from a failing, loss-making, energy sector. Investment would drain away, leaving no provision for new infrastructure, ultimately only pushing up prices more and more in the future and critically damaging the UK’s energy security.
Over the longer term, cost-reflective prices that ensure a fair return for business are in consumers’ interest; and indeed, over the last 5 years, the UK has enjoyed lower domestic prices overall than other leading member states.
But the challenge now is to build fair, open and well-regulated energy markets elsewhere in Europe as well as at home.
Independent research has indicated that full market opening in Europe could increase cross-border trade in electricity by 31 per cent, and reduce prices in the EU 15 by up to 13 per cent. Total savings in the EU could be in the order of tens of billions of euros. The lack of competition in the EU energy markets is costing UK and EU consumers, and it is crucial that all member states press on until we have reached our goal of a true internal market in energy.
So we continue to work towards liberalisation throughout the EU and internationally. We welcome the European Commission’s determination to develop the internal market through anti-trust action and their recent proposals for further legislation. The latter includes measures we regard as essential to the development of competition, such as properly unbundled companies and truly independent regulators.
While there is considerable resistance to the Commission's proposals on ownership unbundling from some Member States, it is encouraging that some companies recognise the way the market is developing and see that the status quo is no longer an option. EON’s recent announcement that it is to sell its electricity transmission network is welcome news and hopefully a sign of things to come.
As wholesale energy prices rise, our competitive market provides the best long-term protection for UK consumers.
Of course when global energy markets experience high prices, the costs for consumers go up, and that can be painful for the less well off.
We must not underestimate the difficulties and anxiety that this process can cause.
Our current framework ensures that no company can dominate energy production, generation or supply, that consumers can switch suppliers easily and quickly to get a better deal, and that third party suppliers have equal and fair access to the market to help drive competition.
It is important that the UK market enjoys the benefits of full and effective competition – which must also work to the advantage of all customers, particularly those on low incomes or the disadvantaged.
Government already issues statutory guidance to Ofgem on social and environmental matters, but the current guidance was issued in 2004, and energy markets have undergone radical changes since. I therefore intend to consult on new guidance shortly, partly to reflect the increased urgency of climate change but also to stress our expectation that Ofgem will take a strong lead in co-ordinating activity to help low income and vulnerable consumers benefit from competitive markets, and particularly to facilitate switching among low income and vulnerable consumers, and so help tackle the problem of fuel poverty.
Switching is a vital mechanism – and we know that, even though some consumers may never switch suppliers, the fact that they could does create an incentive for the companies to act competitively.
An IPSOS/MORI report commissioned by Ofgem showed that 47% of customers who pay by direct debit have switched supplier – but only 24% of the most disadvantaged, 35% of over-65s and a third of customers that use pre-payment meters. It also shows that many pre-payment meter customers are unaware of how much they could save if they were to switch supplier – up to £170 a year according to Ofgem.
And it is estimated that if all customers switched to the best rate available to them, up to 200,000 households would be taken out of fuel poverty all together.
I know that Ofgem are reviewing options for tackling the low levels of switching among the low income and vulnerable, building on their existing work in this area, and I look forward to hearing an update on this at their Fuel Poverty Summit in April.
I also welcome the probe that Ofgem have announced under the Enterprise Act into the electricity and gas supply markets. I look forward to seeing Ofgem’s initial views in September, including on whether competition is working in all sectors of the market, and whether the current arrangements for monitoring and reporting on switching among the low income and vulnerable need further reinforcement.
Together I hope that these steps will ensure that all consumers have the opportunity to benefit, as well as holding retailers’ to account.
And there will be no let-up in our efforts to combat fuel poverty.
Since 2000 we have spent £20 billion on fuel poverty benefits and programmes – assisting over 2 million households in the UK. The Warm Front programme, in England alone, has helped 1.6 million households (since 2000). Winter Fuel Payments now help nearly 12 million people a year across the UK.
A number of electricity supply companies have done exemplary work in trying to address some of these issues through social tariffs and other measures. And I would encourage then to continue exploring how we can help the vulnerable.
We know we need to do more to save more energy. The cleanest, least environmentally damaging kilowatt hour of electricity is the one that’s never generated in the first place.
But there is a clear challenge here for the market. How do we simultaneously incentivise consumers to consume, and suppliers to supply, less. Shifting prices alone will take you one way or the other – but not both together.
The key is how we can develop a market for energy services in the domestic market. In the Energy White Paper we committed the Government to working with Ofgem to develop this market.
We have incentives in place to stimulate that:
Through the Carbon Emissions Reduction Target we expect suppliers to install a range of energy efficiency measures like cavity wall and loft insulation. But that is not all. CERT will, in addition to these traditional methods, allow suppliers the freedom to install a range of microgeneration measures.
And the EU Energy End-Use and Energy Efficiency Directive comes into law in May 2008. This calls on Member States to promote and develop a market for energy services. In response we are developing voluntary agreements with all energy suppliers to require them to raise awareness of a need for energy efficiency and to promote a market for energy services. We expect suppliers to meet this obligation by the development of innovative energy service packages on their own account, or in partnership with ESCOs, or by referral to other agencies such as the Carbon Trust and Energy Saving Trust.
In conclusion, we intervene to support fair access to markets, not prevent it; to promote transparency, not restrict information to operate efficiently; to remove not erect barriers to choice and innovation.
In doing so, we continue to seek cost-effectiveness through market-based solutions, with a strong independent regulator, and a clear focus on international agreement.
And we do this with purpose and speed. Over the next two years alone, because of the tough decisions we are taking, we aim to see:
All ensuring that we have a robust framework in place to make sure the UK makes the fundamental shift to a low carbon energy future over the shortest possible time frame.