Securing Britain’s Energy Future
Speech by Secretary of State Edward Davey at University College London
INTRODUCTION
It’s an honour to be asked to give the inaugural Annual International Energy Lecture here at the UCL Energy Institute.
And I’m delighted to be making the speech today, when Royal Assent has been given to the Energy Bill – so we now have the Energy Act 2013. Thanks to any of you who’ve helped in its birth.
Now in June 2014 the Institute will celebrate its 5th birthday.
And in those five years you have much to be proud of – the wide portfolio of research and consultancy developed in that time, the strong relationship you have with Departments across Government.
The Energy and Climate Change Department I lead had its own fifth birthday in October this year.
So we’ve grown up together.
Just like DECC, the UCL Energy Institute was established to respond to the challenge of mitigating climate change and providing energy security in the 21st century.
And I particularly value one of the founding principles of your work:
That the aim must be “not to simply understand the world, but to help change it.”
Because – ultimately – that is what we are going to need to do. A profound change - from a fossil fuel world to a low carbon world.
And analysis alone is not going to solve our problems. We need practical solutions – affordable solutions – lasting solutions.
And that is what I want to talk to you about, here tonight.
Bringing together the challenge of energy security, the challenge of climate change, and the challenge of energy affordability in a coherent energy policy for the country.
And, crucially, a policy that is built to last.
As the title of the lecture suggests – Securing Britain’s Energy Future.
And I want to talk specifically about the challenge that Britain faces, and indeed Europe as a whole faces, in making sure that we maintain economic competitiveness as we decarbonise.
But first let me address that issue of crafting solutions for the long-term.
SOLUTIONS FOR THE LONG-TERM
“Why should I care about future generations?” Groucho Marx once famously remarked. “What have they ever done for me?”
That quip encapsulates one of the particular challenges of governing in a democracy – resisting the lure of short-term populist solutions that fit neatly into the electoral cycle but just build up problems for the future.
It is all too easy to plump for simple, headline grabbing quick fixes, that, under serious analysis, end up undermining the delicate balance that needs to be struck if we are to meet all of our objectives together.
Quick fixes for instance, that seek to hold down energy prices, but at the expense of the very investment we need for energy security – leading to higher prices in the future.
Or that see accelerated unilateral cuts to carbon emissions, but at the cost of carbon leakage and economic competitiveness.
Or that improve energy security, but at an exorbitantly high price.
And that is why, during the recent review of the impact of Government policies on domestic energy bills, we have taken special care to ensure that any changes we make:
- do not negatively impact on investment in low carbon energy;
- do protect the fuel poor;
- and are compatible with our emissions reductions goals.
But this is a challenge not only for government, but for the Opposition too.
Over the next decade we need tens of billions of pounds of investment in new energy generation and networks if we are to replace the old and dirty infrastructure set to close.
If we are to persuade investors, not just in the UK but around the world, to invest here, they need to see that there is a political consensus on these issues that rises above the normal everyday party politicking.
That we are putting the national interest above party interest.
Now you might think I’m about to launch a broadside on Ed Miliband for doing the opposite – and it’s tempting.
The Coalition Government has serious differences with the Labour Party over its proposal to freeze energy prices regardless of what happens in the global energy markets.
I agree with the assessment of the OECD that Labour is creating regulatory uncertainty that is not consistent with Britain’s need for investment, for energy security, and to tackle climate change.
However, I actually want to focus on the much longer term energy policy where there is agreement.
THE ENERGY ACT 2013
Because I’m proud of the fact that the fundamentals of energy policy are subject to wide cross party agreement.
Contracts for Difference which are our central tool to incentivise investment in low carbon electricity generation and encourage a diverse energy mix.
A Capacity Market to help guarantee security of supply.
And a regulatory regime in the wholesale and retail markets that boosts competition, encourages new entrants, and bears down on prices for consumers.
For the Energy Act 2013, completed its passage through Parliament with the active support of the opposition.
This sends out a strong message that the legal, financial and political framework we are putting in place is designed to last, not just for the next few years, but reaches out ten, twenty, thirty years into the future.
A framework that works with the grain of the energy markets – providing the incentives and stability needed to attract the investment required to guarantee our energy security for decades to come.
A framework that boosts home-grown low carbon technology and energy efficiency, bringing down costs over the long-term, and providing lasting relief for hard-pressed consumers.
By creating the world’s first low carbon electricity market, we are going green at the lowest cost – demonstrating that carbon reduction and economic growth can go hand in hand.
Because this is a framework designed to enable Britain to meet our climate change obligations in the energy sector without sacrificing international economic competitiveness.
Because when it comes to achieving our essential objectives – affordability, energy security and carbon reduction – if we can anticipate the development of the global energy markets, we can position ourselves for success across the piece.
So let me briefly sketch out for you the global picture as it relates to energy and climate change.
AGE OF TRANSITION
We are living through an age of global transition.
The emerging super economies of China, India, Brazil are already energy hungry, just like the established economies in Europe, North America and the Pacific Rim.
Global energy demand is already twice as high as it was 30 years ago.
And the International Energy Agency estimates that it will grow by at least a third again by 2035, with 90% of that growth in developing nations.
China and India alone are likely to make up just over 30% of world energy consumption by 2035.
This is all equates to a huge shift in just a few short decades.
And this increasingly energy hungry world is going to have to face up to the consequences of its appetite.
CLIMATE CHANGE
The latest Inter-Governmental Panel on Climate Change Report makes the situation crystal clear.
Human activity is significantly contributing to the warming of our planet.
Forecasts of the rate at which the world will warm in the future may differ – but all the traffic is in one direction.
And without radical reductions in greenhouse gas emissions, the world our children and grandchildren are set to inherit will be potentially 4 degrees hotter than today.
The debate has to be about how we reduce global greenhouse gas emissions, not if.
Two thirds come from the energy sector, so without action here, the hopes of limiting climate change to manageable levels are close to zero.
Global energy related CO2 emissions trends have generally followed trends in the global economy.
And with the economic growth expected over the coming decades, particularly in the developing world, emissions are set to rise not fall.
There is some good news.
Today CO2 emissions per unit of economic output are 25% lower than in 1990 and there are signs that this could increase to 50% lower by 2035.
So globally we are becoming more energy efficient and more carbon efficient.
We need to continue to increase this trend, and the work being done here by the Institute on energy use will contribute to that.
But the IEA estimate that emissions from global energy use are on course to rise by 20% by 2035 and unless we bring that figure down climate change will not be limited to two degrees scenario judged by science to be manageable.
The answer has been obvious for some time.
We need to decarbonise the way our societies are powered, as our energy demands increase.
This means accelerating the growth of existing low carbon energy generation – such as renewables and nuclear – bringing down prices so they can compete on a level playing field with fossil fuels and eventually replace them.
It means accelerating innovation in technological solutions commercially developing zero carbon fuels like hydrogen and abatement technology such as carbon capture and storage.
And as we do this we need to progressively cut out high impact fossil fuels like coal in favour of lower carbon options such as gas as a bridge to the future, an issue I will return to later.
GREEN GROWTH
Ultimately we need to forge a global consensus at the negotiating table in the United Nations.
And my focus next year will be to accelerate the preparations in the UK and in Europe for the crucial 2015 summit in Paris.
But the lack of an existing global deal should not be an excuse for failing to act at a national or regional level now.
Because in actual fact, tackling climate change is an opportunity for our people, not a burden.
Combined with much greater energy efficiency, the construction of modern low-carbon energy infrastructure will improve our energy security.
It will reduce our dependence on increasingly expensive fossil fuels from risk-ridden regions, in favour of home-grown energy we can rely on, helping to keep energy bills down.
And in the process it will provide jobs for our citizens, profits for our businesses and growth for our economy as the global green marketplace expands.
It is already worth around £3.3 trillion a year and is expected to grow annually at over 4% for the foreseeable future.
China is investing over $1.2 trillion in its green economy between 2011 and 2015.
The US is securing record sums in clean energy and recently became the world’s largest investor in low carbon energy research and development.
For the planet, this is encouraging, suggesting that the world’s two largest polluters have a growing stake in a low carbon-future.
So the challenge for the UK, and for Europe as a whole, is maintain our ambitious vision for emissions reduction and investment in climate-friendly clean energy.
Indeed, it’s why I’ve established at the European political level a Green Growth Group – which now has 14 Member States of the EU actively working together, and now has 2 business advisory groups helping us craft growth-friendly climate change policies.
INVESTMENT
In the UK, we are pushing hard for that green energy investment.
With the tripling of support available to low-carbon technology to 2020 agreed as part of the Levy Control Framework;
With the stable legal, financial and political framework put in place by the Energy Act;
And with our commitment to delivering on renewable energy targets;
We are positioning Britain to compete in the green economy while guaranteeing our energy security.
I consider this action to be imperative, not optional.
Today, 40% of our electricity comes from coal.
20% is from old nuclear.
Much of that is due to come off line in the next decade.
So the Coalition Government inherited from the previous administration, an energy future with a huge multi-billion black hole at its heart - an energy crunch, the result of years of under-investment.
Official statistics suggest that, in the ten years to up to 2010, investment across the whole of the electricity sector totalled just under £28 billion.
That figure has been overhauled in just three years under the coalition Government.
Latest DECC estimates suggest that at least £35 billion has been invested in new electricity infrastructure since 2010, and much more is in the pipeline.
This year I opened the largest offshore wind farm in the world – the London Array.
We’ve agreed key terms to build the first British nuclear power station in a generation at Hinkley Point and are pressing on with plans to replace the current fleet.
And earlier this month, I announced updated contract terms and strike prices alongside wider reforms to the electricity market that could unlock additional investments of around £40 billion in renewable electricity generation projects up to 2020.
So investment is now flowing in the UK which will boost energy security, reduce reliance on imported fossil fuels, and support up to 200,000 jobs by 2020.
But when it comes to investment decisions on energy projects that will last into the middle of the century and beyond, 2020 is fast becoming the rear view mirror.
We need to project the stability we have brought further ahead.
That is why the UK is pressing at a European level for an ambitious 2030 emissions reductions target of 50% compared to 1990 levels as part of a global agreement in 2015.
It has escaped almost every UK commentator but this is the UK leading in Europe. To persuade our European partners to be more ambitious on climate change than they would otherwise be.
And my current judgement is that we are winning that debate.
But if we are to be ambitious, we must also be smart.
A carefully conceived international climate change agreement can help to ensure that those countries that act decisively to limit emissions do not face unequal competition from countries that don’t.
But to guarantee that European economies can compete internationally we have to take advantage of all the opportunities for green growth – from energy efficiency to new technology.
And to be cost effective, we will have to allow Member States to make the right choices for themselves – especially the choices over which technologies to use in the low carbon transition.
So we must deliver emissions reductions in a flexible, technology neutral way without cutting off the carbon-saving and cost-reduction benefits that can accrue from nuclear power for instance – and, indeed, lower carbon fossil fuels such as gas, including shale.
I have always been, and remain, a huge proponent of renewable energy sources in all their forms.
And I believe recent and predicted cost-reductions in clean energy suggest the future belongs to renewable technologies.
But the climate change threat is so great, we should back every low carbon technology and let renewables, nuclear and carbon capture and storage live and compete together.
Because this is the way we maintain economic competitiveness while we decarbonise.
COMPETITIVENESS
So let me turn now directly to the issue of competitiveness and energy prices..
Any plan to tackle energy prices must always place a premium on energy efficiency, because you don’t pay for energy you don’t use.
And the UK has a raft of policies for industry such as the CRC Energy Efficiency Scheme and Climate Change Agreements that help reduce the impact of prices on competitiveness by incentivising more efficient use of energy.
But energy efficiency alone has been and will never be enough.
So we have also acted to protect energy intensive industries from the impact of the EU Emissions Trading Scheme, so we don’t end up exporting emissions outside the EU.
The UK is the first country in the EU to start paying out State Aid for this because we recognise that our energy intensive industries are exposed to international carbon cost differentials – particularly on electricity.
But ultimately we must address the root causes of international energy price differentials.
The United States pays a third of the price European countries pay for gas imports and one fifth of price of imports to Japan.
Japan and Europe pay more than twice the price for electricity than US consumers, with China paying double.
Of course energy is just one factor in competitiveness and attractiveness for investment – financial, legal, tax regulatory systems – geopolitical stability, geography, infrastructure, labour costs and skills all play a part.
But the sheer scale of international energy price differentials, particularly with the US, can have a significant effect on competitiveness and exports. And so where carbon emissions occur.
But if we to address these price differentials properly, we need to recognise why they have occurred.
Some have chosen to focus on the cost of subsidising low-carbon electricity generation in Europe as the reason for the differentials with the US.
But this does not bear close scrutiny.
For the vast bulk of the UK and European economy you could abolish all green levies and all climate change policies, and it would still not make significant inroads into the energy price differentials with the United States.
Why?
Because there has been a strategic change in the terms of trade between the US and the rest of the world. Due to shale gas.
THE SHALE EFFECT
As the latest IEA investigation into energy and international competitiveness sets out, lower prices in the US are primarily driven by the exploitation of their shale gas reserves and relative lack of export capacity.
This has driven down both gas and electricity prices in the US relative to Europe and Asia.
So the problem is not climate change action.
It’s the shale gas revolution we have to respond to.
So what is the answer?
Well its clear we have to get our own house in order, so that we in Europe can trade our energy properly and bear down on prices.
First, we must step up the integration and interconnection of European energy markets so that countries can buy clean, competitive, low carbon electricity from wherever it is cheapest.
That means across Europe we must fully implement the EU’s energy liberalisation legislation by the end of next year and facilitate investment in the physical links that make the interconnections possible.
It just doesn’t make sense for Europe to fail to leverage the potential advantage of a single energy market – we must get real about cross-border infrastructure, and fast.
We must, for example, look again at the unbundling rules that are blocking investment from many major financial institutions.
I’m convinced connecting the UK better into a better functioning European single energy market would spur greater competition in our electricity markets – and provide a real boost for consumers and industry.
Second we must set a climate and energy framework for 2030 and reform the EU ETS to give investors a stronger, more certain carbon price signal.
That may seem odd to some, as it itself may well increase the price of energy for some – but compared to the shale gas price effect, hardly at all.
And pricing carbon better, would stimulate the types of investments that will help make us more competitive and more secure on energy in Europe than we are now.
Third, we must develop strategies and invest more and urgently in focused R&D and innovation for Europe’s energy intensive industries.
I’m not talking about strategies and investment for incremental improvements in energy or resource efficiency – important though that is.
I’m talking about game changing technological breakthroughs, that will dramatically cut the energy usage and/or carbon emissions from our energy intensive industries.
And guess what? It’s being done by some industries already.
Europe’s paper and pulp industry has got together, set a competition between two teams and developed ideas and new breakthrough technology options that will deliver dramatic cuts in industrial energy usage, by completely re-inventing processes.
Last month I met a Cambridge company who have innovated and filed a patent for zero carbon concrete. The UK and Europe has to get behind these game changing innovations.
The fourth part of my package for a strategic response to the shale gas effect on EU/North American energy price differentials is trade policy.
We should use the Transatlantic Trade and Investment Partnership and other negotiations to promote greater international trade in energy, including encouraging the US to export more of its gas.
Not least because the UK is well placed to benefit from such an eventuality as our capacity to import gas has increased five-fold in the past decade.
But ultimately, unless the potential of home-grown electricity and gas production is unlocked, in the UK and across Europe, we won’t see downward pressures on prices strong enough to offset fast rising demand.
And that includes unlocking the potential for European shale gas – the inevitable fifth element of a strategic response to American shale gas.
EUROPEAN SHALE
A recent report from the Centre for European Reform concludes that European shale is unlikely to replicate the step change in energy costs that we have seen in the US.
The geology, economics and politics are vastly different.
But exploiting shale gas Europe-wide has the potential to contribute significantly to energy security whilst reducing dependence on imports from outside the EU, most notably from Russia.
So while European shale isn’t likely to be a silver bullet solution for energy costs in the EU anytime soon, one could imagine, in the 2020s, large scale shale gas production in Europe boosting supply sufficiently well that markets might really be impressed.
And frankly after wholesale gas price rises of 50% in the last 5 years - the key and overriding reason behind today’s high energy bills in Britain - any downward pressure that can be exerted on prices will be welcomed by consumers and industry alike.
And it will also help directly with efforts to reduce greenhouse gas emissions from Europe.
Gas is much better for the environment than coal when generating electricity, with half the carbon footprint.
With the climate change imperative to take coal out of the mix, and with commercially viable carbon capture and storage still some way off, gas provides a bridge to the future.
Not at the expense of renewables and other low carbon energy generation, but complimentary to them.
The UK is pioneering shale gas exploration in Europe, and can show a lead on how shale can be done safely and in an environmentally friendly way.
The new Regulatory Roadmap and the independent Strategic Environmental Assessment we published yesterday show how adverse impacts can be minimised and Britain can gain from developing shale gas:
Boosting the UK’s energy security;
Contributing to economic growth;
Creating thousands of jobs;
And ploughing almost £1 billion back to local communities through benefit schemes.
And I believe that if we can encourage a global move from coal to gas, we will be doing the planet a favour.
If shale gas can contribute to weaning the world off more damaging coal; then we should not fear it; from an environmental point of view we should welcome it.
So while I respect the reticence of some of our European neighbours on shale, the UK Government believes that there should be no obstacles to safe and commercially viable shale gas production across Europe.
Decades of ambitious EU Environmental Directives have left the EU uniquely suited to handling the challenges of shale gas development, from water use through to methane emissions.
We therefore do not believe there is a need to legislate further.
Of course the Commission needs to clarify how existing EU legislation applies to shale gas to provide certainty to industry and to ensure that Directives are applied uniformly across the EU.
But we must ensure EU action is proportionate.
Facilitating safe shale gas production, not putting up barriers.
With over 50 years of experience in onshore oil & gas activity, the UK has robust regulation in place.
We are using our expertise and experience to help the Commission produce this guidance, and are willing to work with Member States to ensure consistent implementation across Europe.
None of the actions I have outlined today on competitiveness can succeed in isolation.
We need to pursue them all.
A carefully conceived global agreement on emissions reduction that ensures that those who decarbonisation more swiftly are not at a disadvantage.
Energy efficiency in our industries and business, helping them reduce the intensity of their energy use and save money, with compensation for the most energy intensive.
Driving greater competition in European energy supply by completing the single market and accelerating interconnection, driving down prices.
And addressing the cost of the raw materials of energy, bringing low carbon technology overtime to grid parity and maximising home-grown gas resources including shale.
This is what will bring the long-lasting solutions that I talked about at the start.
Securing Britain’s energy future.
CONCLUSION
One of the founders of UCL, the poet Thomas Campbell, once wrote:
“O star-eyed Science! hast thou wandered there, To waft us home the message of despair?”
The sheer enormity of the challenges we face, particularly the threat of climate change, can sometimes feel overwhelming.
But these lines from Campbell were from a poem called the Pleasures of Hope.
So I want to leave you with a message of hope.
On energy security, with the Energy Act now passed and the investment in infrastructure now flowing, the lights will stay on.
On affordability and competitiveness, working domestically and through Europe we are acting to make energy as cheap as we can, exploiting our natural resources, including shale gas, in an environmentally sustainable way.
On climate change, science has given us an understanding of the scale of the problem we face.
But it is also providing us with the tools to tackle it.
Bringing down the cost of low carbon technologies so we can build the sustainable societies we will need to survive through this century and beyond.
The next few years will be definitive in the fight against climate change.
I am determined that together we grasp this opportunity.
Governments, scientists, campaigners, businesses.
Academic research delivering across a wide range of disciplines.
Not just analysing, but proposing solutions, just as you here at UCL do.
The whole of society working together to meet our collective responsibility to pass on to future generations a planet that can sustain them.
But there is a particular onus on the politicians and the Governments of the nations of the world.
Because it is we who lead, and it is we who need to hold the course through difficult times when the pressure to trim and tuck is greatest.
As Secretary of State, I have had the opportunity over the past year to meet with my counter-parts across the world and seek to break through the issues that are holding us back.
And I have been greatly encouraged by what I have seen.
The steely determination of the Obama administration to ensure that the United States plays a central role in tackling climate change after years of seeming to stand apart.
The commitment of our partners in Europe to work together to deliver Green Growth.
The Chinese Government recognising its responsibilities as one of the world’s new powerhouses, wanting to build an ecological civilization that softens its tread upon the earth.
Here in the UK, with the Climate Change Act of 2008 and the Energy Act of 2013 receiving almost unanimous cross-party support, we have put in place the legal, financial and political frame work for us to meet our responsibilities over the decades to come.
Affordable energy security and climate change action that is built to last.
Because we don’t just want to be the greenest government ever, we want the next government, whenever that may come, and however it is formed, to have the tools to be even greener still.