UK Energy Security: Active Government, Smart Intervention
Speech by Energy Secretary, Edward Davey MP, to the Economist Energy Summit on the UK's energy security.
Introduction
Let me start today by asking you to take a risk and make a bet.
On England making it to the world cup final. And then winning.
Far, far too unlikely, you might say.
Unimaginable? Perhaps.
Not even Roy Hodgson is planning for that, you might argue.
But I can tell you who is planning for that.
National Grid.
Big occasions like the World Cup lead to huge electricity demand spikes.
Particularly if at or close to the evening peak – when people are at home, cooking dinner, using the washing machine, making a cup of tea.
National Grid’s extensive historical data confirms that the further the England team progress in a world cup tournament, the higher the surges.
If England were to reach the World Cup Final – listen, just stay with me for a minute – if that were to happen, Grid’s data suggests it’s possible we could see the highest domestic electricity demand surge ever.
Outstripping the days when half the nation watched Coronation Street at the same time.
Outstripping Royal Weddings.
Outstripping the previous record TV induced power demand surge - when England played Germany in the world cup semi-finals back in 1990.
In fact, a World Cup Final this summer – with England in it - could even overhaul the record for a domestic electricity demand surge of any kind.
That was back in the 1999 solar eclipse, which saw a sudden increase in demand of over 3GW, the equivalent of over 1.3 million kettles being turned on simultaneously.
Now you’ve got the picture: can you imagine what would happen if, at a crunch moment, perhaps with the match about to go to extra time or penalties, there was a mass blackout?
The peak of all peaks, ever, arrives, and our electricity system falls over.
Well, as Energy Secretary, it would not be a career-enhancing moment.
So I can announce today, that I have spoken to National Grid about England winning the World Cup.
And I can report that National Grid have assured me that the UK has enough electricity generating capacity ready to meet any World Cup spike – through the group stages and beyond.
So if Stevie Gerrard lifts the World Cup, Britain’s lights – and televisions - will stay on.
Active government, smart intervention
And as you place your bets on England winning, my point is this.
Energy security and resilience doesn’t just happen by accident.
Planning to make it happen is meticulous – because our modern lives revolve around the use of energy.
Especially electricity.
If businesses don’t have confidence in the security of energy supply, their costs go up.
Higher insurance premiums, expensive back-up systems.
Less investment for our economy.
So ensuring the lights stay on is a critical economic task for Government and industry – and one we are and will fully fulfil.
With active, smart intervention: with government, regulators, industry, investors, scientists and many others working in partnership.
Not least because the energy security challenge goes far wider than electricity energy.
For it’s also about energy for transport. And energy for heating.
So I want today to set out all of Britain’s energy security challenges – and how we are meeting them, head on.
The challenges
The first energy security challenge is to make sure we have access to sufficient primary energy resources – home-grown and imported.
We also have to be confident that we have efficiently harnessed the power of markets to source and supply secure energy efficiently.
We must be sure that energy is not only available but, crucially, affordable for our people – our households and our businesses.
And we must ensure that all our energy is increasingly low carbon.
Without active government and smart intervention, markets by themselves in the UK and beyond will simply not provide sufficient capacity, and sufficient low carbon capacity in the years and decades ahead.
But let me be clear – the UK benefits massively – and is far more secure – because of our open markets.
Smart intervention supports markets to attract energy investment, and promotes competition.
Where the market is functioning well, and intervention would add unnecessary costs to consumers, the right thing to do is to stay out - not intervene - the approach we chose on gas storage.
Often the development and security of markets requires direct political intervention.
Whether that’s building Europe’s energy single market.
Or promoting diversity of supply away from the dangers of being dependent on monopolistic or oligopolistic supply.
For a key challenge when planning our nation’s energy security is factoring in the international picture.
Global markets. The geopolitics of energy.
The UK is already becoming far more dependent on energy imports than it’s been for many decades – specifically importing more oil and gas, as North Sea production falls.
Our energy markets are closely tied to European and global markets – so supply and price disruptions elsewhere can ripple and even crash onto our shores.
Energy security, in reality, encompasses all these challenges.
But I do want nevertheless to focus on the security of electricity supply today.
So let me set the context for that specific energy security challenge.
Energy security in context
While some of us remember the blackouts of the early 1970s, since then Britain has grown used to uninterrupted supplies of power.
Occasional exceptions occur.
We were reminded just this Christmas what life can be like without power, when unprecedented extreme weather across the UK left nearly 900,000 households cut off, albeit for the vast majority of those cases, for less than a few hours.
Extreme events like that can test the resilience of individual parts of the network, but we haven’t had network-wide supply shortages or cuts for decades.
In fact, despite all the headlines we read occasionally, the UK is rated among the most energy secure countries in the world.
According to the US Chambers of Commerce, Britain is more energy secure than any other country in the EU.
More energy secure than Germany. France. Or Italy.
Indeed, according to the US Chambers, Britain is more energy secure than the US. China. Japan. Australia. Canada. Russia.
In fact, we’re judged the fourth most energy secure country in the world.
But there can be absolutely no complacency.
Because over the next decade the context for energy security is likely to deteriorate, not just in the UK, but across all large energy using economies.
So let me set out three of the practical realities we are facing, before turning to the solutions for the UK.
The problem
And these three problems involve international energy demand trends, future access to resources and the historical legacy in power supply we are facing up to in the UK.
First, global energy consumption.
It is rising fast, driven by the emerging super economies of China, India and Brazil.
The International Energy Agency estimates that it will grow by at least a third by 2035.
This is of course stimulating new finds and innovation – not least in unconventional oil and gas.
But if supply struggles at times to meet growing demand, as many predict, we can expect upward pressure on prices.
And if there are disruptions in supply, we could once again see rapid price spikes.
So the second problem is access to resources.
The UK’s own oil and gas reserves in the North Sea are declining; and the UK is increasingly dependent on imports - more at the mercy of price pressure and volatility in global markets.
That energy security challenge is one more reason for going green – for maximising energy efficiency and low carbon generation in the UK.
But we all know the transition to a low carbon future will take determined effort over several decades.
So Britain will still have to worry about our access to fossil fuel supplies for many years to come, even as we speed towards a green energy future.
Take gas supplies.
Events in Ukraine have starkly illustrated European dependence on Russian gas and have forced a reassessment on energy security, not just across Europe, but with the G7 acting too.
At the moment, fortunately, the UK is much more insulated against Russian inspired gas disruption than many of our European partners.
Our remaining North Sea supply, our LNG infrastructure and our energy relationship with Norway in particular, provide an extremely solid platform – and gives Britain the most liquid domestic gas market in Europe.
One of the reasons why our energy security is marked so highly by the US Chamber of Commerce.
And I am publishing today, our latest Gas Risk Assessment for the UK – a detailed analysis which we submitted to the European Commission last week.
This shows – in detail – that the UK comfortably meets its gas security requirements.
The security of our gas supply has been tested against various scenarios – such as the kind of severe cold winter that would occur only once in 50 years – and the results confirm we have robust gas supplies.
In fact, our analysis shows there is enough headroom within supply infrastructure to cope with both extreme severe weather and the loss of our single largest piece of gas supply infrastructure, and still meet protected demand.
But even with these results, we are not complacent.
Prolonged disruptions in European gas markets would still impact us – initially in higher prices.
And we still cannot ignore the fact that energy resources we may need to access in future, are situated in some of the more volatile regions of the world.
And the third problem is the power sector.
The IEA estimate the global system needs to attract an eye-watering $16.4 trillion in power sector investment by 2035.
The UK is very much part of that power investment challenge.
We are in the middle of a decade - or more - of structural transition as our old or polluting power stations go off line.
And even though this has been known about for many years, under-investment in the last decade means the Coalition in 2010 faced a massive challenge.
And even though we have turned round power investment in the UK, with record levels of investment, we will still need up to £100bn of investment just through to 2020.
With still more than that needed in the following decade.
And competition for energy investment funds in the global market is becoming increasingly sharp.
We in the UK need to make sure that the regime we have in place is among the most attractive in the world to bring forward the investment our energy security requires.
So these 3 problems - of international demand trends, competition for supply resources and the UK’s legacy – make a comprehensive energy security policy more vital than ever.
The solution
And so our Energy Security Strategy - based on 6 pillars.
One – resilience.
To prevent short term disruptions and to get the power back on quickly if extreme circumstances occur, like they did this Christmas.
In March we published a review of those events - setting out a number of actions for electricity distribution network operators to take before next winter.
Two – maximising economic production of our domestic oil and gas reserves to provide reliable supplies.
With the Wood Review and safe exploration of our shale gas potential.
Three – Improving the reliability of European and global markets.
Completing the single energy market, with a renewed focus on the physical infrastructure needed – to boost interconnectivity so we can trade more energy within Europe.
Focusing on greater diversity for gas supplies – from shale, from Central Asia and from Africa.
Four - Reliable Networks to deliver power where it is needed.
More than £16bn has been invested in building and upgrading electricity transmission and distribution networks since 2010, with around £35bn further expected over the rest of the decade.
And the UK has signalled support for 6 GW of interconnection projects to other European countries which would represent a 150% increase in our connected capacity.
Five – Energy Efficiency.
This is critical.
I have spoken before about the UK’s drive to create an energy saving society.
The Green Deal, the Energy Company Obligation, Energy Demand Reduction, products policy, smart meters, business energy efficiency – creating energy efficiency markets with new business models.
Households are already using around a fifth less energy than they were in 2004 – saving the average consumer around £200 a year in today’s prices.
We estimate we can do more – with the potential to save the UK the need to consume 196 TWh by 2020, the equivalent output of 22 new power stations.
And Six – fast-tracking the transition to a home-grown low carbon energy system to insulate ourselves from the international fossil fuel markets in the long term.
With our far-reaching electricity market reform.
Renewables, nuclear, indigenous gas supplies – and new technologies like hydrogen and carbon capture and storage.
And it is this last point that I want to concentrate on now – rebuilding Britain’s energy home grown infrastructure.
Investment in energy security
Energy projects now account for almost 60% of the UK’s total infrastructure project pipeline.
Labour and my predecessor in this job, Ed Miliband, left a black hole in Britain’s energy future - a historic record of underinvestment, and a policy vacuum that if the Coalition had not filled, the lights would be about to go out.
But since 2010, energy investment has picked up, increasingly fast.
Over £45bn of investment in electricity alone.
ONS figures suggest that in four years under this Government, we have surpassed the total electricity investment under the last.
And we will soon be publishing a comprehensive report on the healthy energy investment trends in the UK.
Much of this investment has been in renewables.
Figures from Bloomberg New Energy Finance show that average annual investment in renewables in this Parliament has more than doubled.
With renewables investment in 2013 at record levels.
Already renewables are now providing some 15% of our electricity.
And Britain’s low carbon investment pipeline has never been so large.
We’re heading the world in terms of investment opportunities in offshore wind and marine energy.
We’ve agreed terms for the first nuclear power station in a generation.
We have begun two major commercial scale projects for carbon, capture and storage – in both gas and coal – the only country in the EU doing CCS seriously.
And with the 2013 Energy Act passing into law in December, we now have one of the best legal and financial frameworks to support the cost-effective growth of low carbon technology anywhere in the world.
This of course will address the long term electricity security of supply.
But offshore wind farms and nuclear reactors take a while to build.
What about the short and medium term?
Let’s start with the medium term.
We are on track to run the first capacity auction for our new Capacity Market this December.
This will help ensure we get the best out of our existing generation fleet and drive new investment in gas and demand side response.
Despite all the uncertainties I know investors face – political ones with Labour’s threatened regulation on energy prices and market ones such as the expected competition enquiry – we believe our capacity market through this year’s auction and next year’s will make real strides in improving the otherwise tight electricity margins expected by the end of the decade.
So what about the short term – this winter and next?
Well, it’s not just the World Cup we’ve been preparing for.
We’ve been working with National Grid and Ofgem for over two years now, on a comprehensive plan – much of which was published last summer.
But more details of this plan are in fact being released today.
Dealing with the crunch
But first let’s look what we would face if we did nothing.
Ofgem’s 2013 Capacity Assessment showed that without intervention, capacity margins could fall from the 2013 level of around 6% to a low of between 5% and 2% in 2015/16, before steadily recovering as new generation comes on line.
The good news is that we are already looking at an improved picture for 2014/15, compared to last year’s expectations.
Due primarily to lower demand thanks to energy efficiency measures - and better assumptions for gas fired electricity generation.
That means this winter, risks could be reduced somewhat without major intervention - with levels of electricity supply security much the same as in recent years.
Ofgem will be publishing their full analysis on this in the coming weeks.
But the outlook for the year after next - 2015/16 – will still require one of the significant new interventions we have long been planning for.
National Grid has been working with Ofgem to put in place new balancing measures – using powers in the 1989 Electricity Act - that deal with the problem.
This includes putting in place supply reserves from power-stations that would otherwise be closed or mothballed.
And extending existing demand measures to reward more large energy users who have the flexibility to reduce their use of National Grid power at peak times and who wish to volunteer for payments to use that flexibility if needed.
So today, with the blessing of Ofgem, National Grid has announced it will pilot additional demand measures for this coming winter, ahead of full implementation of both supply side and demand side balancing measures for 2015/16.
Let me be clear, this Demand Side Balancing Reserve will not force any single business or household to switch off or reduce their electricity.
It is entirely voluntary. Nobody will get cut off. No economic activity will be curtailed.
This is about rewarding volunteer businesses. With the flexibility to reduce their use of National Grid supplied electricity. At peak times only. If called upon.
By changing a shift pattern maybe. Or switching to on-site generation rather than relying on the Grid.
This is not new.
The Grid has been contracting for similar services for many years through third parties, from leading businesses.
ExCel exhibition centre for instance. Marriott Hotels in London.
It’s a service used across advanced nations, in Germany, France, the US.
In the UK we are looking at these demand balancing services, if called upon, to provide less than 1% of peak demand this winter.
Compare that ‘less than 1%’ to America.
In the US, they have the capacity to get over 7% of peak demand from demand side response.
And note, both the new demand and supply balancing services will be used only as a last resort – and are a safety net to protect households in difficult circumstances, such as a hard winter or very high surges in demand.
But with these and our other measures in place, both Ofgem and National Grid are confident that the risk of supply disruption will remain at very low levels even in the next few years.
And as Energy Secretary, I’m convinced that this Government now has in place the detailed plan our country previously lacked – so the lights will stay on this year, next year and into the future.
Conclusion
Ladies and Gentlemen, Energy Security is a joint endeavour.
Active government, smart intervention.
Government setting the legal framework, putting the financial regime in place, negotiating internationally.
Intervening where necessary – but protecting the public interest when the wise course is not to yield to special pleading.
And using markets power as much as possible.
Ofgem - enforcing and monitoring licence conditions, defending the interests of consumers, including in security of supply.
National Grid and distributors - ensuring the network is resilient now and in the future.
Industry pressing ahead to build the new infrastructure as they continue to meet the demands on their customers today.
And across society, people being smarter about their energy use, choosing energy saving products, cutting waste.
There is a value on energy security.
The people of Britain know that.
But it is only by setting the right framework that we can ensure that the market operates not just to meet demand but to work in the interests of consumers to keep the lights on and keep bills down.
The high levels of reliability that we have enjoy over the last few decades must not make us complacent.
And as I have demonstrated today, this Government is acting across the piece to maintain Britain’s energy security.
Now and in the future.