Where next for UK energy policy? We’re about to find out…

November 16, 2015

Following the election, and a summer of numerous energy policy changes, there has been a growing need for energy secretary Amber Rudd to set out her vision of energy policy – a Conservative energy policy, unshackled from coalition ties. It has been confirmed over the weekend that she will deliver her long-awaited “energy policy reset” speech later this week.

So, what could and should this speech contain?

In my view, the speech is unlikely to be a fundamental change of direction, but rather a reorganisation and retuning of policies. The objectives of energy policy are likely to remain the same – the oft-cited “trilemma” of affordable, secure, sustainable energy, which has significant cross-party support. Recent events, such as National Grid issuing a “Notice of Insufficient System Margin” a fortnight ago, have pushed energy security right to the forefront of Ministers’ minds. Energy affordability remains high up the agenda, for example energy costs were cited as a cause of recently announced steel work closures  (although the CCC has said that energy prices are not in fact the main cause). On decarbonisation, the Government has repeatedly stressed the importance of the imminent climate negotiations at Paris, and its commitment to decarbonisation under the Climate Change Act.

Whilst the objectives are likely to remain the same, it is clear that change is needed. As we pointed out in our report The Customer is Always Right, the incoming Government inherited a flawed set of policies, which promoted expensive technologies ahead of cheaper technologies, put investor and industry interests ahead of consumer interests, and often failed to secure best value for money. The subsidy budget agreed under the Levy Control Framework has been consistently overspent, and looks set to be exceeded by as much as £1.5 billion in 2020. At this level, we estimate that overall policy costs could rise to over £200 per household by 2020. In addition to this, DECC is being asked to make significant savings against its departmental budget, the vast majority of which is currently spent on nuclear decommissioning. This is the backdrop to many of the announcements over the Summer, which have sought to reduce spending and contain the impact of policies on bills.

So, what then is a sensible way forward?

Policy Exchange has long-advocated an approach to energy and environmental policy which we describe as “Greener Cheaper”. This involves finding ways to achieve policy objectives in a cost-effective manner, minimising the impact on consumer bills. Our approach is technology-neutral, using competition and markets to identify the lowest cost solutions. We also advocate a greater focus on demand-side and small-scale solutions such as energy efficiency and Demand Side Response – which have often been over-looked in favour of large supply side solutions.

Putting these principles into practice, we would like to see the following mentioned in the reset speech:

  • Improving energy efficiency is a very cost effective way of meeting decarbonisation and security of supply objectives, and also provides knock-on benefits such as reducing fuel poverty. There should be a much greater focus on energy efficiency going forward, with it seen as an “infrastructure priority”. At our recent Energy Efficiency Dragons Den we discussed several ways to promote household energy efficiency at little or no cost to Government. For example, the Stamp Duty system could be amended to reflect the energy performance of a property as well as its value. Alternatively, Government could place an obligation on energy suppliers to reduce the energy consumption of their customers.
  • Phasing out unabated coal would have a massive impact on carbon emissions (since coal is currently responsible for 70% of UK power sector emissions)* and is likely to be cheap compared to other decarbonisation options. David Cameron has already committed to a coal phase out, but the Government is yet to provide details of when or how this is to be achieved. A commitment to an accelerated coal phase out would send a strong signal ahead of the Paris climate negotiations. However, moving coal off the grid is challenging given already tight capacity margins (albeit that an over-reliance on ageing coal power stations also presents risks as seen recently). In order to maintain security of supply the Government will need to give clarity and confidence to investors in alternative forms of generation such as gas, where the uncertainty over the future of coal is arguably choking off investment. This is an important but challenging component of energy policy.
  • Get smart on security of supply. Ensuring security of supply is fundamental, but it needn’t be overly expensive. Interconnection to other power markets offers the opportunity to improve security of supply and diversify our energy mix, whilst reducing UK consumer bills. Demand Side Response and energy storage also offer great potential to reduce peak demand and improve security of supply, but in some cases have been held back through regulation. The Government needs to ensure that mechanisms such as the Capacity Mechanism put these innovative options on an equal footing, to drive out the cheapest security of supply solutions.
  • ‘Subsidy free’ renewables – as we argue in recent reports Powering Up and The Customer is Always Right, mature low carbon technologies such as onshore wind and solar PV are rapidly moving towards parity with the cost of fossil fuel generation. Solar PV could reach socket parity within the next few years, and commercial onshore wind could reach parity with the cost of new build gas generation by 2020. Government should focus on these mature low carbon technologies, using the competitive CfD auction to drive down costs.
  • Reduce regulation and institutional complexity – our most recent report Governing Power highlights the high level of complexity in the way that our energy industry is managed and regulated. We propose a significant rationalisation of bodies, creating a single body to manage industry codes, and creating an Independent System Operator. More broadly, Ofgem and the CMA should also look to reduce energy market regulation, which has become enormously burdensome, stifling innovation and new entry to the sector.
  • Long term challenges in heat and transport – the focus of decarbonisation policy to date has been on the power sector. There is significant decarbonisation potential in heat and transport, but this often requires consumer behavioural change, hence progress has been slow. This will need to be a significant focus for DECC over the course of this Parliament.
  • Fuel Poverty remains a significant issue, with 2.3 million households in fuel poverty in England alone. However, our analysis shows that current policies provide less than half the funding required to achieve the Government’s fuel poverty target. A good start would be to ensure that ECO (or any future supplier obligation) focuses exclusively on the fuel poor, as current spending is poorly directed.

In summary, the reset speech is likely to be a defining moment for energy policy over the course of this parliament. Just weeks ahead of the Paris climate negotiations, Amber Rudd has the opportunity to outline a fresh approach to energy policy, which delivers against the commitments to secure, low carbon energy, but in a way which is not overly costly for consumers.

*CCC (2015) Power sector scenarios for the fifth carbon budget, 2014 data

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