The UK energy sector is in the midst of a transformation as the top-down model focused on centralised generation gives way to a new and more dynamic market.
From the rise of renewables and small-scale generation, to the digital revolution and our smart meters programme, energy policy is evolving rapidly and challenging historic assumptions.
In recent years, there has been much focus on the energy “trilemma” of security of supply, cost, and decarbonisation. This has been portrayed as presenting trade-offs – and historically this has indeed often been the case. My argument is threefold:
- The UK has led the world in the transformation of the energy sector over the last 40 years
- We stand on the cusp of the next transformational change in the energy sector, and that this can move us beyond the trilemma; and
- The UK is uniquely well-placed to lead that next transformation – and in doing so, we can deliver real economic benefit to the UK as part of our Industrial Strategy
The UK has been at the cutting edge of innovation in energy for the last 40 years. Through the 20th century, the term “energy markets” was a misnomer – with a consensus around centrally planned systems and firm state control.
Britain was at the forefront of the transition to a market-based approach. Nigel Lawson’s landmark speech in 1982 summarised the change: as he said, “our task is to set a framework which will ensure that the market operates with a minimum of distortion and energy is produced and consumed efficiently”.
That approach presaged the privatisation of the market – unleashing a wave of competition and market innovation and replicated in markets across the world. And the benefits of that privatisation are clear.
- Network costs have fallen 17% since privatisation at the same time as improving system reliability; and we now have over 65 suppliers in the retail market, with the number of consumers switching suppliers hitting record highs.
- From 1990 to 2005, generation grew from 298 to 377 terawatt hours and domestic retail energy prices fell roughly 45% in real terms over the same period.
With privatisation came regulation; and the UK led again with the introduction of RPI-X for natural monopoly regulation and liberalisation for potentially competitive parts of the market. This has heavily and positively influenced the design of the EU’s energy market framework.
The second major wave of change has been more recent – the transition to a secure system which is also low-carbon. Again, the UK has been among the world leaders.
The landmark Climate Change Act made us the first country in the world to set a long-term, statutory emissions reduction target.
Electricity market reform delivered new instruments to ensure security of supply, and to slash the costs of decarbonisation – recognising the need for an active role for government, but using competition to minimise costs.
And our approach to new nuclear has enabled us to contract for the first new nuclear plant in a generation, applying innovative thinking to the financial and operating model, and to confirm that we will enter into negotiations in relation to the proposed Wylfa project.
It is worth remembering that many argued that we did not need a capacity market, and that renewable generation could not compete for support. But what we have seen is many other countries following our lead on security of supply, and the costs of offshore wind cut to under £60 per megawatt hour in the most recent auction – unimaginable a few short years ago.
The UK also led the way in the introduction of emissions trading, introducing an emissions trading scheme three years before the EU ETS. Then, in 2013, we delivered a carbon price floor programme to drive low-carbon investment.
These measures have enabled us to lead the world in taking coal off the system, without imperilling our security of supply – a transition we have managed smoothly, without any major supply interruptions.
BEIS also recognises the need for a relentless focus on keeping costs down for consumers, and, as DECC before it, has taken multiple steps to deliver that:
- our energy price cap is in the final stages of development, and the Bill has received the support of Parliament. This will guarantee protection for 11 million households currently on the highest energy tariffs
- we have compensated our most energy-intensive users to help maintain competitiveness
- we have worked to reduce the impact of renewables on bills
- we have overseen the programme to deliver smart meters, with 12 million installed to date
- and we have supported energy efficiency – recognising that the cheapest unit of energy is always the one that you don’t use. Indeed, the Energy Company Obligation has been responsible for installing 2.2 million energy efficiency measures in 1.7 million households since 2013.
The UK has been at the forefront of both these key shifts over the last 40 years – first, to a market-based system, and second, to a system which helps us to resolve the trilemma – integrating large amounts of renewables, while maintaining security of supply and keeping costs down.
But our work to date is not enough. We now need to place ourselves at the front of the pack for the next big transition.
We must discern and respond to the changes to the system arising from falling technology costs, increasingly distributed energy sources and the rise of the smart digital energy system. And we must deliver all this while ensuring our costs are as low as possible, ensuring that we are competitive in global markets as we leave the European Union.
That is why, last year, the government asked Professor Dieter Helm to carry out his review of the cost of energy. Dieter’s report set out his view that the complexity of the system has added unnecessary costs, and that significant change is needed to exploit the benefits of future advances in technology. Following our call for evidence, we are carefully considering Dieter’s recommendations and their implications for our energy strategy.
Our approach will be aligned with the key technological changes which can help to cut costs, cut carbon, and maintain security of supplies – and drive towards a future where the three corners of the trilemma work in concert, not opposition.
For example, decarbonisation offers us another advantage besides emissions reduction; it provides an opportunity to ensure we have a diverse and resilient energy mix, which is not too dependent on any single source. And our approach in future must foster that optionality, while ensuring that the technologies we support meet the three criteria set out by Energy Minister Claire Perry:
- can we see the potential for significant cost reduction?
- does this have the potential to deliver large-scale carbon emission reduction?
- and is this an area where the UK can benefit from a comparative advantage, leading to increased growth and exports?
But this is only the beginning. The future opportunities are huge – out of the world’s projected $10 trillion investment in power generation over the next twenty years, over 85% is expected to be in zero-carbon sources.
Electric vehicles are projected to make up over half of global car sales by 2040, and in 2017, one in eight electric cars sold in Europe was made in the UK. By 2060, the global floor area in buildings is expected to double, with an estimated investment potential of $16 trillion in green buildings across 21 emerging markets.
Of course we still need to make big changes – not least to our heating systems, which are currently still heavily dependent on hydrocarbons.
But we know that we should not be intimidated by the challenge, as we remember the UK’s proud history of being ahead of the curve in the energy sphere.”
Commenting, Omar Rahim, chief executive of AI energy solutions company Energi Mine, said: “It is hugely promising news to see that the government is moving in a direction that focuses on cleaner energy, driving down costs and promoting innovation.
“For far too long, the Big Six have held a secure monopoly on energy generation in the UK resulting in a stagnant market plus consumers not getting the best deals.
“With the government seemingly receptive to the potential of small-scale energy suppliers and new technologies to disrupt the market, we will hopefully start to see more consumer interest in these kind of projects as they become commercially viable.
“Advancements in the fields of power storage, artificial intelligence and blockchain technology have allowed for the development of smaller-scale energy ecosystems, allowing for peer-to-peer trading outside of the existing networks and alleviating the reliance on established energy giants and overly expensive megaprojects.
“With this approach, we can finally give back power to the consumer while embracing a greener future.
“Chrisholm is right to also acknowledge the benefits that this can bring to the UK economy, if the clean economy is truly set to grow at four times the rate of GDP, it would propel us to become a real leader in the global energy market.”
22 Jun 2018