Ed Gill, Head of External Affairs, Good Energy
Introduction: Why does energy matter?
In recent weeks and months, energy has hardly been out of the news. Whether it be rising bills, concerns around wind farms or controversy around shale gas exploration, the state of flux in which our energy market it finds itself means it is making newspaper headlines in a way it hasn't done so for some time.
But why does that matter?
For many people, and indeed for many policymakers, energy is a relatively mundane subject. But that reality is that we shouldn't, and indeed we cannot, be under any illusions about the importance of stable and secure energy supplies to our continued economic development - both nationally and globally. After all, the ability of our homes, businesses and communities to easily and reliably access energy is a pre-condition to them being able to produce, buy and sell goods – the very basis of our economic prosperity.
We now face two challenges. First, that the way we have traditionally sourced that energy – via fossil fuels – will one day run out, and that rising global demand will make them more expensive. Second, that using that energy emits carbon dioxide that will lead to real and lasting climate change.
The UK energy market, in its current format, is poorly designed to deal with those challenges. When the market was liberalized in the early nineties, Whitehall officials constructed it based on two core assumptions – that our economy can easily access cheap and plentiful fossil fuel supplies (this was the peak of the North Sea oil and gas boom, after all), and that there was no need to account for the carbon emitted by burning of those fuels.
Clearly the basis of those two assumptions has now changed. Dwindling North Sea oil and gas supplies means that the UK now imports some 60% of its energy from the international energy markets. A recent Committee on Climate Change investigation into rising energy bills found that the biggest single factor pushing up bills in 2011 were increasing international gas prices following the Fukushima crisis and the entrance of Japan to the market as a significant purchaser of liquefied natural gas (LNG). That exposure not only means that our economy is increasingly left hostage to international events, but also that a growing proportion of revenue is exported overseas to purchase LNG. At the same time, the instability that price fluctuations bring restricts household expenditure and business investment decisions, and pushes up inflation. And whilst new fossil fuel resources may be found in time, those resources will still run out, their availability increasingly constrained and rising energy demand from developing countries will increase their cost.
The UK also remains one of the world’s top ten carbon emitters. As one of the world’s largest economies there is clearly a need to play a leading role in tackling climate change. The case for international and national policy to reduce carbon emissions now means that the UK government must examine what it can and must do to ensure that the our emissions are reduced.
It is these challenges that set the context of the current debate around UK energy policy. This paper will set out why the government needs to intervene in the energy market, and why it must focus on supporting the development of renewables in particular.
The case for government intervention
Whilst mainstream opinion in the UK agrees on the need to tackle these challenges, there is still some considerable debate over to what role public policy should play in doing so. In the UK, the liberalized nature of our energy market naturally means there is more of a focus on a market-based approach than there is in other European countries. Moreover, many argue that the existing market has actually served consumers well by providing electricity and gas at a price that is cheap when compared to those countries, therefore justifying a more laissez-faire approach.
Taking that approach, tempting as it is at a time of austerity and restrained government spending, would be a serious mistake. The basis of that market – ease of access to cheap and plentiful fossil-fuel, without consideration for carbon emissions – has and will continue to disappear. Moreover, the reality is that if our energy market has been able to deliver cheaper energy prices in the past then it is not because it is a free-market, but rather because it has simply functioned as intended when it was designed by the Whitehall officials who designed it, both during its initial privatisation and during subsequent reforms. The design was of course based on the above assumptions.
At the same time, a retail market dominated by six large energy suppliers, who also own the vast majority of electricity generation capacity, has simply led to the sweating of existing electricity generation assets – originally funded via the taxpayer and built by the Central Electricity Generating Board whilst the market was still nationalized – ahead of investing in new generation capacity.
As a result, the UK faces a huge energy investment challenge in the coming years, with a fifth of our current electricity generating capacity coming to the end of its working life by 2020 and a third set to retire by the early 2030s. Electricity demand is set to double, as the decarbonisation of our economy leads to more electric vehicles and the electrification of heating. In particular, the UK lags woefully behind our European counterparts in investing in renewables, with only Malta and Luxembourg generating a smaller proportion of electricity from that source.
Our market is set up to encourage energy suppliers to place retail prices ahead of investment, and is designed to benefit those suppliers who can manage the changes to wholesale electricity prices to do so most effectively. The problem is that it assumes that suppliers can access the energy necessary to do so easily and cheaply and that that risk will therefore only reach a certain level. But the market structure has failed to keep up with the developments of recent years – the reality is that we now import more energy than ever before, and that introduces a new set of risks associated with that. It those risks that suppliers are now struggling to manage on behalf of the consumer, leading to higher bills.
The UK now needs to attract in the region of a massive £200bn of investment to upgrade its energy infrastructure over the next eight years. In recognition that our market has failed to attract the investment we need, and that the assumptions on which the existing market is based have changed, the government has launched the most ambitious set of reforms to our energy markets since their privatization, through the Electricity Market Reform (EMR) process.
Why policymakers should back a renewable future
So where does renewable energy fit in to the equation? What benefits can renewables bring to the table that other technologies simply can’t come close to delivering? And why is support for renewables from government policy so important during the transition to a low-carbon economy?
The UK has previously been one of Europe’s laggards when it comes to renewable energy. This is despite the fact that we have in the region of 40% of Europe’s total wind resources and that wind farms in the UK generally perform better than those on the Continent. As an island nation we have a huge amount of wave and tidal power potential. The recent popularity of solar power in the UK not only reflects the attractiveness to the consumer of generating their own electricity from renewables, but the reality that the UK has significant solar power resources, just as other countries with similar climates – such as Germany – do.
As the only UK’s only 100% renewable electricity supplier Good Energy recently mapped out how the UK could become 100% renewable by 2050, using the DECC 2050 Pathways Calculator:
The more of these technologies we use, then the more we can reduce our exposure to increasingly volatile international fossil fuel prices. What is absolutely vital, however, is that policymakers do not focus on just one technology as a ‘silver bullet’ solution to the UK’s energy woes, but the full range of them. That is important because, as Good Energy’s experience shows, each technology brings with it different electricity generating characteristics. For example, wind power is widely known for its intermittency (though wind farms do generate electricity around 85% of the time) and therefore the variable quantity of electricity generated for suppliers to use. However experience shows that this variability can be offset through the use of solar power; those days of the year when less power is generated by wind farms also tend to be the same days when more electricity is generated from solar power. Similarly the same is true with hydropower, as the dry seasons throughout the year are naturally the sunniest.
A decentralized approach is also key to offsetting the variability of renewables. In the past the UK has followed a traditional, highly centralized model of electricity generation, which by and large leaves consumers reliant on their energy supplier for the cost of their energy. By decentralizing our market, and promoting wider ownership of electricity generation through more locally based schemes and more independent development of new sites, it is possible to not only to ensure that our electricity generation portfolio contains the broadest possible range of technologies, but that they are deployed in the most dispersed fashion possible. This decentralization needs to take place not just at small-scale domestic or community level, but across a range of sizes from that level up to the largest offshore wind farm.
It is also worth noting that in May 2012 a Bloomberg New Energy Finance report for Greenpeace analysed the generation investments of the Big Six utilities and it clearly illustrated that new market entrants are massively outperforming the Big Six when it comes to investing in renewables. This change has already begun but now needs to be accelerated through a clear decentralization agenda, set by the government.
This geographical diversity creates a natural hedge against variations in weather conditions and, in Good Energy’s experience with working with small and medium sized renewable generators, is key to managing the intermittent nature of renewables. It also allows us to harness them more effectively. Policymakers should therefore not just be questioning what renewable technologies government is seeking to encourage the growth of, but also how those technologies are deployed.
There is a need to be aware of the wider benefits of investing in a power source with a longer lifespan than traditional fossil fuel sources. Renewables bring benefits to our wider economy not only because they are environmentally sustainable, but because they are economically sustainable too. Every pound we invest in renewable energy is a pound invested in perpetuity. Every pound we invest in other energy sources is an investment that will one day be written off. In April 2012, a Renewable Energy Association report found that in 2010/11, the UK renewables industry was worth £12.5 billion and supported 110,000 jobs, with 400,000 in total required to meet the 2020 renewables targets.
Support from policymakers both inside and outside of government is key to bringing about this change, because it is so fundamentally at odds with the status quo. In a liberalized energy market, the government naturally has to look to subsidy rather than direct taxpayer investment to build new generation capacity. This is not only necessary as a short to medium term measure to bring down the costs of developing and deploying new technologies (and it is essential to ensure that as the cost of doing so reduces, so does the level of government support), but also because the very economics of renewables means that in a traditional market where the price of electricity is predominately determined by the cost of the fossil-fuel used to generate it, then deploying technology that simply removes that cost, and therefore the ability of investors to make a margin on managing its volatility, goes against the very grain of the DNA of our market. The key to tackling this problem is to ensure that there is a sufficient critical mass of renewable power being generated so that it is this energy source that determines the market economics instead.
The UK has huge amount of potential when it comes to harnessing renewable energy, and our continued reliance on fossil fuels – and our increasing reliance on importing them from international energy markets in a world of rising energy demand – is messy, overly complex and leaves billpayers and the economy dangerously exposed to world events. The price of non-renewable energy resources is volatile, unpredictable and dependent on events that we have little control over. In contrast, we know how much renewables cost – not just in terms of construction, but also where the fuel itself is free. The chief criticism of renewables – their intermittent nature – is one which can be countered through a decentralized approach that encourages geographical as well as technological diversity. This makes them both a more reliable and more sustainable energy source than traditional fossil-fuels. But this also means that in the short to medium term there is a need for policymakers to support renewables not just on the grounds of them being a developing technology, but also on their grounds of their disruptive nature to the wider economics of the market.
What benefits are there to the consumer?
This approach will deliver not only benefits to the economy at a macro, national level, but also directly to the individual and for business too. Our existing energy market leaves those people disengaged with the energy they use, with little opportunity to control its cost and tailor usage in a way that suits them. The market fails to send price and information signals to the energy consumer that allows them to take advantage the times when the cost of generating electricity is cheaper. A traditional, centralized approach means that the economic benefits of investment are spread in a relatively small number of locations rather than across a wider range.
In the most basic sense, an approach to energy investment which ensures economic as well as environmental sustainability means that subsidy generates maximum value for money for the consumer. Renewable energy represents the very pinnacle of that value because the fuel source used for generating electricity will never run out. In contrast, the finite nature of fossil fuels means that investment in those technologies will have to be written off one day, once those fuels runs out.
Another key benefit of renewable energy to consumers is price stability. For example, Good Energy is the UK’s only 100% renewable electricity supplier and our prices have not risen since August 2008. This was during a time when all other suppliers were increasing theirs. This is a clear demonstration of how renewable energy is better for our energy security, and is more resilient against price volatility.
The comparatively easy ability to generate electricity from renewable resources (when compared to traditional, fossil-fuel powered plant) creates a potential for wider, decentralized deployment. We have already seen hundreds of thousands of households and businesses start to generate their own electricity through the government’s Feed-in Tariff scheme. This scheme gives people and businesses greater control over their energy bills at a time when larger, traditional energy suppliers simply cannot provide that control.
Generating electricity at a more local level has it benefits too. Recent years have seen the growth of the community energy sector in the UK, which is once again testament to the comparatively accessible nature of renewable energy. As well as being key to the kind of more decentralized market place we will need in the future, these projects provide opportunities for people to become a stakeholder in the generation of electricity they use. Medium-sized, commercially led schemes provide the opportunity for consumers to benefit from initiatives such as community investment or shareholding options, but also from discounted local electricity tariffs.
Put simply, the accessible nature of renewable energy presents a whole range of energy opportunities for individuals, households and businesses that simply cannot be overlooked.
As is the case in any developed country, the UK’s energy market forms the cornerstone of our economic development and continued prosperity. In a world where the availability, cost and environmental impact of traditional energy sources are evermore uncertain, only investment in renewable energy can provide the bedrock of stability that we need to ensure that our energy market fulfils its wider economic purpose.
Delivering that is not without its challenges, however. But as this paper sets out, those challenges are more than matched by the solutions that exist and the opportunities for the consumer that they deliver.
With that in mind, policymakers should focus on the following to deliver those potential benefits:
 Committee on Climate Change, “Household energy bills – impacts of meeting carbon budgets”, December 2011
 DECC, “2050 Pathways analysis” , http://www.decc.gov.uk/en/content/cms/tackling/2050/2050.aspx