Issue brief: Energy policy
What is energy policy?
An enormous headache for Britain's policymakers, that's what. 'Keeping the lights on' might seem like a flippant cliché to some, but it is a serious business for those tasked with making sure there is enough electricity to go round over the next century or so. The struggle between different sources of energy is being fought on a complex battlefield of relative merits which will eventually determine our 'energy mix'. At the same time, policymakers have to balance the needs of the companies providing energy with the consumers who need it. Both have to be encouraged to make efficiencies wherever possible, and both have to be talked down from bitter confrontations with the other. Then, over all this policy turmoil, comes the biggest headache of all: the thunderhead of the climate change threat, weighing down on the sector and placing intense pressure on ministers to decisively shift the ways in which we generate our electricity.
The biggest target of all is enshrined in law under the Climate Change Act. By 2050, Britain's total emissions have to fall by 80% on their levels in 1990. There has been some progress on this; between 1990 and 2010 UK emissions were cut by 20%. That's faster progress than the EU, which as a whole only managed a cut of just over 15% during the same period. We shouldn't be patting ourselves on the back too much, though. Much of the legwork has yet to be done, with a 50% cut supposed to be achieved as soon as 2027. The clock is ticking.
How to get there? Many believe the answer is replacing old, carbon-heavy energy sources like oil- and coal-fired power stations with renewable energy. About 20% of our current power-generating capacity will be shutting up shop in the next ten years or so. In part this is because of an EU directive of 2001 which forced the closure of large combustion plants which couldn't cope with new emission standards. Two-and-a-half cities' worth of power will have shut down by 2015.
This shouldn't be a problem because the government is legally committed to meeting 15% of the UK's energy demand from renewable sources by 2020. The Department for Energy and Climate Change (Decc) is attempting to achieve this via a raft of measures. Feed-in tariffs have subsidised the development of small-scale low-carbon electricity generation. A renewable heat incentive offers payback over a 20-year period for commercial, industrial, public and other generators of renewable heat. Companies supplying over 450,000 litres of fuel per year are obliged to source a percentage from a renewable source. It is a mixture of stick and carrot which is costing consumers about £2 billion a year. This will have to rise to nearer £8 billion to meet the directives target, thinktank Civitas has warned.
This is the context for the energy bill, which was introduced in the 2012/3 session and was one of four bills to be carried over into the coalition's penultimate session. The aim is for the legislation to pave the way for £110 billion of investment - a substantial amount, but not enough according to some.
The oil and gas industry is not standing back and letting the shift to renewables overwhelm it. It is an "expanding industry", business secretary Vince Cable said in April 2013, which provides nearly £27 billion of revenue in alone and has an extensive supply chain viewed as a strategic resource by those in power. Big oil still matters: the industry supports 440,000 jobs across Britain and currently meets half the country's main electricity needs. The Treasury appreciates its contribution, too; in 2012 the sector paid £11.5 billion into the chancellor's coffers. The government launched its oil and gas strategy in 2013, in which it pledged to continue working with the industry as it provides energy "for many decades to come".
It is over those decades, though, that the big transition to renewable will also take place. Ministers could very easily meet the climate change targets if they wanted to - anything is possible at a price. That is the problem. Consumers are already seething with anger at the high cost of their energy bills. Attempts to plaintively explain that government policies can only influence around 11% of their bill are usually met with deaf ears. Global oil and gas prices are the biggest drivers, ministers insist. That is true, but it does not stop voters from being deeply suspicious of slow-moving energy firms shifting their prices downwards when global prices fall.
Decc has attempted to combat scaremongering about energy bills by producing its own figures. Its estimated average impact of policy tweaks on household energy bills calculates a total cost of £286 a year, but also savings of £452 – ie: bills will be lower by £166.
The debate is also a little misleadingly focused on electricity and power, which only accounts for one-third of the UK's energy needs. Transport, dominated by oil, accounts for another third, while heating (dominated by gas) makes up the final third.
Politics plays a big part in this debate. The Conservatives are naturally suspicious of some sorts of renewable energy - just look at former energy minister John Hayes' brazen opposition to wind energy, for example. While energy and climate change secretary Ed Miliband eschewed nuclear energy, which had been preferred by New Labour, in favour of what critics claimed was 'grandstanding' on climate change.
Bubbling away under the surface of this debate is a clash of ideas and attitudes which often finds itself reflecting the bigger partisan divide in this country's politics. Conservative big beasts like Lord Lawson are firm climate change sceptics; others simply believe Britain, which only contributes two per cent of global climate change emissions, is doing too much.
Can shale gas be developed commercially? Its possibilities remain substantial, but there remain lots of question-marks about its viability too.
There is a third factor in the equation though, completing the triangle in what the Energy Technologies Institute describes as an 'energy policy trilemma'. In addition to making energy sustainable and affordable, it also has to be secure.
The attempt to replace emissions-heavy energy production with renewable alternatives is undermined, in the views of some, by the nagging suspicion that the switch is simply not plausible. Transferring from a fossil-fuel-dominated energy mix to one powered by renewable and nuclear energy involves serious engineering, financial and economic challenges which could prove impossible to achieve if consumer bills are to be kept in check, warns Liberum Capital. Its assessment - that utilities companies and investors should steer clear for the time being "as the implausibility and contradictory nature of policy is exposed by events".
Gulp. This view is not an isolated one. The fear of a "pinch point" is being articulated by Energy UK, the industry body's main organisation, which fears an energy gap is opening up. "Are energy prices going up and will they going to continue to go up? Yes," says its new chief Angela Knight, herself a former minister under the Major government. "Why? Because we are dependent on the world price of gas, which is increasing, and we are shutting down our coal-fired power stations. Coal produces 40% of our electricity and it's cheap. But we've got an emissions directive that is going to shut down a quarter of our coal-fired powers stations before 2020."
The civil war between the renewable energy sources also generates intense controversy, as each option on the menu points out what's wrong with all the others. Onshore wind energy is bashed by anxious backbenchers keen to protect their local landscapes, which is why in Britain the emphasis is usually on offshore options. Costs are relatively low and are set to decrease, but rely on government subsidies nonetheless. Tidal, geothermal and biomass energy are all variously dismissed for being too expensive, or too unreliable, or too energy intensive to produce.
Then there's the nuclear option. Energy giant Centrica raised eyebrows in February 2013 by abandoning its 20% stake in the Hinkley Point project being headed by French company EDF Energy. The plan to build two nuclear reactors will cost £14 billion, but with one big firm voting with its feet its prospects are now looking uncertain. Nuclear is an economical and clean source of energy - provided industry disasters like Fukushima and links to serious diseases are ignored. It is able to scale-up in a way that most renewable sources are not; whole cities can be powered by nuclear power plants, whereas wind energy is often more localised. Ultimately, the stakes are higher. Construction takes longer. High subsidies and loan guarantees are often essential. Then there's the small question of nuclear waste, which lasts for an appalling 500,000 years.
Whichever option the government goes for, opponents of the push to tackle climate change will be critical of the price being paid by energy consumers. This means business as well as households: the independent Committee on Climate Change estimates climate policies already in place have together added 21% to Britain's industrial electricity prices. This would be less painful for those against the government's approach if they didn't feel the reliance on subsidies was making the transition even more powerful than it has to be. It's feared the reliance on subsidies is holding back companies from innovating the conversion devices to make renewable energy sustainable in the long-term.
Decc faces criticisms over its attempts to tackle another big part of the energy debate - limiting the demand for energy in the first place. Its Green Deal aims to help households and businesses to increase their energy efficiency. This is a laudable part of its bid to fulfil Cameron's pledge to be "the greenest government ever", a promise seized upon by environmental campaigners as the standard by which the coalition can disappoint as nauseam. On the Green Deal, though, there does seem to be room for disappointment. Three years into the coalition, the energy and climate change committee was forced to conclude in a recent report that ministers still couldn't really define what they wanted to achieve with the programme.
A firmer shift being pushed through by the coalition is the plan to make consumers' task easier in switching between energy firms. The myriad of pricing options currently on the market is to be simplified, forcing consumers on to the cheapest tariff available. Experts have warned some customers on the cheapest of the deals available at present could end up paying more as a result of the changes.
By mid-2013 a fresh challenge was emerging: allegations of petrol price-fixing which could have meant motorists paying far more at the pump than they need have done. The scandal, which was being investigated as this article went to publication, suggested major players in the industry could have questions to answer about potentially criminal activity, placing further pressure on ministers to come up with a robust response.
1,611,000 barrels of oil: The amount of oil consumed by Britain in 2009. That number is comparable to Iran (1,741,000), less than China (8,625,000) and significantly less than the US (18,686,000) (source: BP statistical review of world energy)
2012 electricty generation share: Coal 39.5%, gas 27.5%, renewable 11.5% (source: Department for Energy and Climate Change)
24 billion barrels - the upper estimate of oil reserves still remaining in the North Sea. The number could be as low as 15 billion barrels, however. (Source: Oil and Gas UK)
"It is the duty of the Secretary of State to ensure that the net UK carbon account for the year 2050 is at least 80% lower than the 1990 baseline.
(2)'The 1990 baseline' means the aggregate amount of—
(a)net UK emissions of carbon dioxide for that year, and
(b)net UK emissions of each of the other targeted greenhouse gases for the year that is the base year for that gas." - the Climate Change Act 2008 clause legislating to cut carbon emissions by 2050
"Global gas price hikes are squeezing households. They are beyond any government's control and, by all serious predictions, are likely to continue rising. We are doing all we can to offset these global energy price rises, and while we have more to do... our policies are putting a cushion between global prices and the bills we all pay." - energy and climate change secretary Ed Davey, March 27th 2013
"Rising energy prices are consistently one of consumers top financial concerns and millions will be shocked by the size of their bill after such a cold winter. Bills will only be kept as low as possible if there is more effective competition, easier switching between suppliers and every tariff presented in a clear, consistent and simple way so people can easily spot the cheapest deal." - Which? executive director Richard Lloyd, May 22nd 2013