The heat is on. We need decisions on energy
Britain must urgently replace its generating capacity. But ministers are sitting on their hands, writes CBI director-general John Cridland
'Investors are in the blocks waiting for the Government to fire the starting pistol, but they will not wait for ever.'- John Cridland
Shale gas won’t transform the energy landscape in the UK but it could play a welcome role in powering the British economy and homes. And frankly, when it comes to energy policy, we need all the help we can get.
Ministers must make some important decisions soon if Britain is to avoid the real risk of electricity shortages from 2015 onwards. And if we are to have a system that can fuel long-term future growth, we need Whitehall to have detailed plans in place in months, not years. I am seeing growing anxiety in the business community that time is being lost and that delays could have serious consequences.
By the end of 2015 eleven of our coal plants will have closed to meet new EU carbon constraints and by 2019 seven of our eight nuclear power stations will cease production. So by the end of the decade more than a fifth of the UK’s generating capacity will have gone at a time when the National Grid forecasts a 10 per cent increase in demand.
In fairness, the coalition has done much of its thinking on energy and there are many proposals in Whitehall’s in-trays. What is missing are bold decisions or a convincing plan of action. Investors are in the blocks waiting for the Government to fire the starting pistol, but they will not wait for ever.
The White Paper that promises to be the greatest reform to our electricity market since privatisation in 1989 will soon be celebrating its first birthday. But no Bill has yet been published to explain how a secure, cost-effective and carbon-friendly electricity supply will be delivered. Without that small print we cannot generate the £200 billion of investment needed to create a diverse energy mix. For the Government, the heat is on.
'If we ask companies to build gas stations, they need to know they can make a return over the decades ahead.'- John Cridland
There was a welcome signal in the Budget about one electricity source on our doorstep: gas. A new tax regime to foster investment in North Sea gas shows that the Government knows gas is vital to meet our energy goals. It can bridge the electricity supply gap, as gas stations can be built relatively quickly and cheaply without relaxing the need to meet legally binding carbon-reduction targets. And if we are going to need more gas, it makes sense to boost our energy security by maximising our use of our supplies left in the North Sea and fully exploring the potential for shale gas in England.
But how do we get the power stations built? Part of the puzzle is the Government’s electricity market reform (EMR), which aims to attract the investment we need. This process has been chugging along for two years now, and we find ourselves in a hiatus while the generating companies and their financial backers wait for details of what the market will look like.
If we ask companies to build gas stations, they need to know they can make a return over the decades ahead. At the same time we know we cannot have a lot of gas stations running full tilt in the 2020s because we are committed to decarbonising our electricity system. This looming switch-off date is a turn-off for investors, so what will tempt them to make long-term commitments?
There is an element of EMR that can help: the capacity mechanism. Gas generators could be paid to be on standby, running as a back-up to renewables, for example on days when there is little wind blowing. That might sound expensive, but remember that the alternative would be to build even more renewable capacity and that would cost a lot more. The details of this capacity mechanism are up in the air, but no investment decisions will be made until they are known.
Progress on carbon capture and storage is also vital. CCS captures and locks away carbon dioxide emissions created during electricity generation. It means that we can continue to fire power stations with gas as well as coal without missing carbon-reduction targets. So the more viable CCS begins to look, the more confidence investors will have. We are good at this sort of clever stuff — the CCS industry could be worth £6.5 billion a year and support 100,000 jobs by the 2020s.
The Government has just relaunched its competition to award £1 billion of funding for CCS demonstration projects. First time round the project took four years and eventually collapsed. This is our last chance to grab the lead in this new type of business. Ministers must learn the lessons and ensure that this competition is handled well and with a sense of urgency.
The Government’s gas generation plans, to be published in the autumn, should tie all of these strands together and set out a clear commitment to gas that will attract investment. If done successfully, it can ensure that not only do the lights stay on but that we all can enjoy a secure, green and affordable electricity supply.
John Cridland is the Director-General of the CBI