On the road to a low-carbon future
So the much-anticipated Energy Bill has finally been released. Reactions in the media and from various industry experts appear to broadly give it the thumbs up. And for large businesses, there are certainly elements to cheer.
However, I’m still concerned at how much there is yet to be decided, and exactly what the impact on customer bills will be. I passionately believe that climate change has to be tackled and investment in low-carbon technologies is the way forward – both on the demand and supply side. But the market design needed to deliver this must be as efficient as possible, so the huge changes we need to keep the lights on are delivered at least cost.
“Energy-intensive manufacturing is finally getting its place in the sun,” said CBI Director General John Cridland, in reference to assurances in the Bill that key industries will be exempt from new low-carbon taxes. In the past few weeks, I’ve written about the £250-million already on the table to offset EU Emissions Trading Scheme and Carbon Price Floor costs for this sector. So I will be watching closely to see how this offer of further support will work in practice – and in particular, for reactions from businesses who previously felt relocating outside the UK was the only option to remain competitive in a global market.
For businesses of all sizes – along with domestic consumers – rewards are on the table for embracing energy efficiency, and not just in the shape of smaller bills. Making a surprise inclusion in the Bill was a consultation on financial incentives for reducing energy use, proposing payments “for each kWh saved through energy-saving measures installed such as energy-efficient lighting”.
Of course, minimising waste should be an essential part of any effective energy management plan, and many of our customers are already focusing on this. As Ed Davey was keen to emphasise, even a modest 10% reduction in 2030 translates to five fewer power stations needing to be built, a reduction of almost five million tonnes of CO2, and a £4-billion cut in bills.
However, we have seen similar carrots on the table for larger energy consumers before, when the Carbon Reduction Commitment was first introduced – although the incentive element of the scheme was later scrapped. So I’ll be very interested to see how this new proposal takes shape. My hope is that companies already pioneering widespread energy efficiency won’t miss out for being ahead of the pack. But with the forthcoming consultation process, there’s an opportunity to have some influence.
It’s all in the mix
As I’ve said many times, no one energy source is likely to dominate our future generation, but rather a mix of renewables, gas, nuclear and some coal (with the caveat of any new plants having to incorporate carbon capture and storage).
In npower’s recently-released Future Report, experts at the LSE outlined three possible scenarios for our energy future. While, of course, the Government is aiming for the most optimistic – Hitting the Target, the way the media is currently portraying the split in the coalition between pro-gas and pro-renewables, it will be interesting to see which of our Future Report’s scenarios looks most likely this time next year. Remind to me to update this blog in 12 months!
As we know, whatever scenario Britain embraces, supporting the necessary transition won’t be cheap. To meet both our security of supply and climate change policy goals will take around £350 billion by 2030. Some of this cost will, of course, be shouldered by consumers. Estimates of £95 per domestic bill by 2020 are being cited – or a 7% increase. For businesses, costs of around £28 per megawatt by 2020 have been predicted by DECC, although these may well be revised upward now we have a clearer picture of the future policies outlined in the Bill.
The devil in the detail
While price rises are inevitable, it’s important that the cost of energy should not be higher than it needs to be. Energy is already expensive, although thankfully the UK currently has some of the lowest energy prices in Europe. But Government policy will continue to make up a larger and larger proportion of the bill in future (energy supply companies such as npower can only actually influence a fifth of the bill cost). So it’s important to have a policy framework that minimises costs and creates predictability for customers.
With this in mind, some of the new mechanisms proposed need to be carefully worked through to ensure they deliver the best for consumers, as well as investors. Contracts for Difference, for example – which will replace the Renewables Obligation as the main mechanism incentivising investment in low-carbon-generation technologies – could create large volatility in monthly costs and therefore risk more frequent price changes and increased costs to customers.
But now the Energy Bill has set out a framework, the real work starts to iron out the detail of exactly how it will be implemented. With so much uncertainty in the lead up, with different sections of the Government pulling in opposite directions, a continued push for early clarity on secondary legislation is essential to the Bill’s successful implementation.
What’s important now is that decisions based on fact, rather than political view, inform the next steps.