The man with the plan
E&T talks to energy secretary John Hutton about UK's power strategy.
E&T: The utility sector has endured a chequered history of public and private ownership. What does the future hold?
John Hutton: As with many sectors, utilities have probably come full circle in terms of private and public ownership. They started as private enterprises, moved to state ownership in the post-war era, were re-privatised in the 1980s, and experienced substantial further market reforms throughout the last decade.
Gas, for example, was sourced and supplied by a series of private and municipally operated companies for over 100 years before nationalisation.
Under the 1948 Gas Act, a nationalised gas industry was formed with 12 area gas boards. Then came Sid in 1986, returning British Gas to the private sector, with greater competition introduced in the 1990s and then the start of the transition to energy service companies.
Now we need to ensure that we have a stable environment in which companies can invest with confidence to meet Britain's 21st century energy requirements.
E&T: There is a general consensus that there are two key challenges for the utility sector; tackling climate change and providing energy security. How will the government tackle these?
JH: Tackling climate change and securing our future supplies means that we have to be prepared to make tough decisions now. In meeting both of these challenges, time is of the essence.
In the UK we will face a massive shift in our energy market, as we move from being a net exporter to net importer of energy. And as we face the fact that over the next two decades, we will need to replace at least a third of the UK's generating capacity.
The effectiveness with which we make this transition will be a key factor in determining the living standards of the generations that will come after us.
In the UK we see properly structured, competitive, well-regulated markets as a significant component of our long-term answer.
We know that a market-based approach achieves the most efficient outcomes. But this is not the same as laissez-faire. We have clear policy goals - energy security and tackling climate change - and we will act whenever it is necessary to correct market failures.
E&T: Does the government plan further intervention or are you content to let the market find its own way forward?
JH: The principles behind our intervention will always be framed by asking whether the decision we face will help or hinder the market-based approach we naturally prefer.
To depart from this approach will require, firstly, clear and explicit evidence of failure; secondly, the pursuit of overriding policy objectives, and finally, a precise quantification of costs and benefits.
Adhering to these principles will ensure predictability and continuity.
E&T: How do you then plan to decarbonise the economy?
JH: In his review of the economics of climate change, Sir Nicholas Stern was right when he described climate change as the biggest market failure of all time, and that putting a meaningful price on carbon is one of the key means of correcting this failure.
The energy industry has made it clear to me that to invest with confidence in low-carbon energy production, it needs the long-term certainty that a strengthened EU Emissions Trading Scheme can bring to the carbon market.
A carbon price that reflects the environmental costs of energy production and consumption is the single most important pre-condition for decarbonising economies. It will send the right price signals to incentivise climate-friendly energy polices and the new low-carbon technologies we will need in the future.
To be effective, carbon trading schemes need a commitment to long-term stability, greater transparency and accuracy on emissions data, and minimal political interference.
The government is committed to securing this in the Phase 3 of the EU Emissions Trading Scheme and beyond, and I broadly welcome the Commission's proposals for the strengthening of the scheme.
In just over 30 years, the low carbon industry could be worth as much as £3tr per year and employ more than 25 million people worldwide.
We must ensure that UK companies make the most of these opportunities and help us become a world class centre of energy expertise and leading location for inward investment across all energy sectors.
E&T: It is going to take considerable investment to update the UK's infrastructure and meet obligations. How do you feel that this is progressing?
JH: Liberalisation has led to significant new infrastructure being delivered on time by the private sector. Between 2005 and 2010, the UK market will deliver around £10bn in new gas import, storage and pipeline capacity.
A strong market-based approach to domestic production is going to be important. That means developing new technologies, but also making the most of our traditional indigenous resources of fossil fuels. The UK still meets around two-thirds of its energy needs from the UK Continental Shelf. And we're working on a number of fronts to fully realise the remaining assets.
We estimate around 15 per cent of the UK's oil and gas reserves exist in the west of Shetland. My department is playing an important and useful role in facilitating a discussion among a number of potential investors about how to unlock these reserves.
Securing our energy needs mean that government has a very clear role in expanding the options available for investment by energy companies.
We have short- to medium-term decisions to take to deliver our energy future up to 2020. And we have long-term decisions leading up to 2050 and beyond to ensure the energy future for generations to come.
The end game is to largely decarbonise our electricity mix by the middle of this century.
E&T: Despite this desire to increase our level of renewables, there is surely a continued need for fossil fuels?
JH: As we develop low-carbon technologies, we should be under no illusion: generation from fossil fuels will continue to play a leading role. I believe very strongly that our job is not to try and dictate the exact mix. A market-based approach to allocating scarce resource remains our most effective tool in the fight against climate change - provided we can secure a robust price for carbon.
As a country we have to accept the reality that, even in meeting our EU 2020 renewables target, fossil fuels will still play a major part for the next couple of decades at the very least. And there is nothing wrong with that - provided we are meeting our international obligations to reduce our carbon emissions.
For critics, there's a belief that coal-fired power stations undermine the UK's leadership position on climate change. In fact, the opposite is true. Developing economies need to be able to see by the actions that we are taking that it is possible to use indigenous energy reserves as you decarbonise your economy.
Leadership isn't about forcing people into making binary choices, particularly when the primary goal - substantial emission reductions - can be achieved without having to make binary choices in the short-term.
The world will use a mix of energy sources for the foreseeable future. Our leadership role is best served by the actions we take on capping emissions, carbon pricing and supporting the development of new CCS technology. Not by a gesture of politics.
Fossil fuels will continue to play an important role in ensuring the flexibility of the electricity generation system. Electricity demand fluctuates continually, but the fluctuations can be very pronounced during winter, requiring rapid short-term increases in production. Neither wind nor nuclear can fulfil that role. We will continue to need this back-up from fossil fuels, with coal a key source of that flexibility, as we increase the proportion of renewable energy in our country.
That's why we are taking a global lead on clean coal power generation.
Within seven years, one of the world's first commercial scale demonstrator plants will be up and running here in the UK, generating electricity from coal with up to 90 per cent less carbon emitted.
Through our competition, the government is intervening in the right way to help develop this breakthrough technology.
E&T: As wholesale energy prices rise, does the UK competitive market provide the best long-term protection for consumers?
JH: Of course, when global energy markets experience high prices the costs for consumers go up, and that can be painful for the less well off.
We must not underestimate the difficulties and anxiety that this process can cause.
Our current framework ensures that no company can dominate energy production, generation or supply, that consumers can switch suppliers easily and quickly to get a better deal, and that third party suppliers have equal and fair access to the market to help drive competition.
It is important that the UK market enjoys the benefits of full and effective competition - which must also work to the advantage of all customers, particularly those on low incomes or the disadvantaged.