The energy sector over the next 15 to 20 years has perhaps the greatest potential and wide-ranging impact upon UK jobs, skills and the growth of our economy than any other. So, despite a lacklustre Queen’s speech containing little legislation which addresses the major issues the UK faces today, there is a significant one which is already making its way through it parliamentary process – the energy bill.
However, there is a real and present danger of this government getting the energy bill and policy badly wrong with the scale of failure almost criminal. The reason for this is not just about policy but the issues of lack of decision-making and the insecurity of the decisions which are being taken. Investors are saying loud and clear that decision-making meetings within their investment boards are dominated not by planning or capital issues, but judging and managing political risk.
This is understandable given the number key issues in the bill have yet to be resolved – two and a half years since electricity market reform began including: gas storage, route-to-market for renewables, decarbonisation, a capacity mechanism for generators to ensure the lights don’t go out, not to mention a deal with EDF Energy on its nuclear strike price. These are daunting issues at the best of times, but Ofgem has predicted that the UK will have just a four per cent energy capacity margin in 2015-16 compared with 14 per cent today. This could mean the UK’s energy-intensive users being asked to scale back its usage for a short period – not exactly a ‘three day week’ territory but could still be a long weekend.
Also impacting on the bill is the change in ministerial personnel. Michael Fallon was appointed as energy minister before Easter, replacing John Hayes after just seven months in the job. Industry and investors have been crying out for clarity and certainty and this does nothing to alleviate this, especially as Fallon retains his BIS responsibilities as well.
Moreover, for all of the energy sector and the bill’s woes, the elephant in the room is the role of the ‘big six’ vertical integrated energy companies (they generate and supply power within their own companies) in the sector and in delivering the government’s energy policy. Independent generators, suppliers such as the Co-op, consumer groups, comparison websites, and Labour are of the view that the six have to be broken up to increase liquidity and competition in the market.
While it is the right thing for Labour to have this policy objective, the difficulty arises when governments are relying on, and requiring, energy suppliers to deliver government policy – the Green Deal, smart metering, nuclear (as outlined above with EDF), renewables targets to name but a few. If the ‘big six’ are to continue to be the main deliverers of energy policies, it is difficult to understand how the regulator Ofgem or a new regulator is going to be able to exercise its muscle when everything hinges on suppliers helping the UK meet energy emissions and efficiency targets.
In conclusion it is my experience that all of the current issues with: the energy bill, political risk, the capacity-margin warning, and Ofgem exercising its powers, have all been affected primarily by the lack of real thought and clarity as to how energy policy is delivered by government. The ‘big six’ currently have a crucial role in helping the UK meet its targets and commitments, and Labour needs to think how this would change if elected in 2015, given the desire to break them up. Therefore I believe, that, while looking at the role and powers of the energy regulator and looking at policies to create a more competitive and liquid market for a fairer deal for consumers, a further emphasis should be applied as to how energy policy is actually delivered because apart from being the right thing to do, it is how failure and success is measured by an electorate who are struggling with their energy bills.
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Mike Harrison is a member of Progress and an energy sector communications consultant. He tweets @miguel1982
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