Opportunities in UK energy markets: Edward Davey`s speech at Global Business Summit on Energy

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Introduction

Thanks very much. This has long been one of the great business cities. For fifteen centuries, it has welcomed traders and merchants from around the world.

In fact, its Old English name directly translates as ‘London trading town’. And that’s as appropriate today as it was a thousand years ago.

We are part of Europe, but have strong ties to much of the world. Our working day bridges the Asian and American markets. English is the lingua franca of business; most international contracts are based on English law.

So London remains a fantastic place to do business, including energy business - which is of course what today’s session is all about.

I’m sure the panel will generate some sparkling discussion. But before the day gets underway, I thought I’d take this chance to fill in some of the detail about the UK’s energy policy - and the opportunities it provides for investors.

Opportunities

Over the next decade, the UK energy sector is going to change radically: as more and more low-carbon energy comes online, and existing infrastructure is upgraded.

We’re going to see significant changes in the way we make, save and use electricity. Our ambition, as you’ve just heard, is to rebalance our economy, and put green growth at the heart of our policy.

These changes aren’t unique to Britain. At the G20 in June, all members recognised the importance of putting green growth at the heart of their structural reform policies.

But the UK’s investment need is particularly strong. Thanks to a combination of legally binding climate targets, ageing infrastructure, and rising demand, we need double the normal rate of investment between now and 2020.

Numbers

In less than ten years, we have to find 20 gigawatts of generating capacity – and £110 billion of investment in electricity generation.

Even if we go full-speed ahead on energy efficiency, we still expect demand for electricity to rise. We’re talking about building as much as 18GW of offshore wind by 2020, if costs come down; and 16GW of new nuclear power by 2025.

Creating a cost-competitive Carbon Capture and Storage industry in the 2020s, and seeing new gas come online to ensure we can meet demand as we decarbonise.

This is the biggest overhaul of our energy infrastructure for decades. It brings huge opportunities right across the supply chain. And it’s driven not just by need – a fifth of our power plants will close by 2020 – but also by our climate commitments.

We have legally binding renewable energy targets for 2020; carbon budgets setting the level of emissions out to 2027; and a 2050 target under the Climate Change Act.

No other country has set carbon targets in that much detail, that far ahead. So the overall position is clear: It is government policy, enacted with wide cross-party support, to move to a low-carbon economy.

This change brings real opportunities for the energy sector - and for new investors.

Investors

Existing players don’t have the capacity to invest at that kind of scale. We need new players, including institutional investors, who have the muscle to make big investments in technologies with high capital costs.

That means doing everything we can to take the risk out of investing in the UK’s energy markets. From a government perspective, that means making sure we keep political risk to a minimum.

And here I want to pick up on one thing in particular which Nick mentioned: predictability.

Our priority is to set a clear policy direction. To reassure investors and entrepreneurs alike that the UK will remain a great place to do low-carbon business.

So we will make sure our policy positions are predictable, transparent, and based on the evidence. And if you look at what we’ve done so far, I think you can see that we’re holding fast to that aim.

We’re opening up markets, providing long-term certainty for investors, and removing barriers to entry – three things that are vital to bringing forward new investment.

Markets

Take the Green Deal, the nationwide energy efficiency programme for homes and businesses.

We want to establish a vibrant new market in energy efficiency, one that could attract capital of up to £15bn for installation of energy efficiency measures in the residential sector over next decade.

Or take the reform of the electricity market, the biggest news in the UK utility sector. It’s designed to give investors the certainty they need to raise capital to build our clean energy future.

The overall aim of the reform is clear: we want to encourage competition on cost between low-carbon electricity sources –including renewables, carbon capture and storage, and new nuclear – while ensuring our long-term supplies are secure and affordable.

So we’re setting up a framework that will offer reliable contracts, delivered in ways that are trusted by investors.

To unlock low-carbon investment, we’ve chosen a feed-in tariff with contracts for difference, providing a guaranteed price.

From an investor perspective, this delivers clear & predictable revenue streams - making sure we have an active and liquid wholesale market, and giving new investors enough certainty to enter.

As a package, this reform will enable large-scale investment in low-carbon generation capacity in the UK in a cost-effective way.

The Rating Agency Standard & Poor’s now takes the affordability of the regulatory system into account when they assess projects, so the affordability of the EMR framework should provide additional comfort to the investor.

And the important thing is that it’s a staged process, designed to minimise risk.

The idea is to move gradually from administrative price setting to full market price discovery over the next decade, as different technologies mature at different rates.

To make sure existing investors aren’t left in the dark, transitional measures will ensure that investments made under the current regime - the Renewables Obligation - remain predictable.

When it comes to cost-effectiveness, we are absolutely determined to follow the evidence – even if it means taking a little bit more time to get the details absolutely right.

We’ve just announced the level of subsidies for renewable electricity for the next five years, unlocking between £20 billion and £25 billion of new investment in the next four years, and bringing down costs to consumers.

We’re also committed to cleaner fossil fuels, which is why we’re working with industry to create a new cost-competitive carbon capture and storage industry in the 2020s.

We’ve got a £1bn competition, a £125m Research and Development programme and a well developed regulatory framework to help bring this pivotal technology to commercial fruition.

As our energy mix changes, our network will also need to evolve. So we have a £500m Low Carbon Networks Fund, to encourage innovation in smarter electricity networks.

Barriers

We’re also working to break through some of the non-financial barriers holding up investment.

The new National Policy Statements on energy will make our planning system faster, more predictable, and more accountable.

To help get more renewables online, we’ve published a Renewable Energy Roadmap, which focuses on the eight key technologies which have greatest potential - identifying the non-financial barriers to deployment.

And we’re working with industry and the regulator to deliver a more liquid and competitive power market, so that all investors can manage risks and have fair routes to market.

Conclusion

I hope I’ve given you a sense of the opportunities in UK energy markets, and the two big themes which run through UK energy policy: predictability, and evidence.

As we look to build a diverse, secure energy system – one that can meet the UK’s future energy needs at the lowest environmental cost – we will need significant new investment.

Unlocking that investment, and reducing our political risk profile, means making sure our policy positions are predictable, and based on the evidence.

If we get it right, the prizes on offer are alluring. For Britain, secure supplies of affordable low-carbon energy. For businesses, the opportunity to build and operate the energy system of the future.

And for investors, the chance to be part of an historic, unprecedented replacement cycle – with opportunities stretching out for decades to come.

Thank you very much.

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