Britain must tackle its energy gap

By Andrew Duff
Published: February 4 2009 19:39

The UK energy sector is facing huge and pressing challenges. We need a modernised power system capable of reconciling environmental commitments with long-term security of supply at an affordable cost. Achieving this, and avoiding a genuine energy crisis, requires a coherent energy plan and a sense of urgency.
Currently the industry is able to push ahead with some wind and gas power stations. That is good news, but more is needed; we will have to deploy the full range of available energy generation technologies. There must also be a step-change in reducing demand, which means greater fiscal incentives, not just taxes, to encourage consumers to invest in energy efficiency. A lower- carbon primary energy mix is even more vital if we are to move to greater electrification of private transport, reducing the reliance on oil.
For the time being, though, government and regulators continue to treat the big energy issues in isolation despite the recent creation of the Department of Energy and Climate Change. The drive to set and meet ever more stringent CO2 targets is not integrated with the ministerial push to tackle energy costs and, vitally, the need to ensure security of supply.
At a time when confidence is so low, when investment is so desperately needed and when finance is so challenging, commentators seem to demonise even modest investor returns in the most strategically important part of the economy. What is needed to stimulate the extraordinary levels of investment required is simply encouragement. We have a real desire to work in partnership with government and communities to deliver billions of pounds of infrastructure, along with the jobs and technologies that will surely follow.
Last year we saw homes go without power because of a lack of capacity on the grid. We cannot let the system become any more fragile. The energy gap created by the retirement of older nuclear and coal plants is likely to bite much earlier than in 2015 or 2016 as many assume. Some 30 per cent of coal capacity will need to close before the end of 2015, with stations using up their quota of hours under the European Union’s large combustion plant directive. At current run rates a significant proportion of this could close by 2013. To address this, and meet a tenfold increase in renewable energy by 2020, we need unprecedented investment in energy generation.
RWE’s announcement last month that it is willing to put billions of pounds of private capital into nuclear energy comes in addition to an existing £10bn investment plan incorporating offshore wind, gas stations and clean coal technologies. Over the critical next decade RWE plans to invest vastly more in the UK than it will earn. This will bring jobs, technology leadership and the prospect of an export-driven stimulus to the economy over the next 10 years, but there will continue to be competition for that capital. Continental Europe is facing equally pressing energy challenges, which will bring the UK investment climate under scrutiny.
Energy prices in the UK have risen faster than in other countries recently but are still lower than the European average and on a par with other leading countries on the continent. Over the last two years, only a portion of the increase in global coal, gas and oil costs has fed through to customers because competition has successfully shielded them from the worst of these commodity price shocks. In the last two years, gas costs have risen by 177 per cent at their peak and today are still double those in January 2007, while npower customers have seen a net increase of 27 per cent.
To cushion the impact of rising prices, companies have more than doubled spending on “social tariffs” for low-income groups and pensioners in the last year. Over the three years from April 2008, the energy industry will also spend about £3.7bn on domestic energy efficiency measures, 57 per cent of national spend, with the government contributing the remainder through its Decent Homes and Warm Front programmes. RWE npower alone has more than doubled energy efficiency expenditure every three years since 2002.
The UK energy market has been heralded as a model for much of Europe.
Official statements about the energy market and its evolution must not undermine confidence that the UK, the architect of this model, still supports the open markets agenda. This is vital to maintaining the country’s attractiveness to investors. We must not allow the hard-won advantages this brings to the UK to be dissipated, at a time when investment needs are so pressing.
The writer is chief executive of RWE npower
Copyright The Financial Times Limited 2009