Comment: We’ll have to trust the energy secretary – whether we like it or not
By James Smith
We need secure, low carbon energy at the lowest cost. Now the wisdom of the minister, not the market, will determine if we get it.
Major decisions on energy investment, once taken by the Central Electricity Generating Board, will now, for a crucial period, be taken by the secretary of state at the Department for Energy and Climate Change (Decc). Does it have to be this way? How will politics be kept out of the operational decision making?
We had 20 years when energy policy was simple. Low-cost North Sea gas coupled with efficient, low capital cost gas turbines, tucked nicely out of sight, gave us cheap power.
In contrast, today's landscape for electricity investment is daunting. Over ten years, a fifth of electricity capacity will be lost as old coal and nuclear plants shut. The required new electricity investment is over £100 billion in this decade alone. That's ten Channel Tunnels' worth and the technology is not proven.
We must also, over the coming 20 years, virtually eliminate carbon emissions from electricity production. It can't be done cheaply. But the wrong decisions will lead to overly expensive outcomes. Billions of pounds a year are at stake. To keep the economy competitive, we must pursue low carbon energy at least cost.
Faced with a project of this scale and importance, it would be nice to have four things on our side – proven technology, simple policy, ready financing and time. None applies.
Only three low carbon electricity technologies are truly relevant for the UK – carbon capture and storage (to contain emissions from fossil based power), new nuclear and wind, mainly offshore. But none is well tried and all are capital intensive. Offshore wind, for example, is nine times as capital intensive as gas turbines.
The principles embedded in the Energy Act now going through parliament are sound. Faced with risk and uncertainty, the Act sets out a phased approach for testing a diversified set of technology options. Initially there will be significant market intervention. Once technologies are mature and there is a real price on carbon, the unseen hand of the market can take over.
But translating sound principle into detailed market policies inevitably results in major practical complexity. There are four new policy instruments – a carbon price; a carbon emissions limit; a subsidy (contracts for difference); and a capacity payment – to make sure the lights don't go out when the wind is low or because there is insufficient investment in capacity.
Each of these instruments is new, each is complex and they interact with each other, compounding complication and uncertainty.
What of the climate for investment? The balance sheets of the electric power companies are stretched and technology and regulatory risks are high. Companies have an understandable fear of unintended policy consequences and worry about political consistency.
So if we have untested technology, complicated new policy, an uncertain investment environment and little time, intervention, welcome or not, is needed to get investment going.
Intervention will be made through 'administrative action' based on 'ministerial discretion' by the secretary of state at Decc using those four instruments in the Energy Act. On this person and his successors, of whatever political stripe, is being conferred the means of determining our electricity investment over the next ten to 15 years. This is because it is only after ten to 15 years that technologies will have matured sufficiently for investment decisions to be handed back to the market. But, by then, big investments will have been made and the technological shape or our electricity system will be set for years to come.
Let's take examples. The secretary of state will initially be negotiating with technology investors, as is happening on nuclear. He is setting 'strike prices', to provide early subsidies for a range of technologies. He will later conduct technology-specific auctions for subsidy, thereby influencing the relative proportions invested in different technologies. This will also affect the phasing of introduction of new technologies. If badly handled, such phasing could block lower cost options.
He will use the capacity market to buy backup power to cope with intermittency of wind power and to cover the loss of solar power after dark. Backup power means underused capacity, so the costs are high. He needs to be mindful of minimising the overall system cost and not creating too much intermittent power, leading to excessive backup costs. Low carbon, low cost and energy security can be in conflict. Such conflicts need to be sensibly handled and not overplayed.
I am not suggesting intervention is unnecessary. Actions of this kind, complex and difficult, are required to deliver a secure, low carbon energy system. The question is who should be making such decisions.
I would have preferred different institutional arrangements, enabling separation of those decisions that are best made in politics from those that are best made within the industrial sector. There are models of different arrangements, especially in the United States. Unfortunately, the time for considering these for the UK is long gone.
So we must think of what will best aid the secretary of state, and his successors over several parliaments, in their decision-making.
There is a premium on the system's thinking. Electricity demand on a cold winter evening is three times that of an early summer morning. The sun does not shine on a winter's evening, wind speeds can't be controlled and nuclear is inflexible. All this has a profound bearing on working out how to minimise total systems costs – for which we all ultimately pay. Industrial engineering and evidence based costing are vital. There is then the phenomenally complex task of converting systems engineering into effective market incentives – requiring quite different skills.
To cope with the risks that come with applying ministerial discretion, I think there are four watchwords – objectivity, openness, competence and continuity.
These watchwords apply not just to the ministerial team at Decc but also to the civil servants on whose advice they rely. A capable team of officials has been established at Decc. They have excellent connections with academic and commercial bodies that have considerable expertise. It is vital the Decc civil servants are not undermined, whether by reorganisation or too much cost cutting.
Select committees are becoming increasingly effective at holding the executive to account. The select committee on energy in the Commons must scrutinise the application of ministerial discretion. The equivalent committee in the Lords must do so too. For these committees, the same watchwords of objectivity, openness, competence and continuity apply. Given long lead times on energy investment, theses committees need to be thinking far ahead.
Industry too must speak up and, through logic and balance, sustain the right to be heard.
At the root of this I believe the UK does possess the engineering and the regulatory skill to deliver the low carbon energy we need, at the least cost possible. But the wise exercise of substantial ministerial discretion will be crucial to making it a reality.
James Smith is chair of the Carbon Trust. He retired from Shell in 2011, having served seven years as its chairman.
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