Speakers: The Rt. Hon. Peter Lilley, MP; Andrea Leadsom MP, Minister of State, Department of Energy and Climate Change
24 November 2015 – meeting notes
Chair: Lord Palmer
Parliamentary attendance: Lord Palmer, Peter Lilley MP, Peter Aldous MP, Andrea Leadsom MP, Lord Haworth
Speaker: Andrea Leadsom MP, Minister of State, Department of Energy and Climate Change.
Prior to the arrival of the speaker (who was delayed on Parliamentary business) there was a lively discussion led by Peter Lilley MP.
Andrea Leadsom MP:
There is a strong desire to see control of energy costs. She had been delayed by a debate she had just attended in Westminster Hall on fuel poverty, which is, in part, the result of high energy costs.
In DECC we are ruthlessly focused on energy costs. We talk about the energy trilemma: keeping the lights on, costs down and decarbonising. The Secretary of State made clear in her statement last week that everything we do will focus on keeping the bills down. Decarbonising at the lowest possible price and keeping the lights on as cheaply as we can. We won’t be cutting corners with energy security, but what we will be doing is giving investment certainty to businesses (which keeps costs down) and we will be putting pressure on the big energy companies to pass on the benefits of reductions in wholesale prices.
Since coming to office we have been tackling the concern of the over-deployment of renewables. We are very clear about this; renewables have been a victim of their own success, their deployment has been greater than expected. That has meant the subsidy has grown in aggregate and that has impacted on all consumer’s bills. The reason for closing early the renewable obligation for onshore wind and consultation on reducing the feed in tariffs is specifically to address the issues for bills. The OBR forecasts is that we will have beaten the budget on impact on consumer bills by 2020 to 9.1 billion (purely because of the over-deployment of renewable).
Wholesale costs make up 50% of bills, what we are trying to do there is to promote competition and to urge the big energy companies to pass on the wholesale price reductions. We are also committed to implementing the finalised recommendations of the CMA. We are absolutely committed to switching, with an aim of reaching 24 hour switching (which puts a downward pressure on bills).
Looking at the steel sector (which has been a great concern for the government). For extra-large industries (such as steel), UK electricity prices were the highest in the EU (whereas gas prices were the third lowest). Government is administering a package, under state aid rules, that is trying to mitigate the impact of energy prices on our biggest industries. The Prime Minister is committed to doing that throughout the lifetime of this parliament.
On gas prices, the UK benefits from a very liquid global gas market, with a very secure supply and some of the cheapest prices in Europe. We have our own domestic supply, which is admittedly declining. Currently we are importing half our gas, but by 2030 that could be as high as 75%, which is a reason why the government is focusing on promoting shale, in order to have a home grown, reliable and hopefully cheaper source of gas for the future.
Gas is the greenest fossil fuel, at around half the carbon foot print of coal when used for power generation and it is vital for energy security. The more intermittency you have on the grid, the more you pay for energy, so we need a balance (which includes renewables) which is why the Secretary of State announced that we want to move from coal to gas as a cheaper and lower carbon energy generation. That gas is a bridge to a lower carbon future, as the costs of renewables come down further, with improvements in storage and technologies. Another huge way to bring down costs is energy efficiency, what we really want to get to is lower demand and more energy efficiency.
Energy security remains our first priority; to generate that we have also been looking at new nuclear. Hinckley C is the first in that programme. It is simply not true that it is incredibly expensive and not keeping costs down. Once it starts producing it will be at £96.50 mwh. The private sector will take all the costs of the delivery, timescale and project and we will end up with a cost of energy that is comparable with renewables and cheaper than offshore wind and does not have the intermittency problem of other renewables and is a long-term, reliable, low carbon source of energy.
Smart meters is a big project for government and industry. We are focused on that to help consumers manage their energy use better and to be able to switch much faster.
Finally, network costs amount to about 20% of bills. We are looking at what more competition we can introduce to bring down costs, e.g. offshore transmission line. More interconnection with European markets means we will be able to import cheaper electricity, often from low carbon sources (nuclear in France and hydro electricity from Norway) we are supporting an ambitious energy union for Europe, which we think will save the UK consumer money.
We are also interested in innovative ideas such as off shore generators connected to interconnectors, which has the potential to provide base-load from renewables.
Questions and comments
How will DECC capture the system costs either through the next CFD auction round or through some other work stream?
ANDREA LEADSOM MP: At moment there is some work on whole system costs, once that is finished we will be looking at how best to reflect that in pricing systems. There is a lot of work still to be done. My view would be that anyone who wants to play should meet the full cost of the energy trilemma, for example, we are looking at every policy to see how it affects the three legs of the trilemma, so that we are always looking at it from the three points.
There are still elements of the policy that do not fit the framework, there seems to be a contradiction. Current policy suggests that offshore wind in the Scottish islands will still take part in the pot 2 funding, so essentially the government has constrained cheaper onshore wind on the mainland but would still favour more expensive (£115 mwh strike price) in the Scottish islands, which would have an even greater all-in system cost because of the greater transmission cost.
ANDREA LEADSOM MP: We are closing the RO for onshore wind early, that is for all onshore wind projects (excluding those already in the pipeline) to the extent that onshore wind projects get built, we are looking at the potential for a subsidy free CFD, but as things stand the subsidies will not be available for onshore wind. We are still looking at the CFD pot and have not made any announcements yet.
The Scottish highlands and islands is a slightly different issue. The window is comparable with offshore, the productivity of those turbines is greater. As they are technically onshore they are cheaper to build, as you rightly point out, the transmission costs might be higher. So the point is if it nets out or not, they could be in a pot 2, but again those issues are being looked at.
What is your view on energy storage and the role it can play in renewables? Is DECC doing anything to look at how they can encourage future and current renewable installations to integrate storage?
ANDREA LEADSOM MP: It has massive potential. Personally, as a constituency MP, in the last parliament I dealt with a lot of issues over intermittency, I think it is a great shame that at this time of great deployment of renewables, storage was not part of the equation. I think there is enormous potential.
DECC has an innovation fund and has been looking at projects on storage and the whole system costs with a view to try to ensure that the energy trilemma is taken into account by all those taking part in the projects.
Gas is the greenest fossil fuel; it can be a lot greener with carbon capture and storage, what role is there for CCS?
ANDREA LEADSOM MP: There are now some commercial level CCS projects around the world, there are still very few, it is still very expensive and requires a big cost of infrastructure. It can still play a part, but it is by no means proven in terms of particular projects. It has a lot of potential, like many things, the question is one of affordability and the cost to the consumer verses the potential for the technology.
Why does it cost 3 times as much to produce power in the UK as it does in France, have the Treasury come up with a credible answer for that question yet?
ANDREA LEADSOM MP: I’ve been told that the existing nuclear fleet in the UK produces electricity very cheaply and our existing nuclear fleet is very old indeed. The French fleet is not as old and that also produces energy very cheaply. Our CFD is brand new build, part of the problem that we have (as set out last week by the Secretary of State) is that 20 years of market intervention have failed to see new generation get built. But we are now in a situation where if you want anything built it has to be subsidised because that is the way the market is at the moment. If we want to be in a position where in 50 years’ time our source of energy is cheap we need to get the investment in. That is the policy decision we have taken. It has been pointed out that Hinckley C is the biggest new nuclear investment since Fukushima. These projects are complicated and expensive. We are also interested in small modular technologies and interested in seeing the role that Britain can play in designing and exporting these technologies. This is a good shot at a low carbon, affordable energy future.
How important is the on shore shale component of the gas strategy? What is the backup plan if it does not come to pass?
ANDREA LEADSOM MP: We currently import 50% of our needs, this could go up to 75%, we are fortunate to have a global market in gas and we working on interconnection too. So you could ask why we need a home-grown source. But my money is never on just importing it all and relying on everyone else, relying on other countries. Our gas requirement is going to go up if we seek to have more of our electricity from gas. This potentially enormous source of home grown gas (which is from just up the road, so has a decarbonisation advantage) as well as being a whole new industry that would be in a part of the country that would benefit from the financial injection. From an economic and energy security point of view it would be brilliant news. However, at the moment we have not explored a single well yet. This has enormous opportunity, the anti-frackers are very selfish, and it would be a great shame if we do not get it off the ground.
It is proving difficult but there are a lot of enlightened local authorities who can see the advantages for jobs and growth, the challenge is to give them enough information, get the myth busters out there about the actual truth of the industrial process, including the fact that we also have the tightest regulations in the world.
From the solar industry we feel as an industry, that DECC is not particularly well informed of the costs of storage, particularly battery storage and a lot of the financial assumptions made are a long way from the truth. We are concerned at some of the decisions and policy directions. How can we as an industry help DECC be better informed as to how costs is coming down?
At the moment it appears that there is a misunderstanding about the cost development of storage and how it is applicable alongside solar.
I think that solar is a superb industry and I am totally passionate about the solar industry. The whole point of the consultation is to reduce or protect consumer bills. I would love nothing more than solar absolutely take off; it has a huge part to play in the low carbon future. My point is that it is a great shame that the revolution in power generation from the sun took off but that storage did not grow alongside it. The intermittency is a massive problem, there is a real challenge, and we need to be honest about that.
I had a round table with 15/20 trade associations within the solar and renewables sector, I would be delighted to do another one to look at storage, get a group together to come and talk to me or my officials about this.
Lord Palmer thanked the speaker and closed the meeting at this point.