Jun 15 2017

Post UK election: It’s watch this space on energy

The political adage that ‘Oppositions don’t win elections – governments lose them’ came to mind as Britain’s twice disrupted general election campaign finally came to an end on Thursday 8 June. Expectation busting results achieved by Jeremy Corbyn’s Labour Party left many of the commentariat acting as if the Labour Party had won. In reality the incumbent Conservative Party had strictly won the match – but contrary to expectations they had not done so by a margin big enough to actually form a government without  the support of another party – in this case the Democratic Unionist Party (DUP) from Northern Ireland.

This time there will be no formal coalitions with the minority party taking key portfolios. Instead it will be a return to the informal arrangements the Conservative Party has had before with the DUP, and the days of the Labour/Liberal pact that kept the Labour Party in power till the general till a lost vote of confidence in the House of Commons led to the 1979 general election that ushered in the era of Thatcherism.

Where does this political version of ‘Back to the Future’ leave UK energy policy? The immediate answer is – watch this space. Indeed the power sharing Executive in Northern Ireland fell earlier this year when the now leader of the DUP, Arlene Foster, resigned as Deputy First Minster after being caught up in the fall out from a reportedly massive overspend on heat-based renewable energy in Northern Ireland[i].

All this, as in Australia, emphasises that energy policy is nothing if not politically charged, especially when it comes to the prices voters pay for their energy. This was a point highlighted in the UK general election with all the major parties threatening to intervene in the UK’s energy market in various ways. It was also a stark reminder of when, in the mid 1970’s, Labour’s then newly appointed Secretary of State for Energy was the former hereditary peer, Tony Benn MP. He apparently thought the Prime Minister had side-lined him by moving him from the Industry Department to the Energy Department. However a close political colleague told him "Don’t forget electricity bills drop through every voter’s letter box".

In the wake of the BREXIT vote in June last year, David Cameron’s resignation as Prime Minister and Theresa May’s emergence as Leader of the Conservative Party and Prime Minister, she too reflected the retail politics of energy when in March this year, in the wake of energy price rises, Prime Minister May told her Party’s spring conference “Our Party did not end the unjust and inefficient monopolies of the old nationalised energy corporations only to replace them with a system that traps the poorest customers on the worst deals.”[ii] Come the launch of the general election campaign, the Conservative Party committed to protecting “customers who do not switch against abusive price increases” by introducing “a safeguard tariff cap that will extend the price protection currently in place for some vulnerable customers to more customers on the poorest value tariffs”[iii]

Labour’s general election manifesto also confirmed they would “Introduce an immediate emergency price cap to ensure that the average dual-fuel household energy bill remains below £1,000 per year, while we transition to a fairer system for bill payers”[iv]

So, how has the UK moved from being the architect and committed promoter of the split function privatised energy market model promoted by the Thatcherites (and also exported to Australia and especially to Victoria under Premier Jeff Kennett) to one where the leader of the Conservative Party was applauded by the media for saying her government will cap energy price rises?

Like the Australian market, the UK energy market is in transition to a more distributed, technology driven, customer focussed market with smart meters heralding an end to the estimated bills of yesteryear. Yet the media and political focus remains on prices that appear to go up like a rocket and fall like a feather and billing systems that have all too often have aggravated this. The other challenge has been the emergence of policy responses that tend to place additional price burdens on energy consumers rather than taxpayers.

Initially it was the cost burden placed on all UK electricity consumers from legislation in 1989 to meet the cost of decommissioning the country’s aging nuclear fleet. This was the Non Fossil Fuel Obligation and from the early 1990’s was an 11 per cent levy on all electricity supplied in the UK (of which a small percentage then went towards the cost of supporting renewables). This steadily declined as full market liberalisation came in, a move championed by Tony Blair’s New Labour Government from 1997 onwards when plans for what was to become the Renewable Energy Obligation (based largely on earlier versions of Australia’s Renewable Energy Target) were laid in parallel with the dropping of all price controls and the creation of a market based on the commoditisation of electricity and gas and the emergence of the energy trader. With the sharp drop (40 per cent at the time) in wholesale prices this generated in the early 2000s, then bringing in the statutory cost sharing for new renewables and energy efficiency was relatively easily accommodated as the political goal of falling energy prices was apparently secured.

However with the UK’s nuclear stations coming to the end of their planned life, EU sulphur controls progressively closing coal fired power stations and North Sea gas really starting to decline, concerns about the UK’s security of supply rose dramatically. Tony Blair placed new nuclear firmly back on the agenda in order to meet the twin goals of energy security and carbon reduction. The challenge increasingly became how you get such a high cost technology to happen in a competitive, liberalised, energy market especially when the EU emissions trading scheme was creating prices too low and unstable against which to take big investment decisions (be it for large offshore wind or new nuclear or power plant with carbon capture and storage systems). What was need, it was said at the time, was the stability of a ‘carbon price floor’. This duly arrived in the Government’s 2011 Budget[v] underpinned by David Cameron’s commitment to lead “the greenest government ever”[vi].

However the election of 2010 also put the historically anti-nuclear Liberal Democrats in coalition with the Conservatives, so any form of direct taxpayer subsidy would just be a step too far. To square the policy circle the energy consumer funded capacity market was created with statutory backing - highlighting the need for a fully functional and competitive retail market so that competitive pressures could minimise the price impact of policy.

Yet a deeper dive into each Parties policy material for the General Election shows just how they are preparing for the ‘energy transition’, grappling with the cost and competing interests in their own Parties.

The Conservatives, for example, remain committed to “take a lead in global action against climate change”, but in a gesture to their countryside base “do not believe that more large-scale onshore wind power is right for England”[vii].

They also gave a strong commitment to shale gas:

“The discovery and extraction of shale gas in the United States has been a revolution. Gas prices have fallen, driving growth in the American economy and pushing down prices for consumers. The US has become less reliant on imported foreign energy and is more secure as a result. And because shale is cleaner than coal, it can also help reduce carbon emissions. We believe that shale energy has the potential to do the same thing in Britain, and could play a crucial role in rebalancing our economy. We will therefore develop the shale industry in Britain. We will only be able to do so if we maintain public confidence in the process, if we uphold our rigorous environmental protections, and if we ensure the proceeds of the wealth generated by shale energy are shared with the communities affected.”[viii]

Conversely, where this involves fracking both Labour and the Liberal Democrats would ban it – a commitment that could be achieved through the strong control both parties have over the UK’s local councils.

The Conservative Manifesto also committed them to “commissioning an independent review into the Cost of Energy” and “giving individuals greater control over their energy bills and protecting customers from unfair bills…we will help them to save energy”, they continued:

“An energy efficient home is a more affordable and healthy home. We will improve the energy efficiency of existing homes, especially for the least well off, by committing to upgrading all fuel poor homes to EPC Band C by 2030. We will also review requirements on new homes.”[ix]

This would mean a big boost to insulating the homes of those who are particularly vulnerable to the impact of higher energy bills. It remains to be seen if this will be funded by sustaining the legal obligation on energy companies to achieve carbon savings in their customers’ homes through investment in energy efficiency or by a different, taxpayer funded mechanism (the firm preference of some in the industry).

Labour also re-stated their commitment to a better insulated Britain with a pledge to:

“Insulate four million homes as an infrastructure priority to help those who suffer in cold homes each winter” and

“Home owners will be offered interest-free loans to improve their property. For renters, Labour will improve on existing Landlord Energy Efficiency Regulations and re-establish the Landlord Energy Saving Allowance to encourage the uptake of efficiency measures” [x]

Labour also committed to:

  • Changing Network Operator license conditions to regain control of energy supply networks
  • Supporting the creation of publicly owned, locally accountable energy companies and co-operatives to rival existing private energy suppliers, with at least one in every region
  • Legislating to permit publicly owned local companies to purchase the regional grid infrastructure, and to ensure that national and regional grid infrastructure is brought into public ownership over time.

With most of the UK’s local network infrastructure now owned outside of the UK, this theme of local companies owning local grids echoes much of the ‘regaining control’ debate that underpinned the UK’s Brexit vote. The role of local energy companies also reflects this and the steps already taken by some major Labour controlled UK cities to set up their own energy companies.

Labour would also “support further nuclear projects” and, unlike the Conservative Party said it would “retain access to Euratom, to allow continued trade of fissile material”. Such access is regarded as crucial by those driving nuclear new build. This is because if the Conservative Government withdraws from Euratom (one of the founding institutions of the European Union) as it has said it will, not only will this mean the UK having to create its own (internationally acceptable) nuclear safety standards just as it tries to get new nuclear plant built, but it will also face a novel legal position given that nuclear fuel in transit is apparently formally the property of Euratom.

The Liberal Democrats have traditionally, along with the Green Party (who post-election still have just one MP) been the traditional environmental advocates amongst the UK’s political classes. In this year’s General Election this was again very much in evidence and highlighted by commitments that include:

  • A new legally binding target to reduce net greenhouse gas emissions by 80 per cent by 2040 and to zero by 2050.
  • Generating 60 per cent of electricity from renewables by 2030, restoring government support for solar PV, onshore wind in appropriate locations and expanding community energy schemes.
  • Supporting an ambitious carbon capture and storage programme (a commitment also in The Labour Manifesto but absent from the Conservatives although the current Conservative Secretary of State has since said CCS infrastructure will be supported).
  • Ensuring that at least four million homes are made highly energy efficient (Band C) by 2022, with priority given to fuel-poor households.
  • Aiming for at least 30 per cent of the household market to be supplied by competitors to the ‘Big 6’ by 2022.[xi]

It is against this background that both the industry and the Energy Regulator, Ofgem, strongly assert the benefits of the competitive retail markets driven, increasingly, by the more distributed type of home based generation that is now emerging. New models of supply are become apparent – but market dynamism will be essential to drive some of the new businesses that are emerging.

The challenge for some key players in the UK energy policy community will be to highlight the benefits of liberalised markets and retail competition at a to time when the inheritors of Mrs Thatcher’s politically legacy are only able to govern with the support of a party from a region where energy costs have traditionally been much higher than the rest of the UK.

So if you need significant investment just to keep the lights on and drive the transition to a new consumer driven future then UK energy policy is going to be nothing if not interesting.

 


[i] This Renewable Heat Incentive scheme, set up in 2012, aimed to increase consumption of heat from things like biomass boilers and heat pumps and the BBC has reported earlier this year that the overspend was expected to cost Northern Ireland taxpayers GBP490.

[ii] Prime Minster The Rt. Hon Theresa May MP. Address to the Conservative Party Spring Conference 17 March 2017

[iii] ‘Forward Together’. Conservative Party General Election Manifesto. May 2017

[iv] ‘For the many not the few’. Labour Party General Election Manifesto. May 2017

[v] The government imposes the “carbon floor price” on electricity generators by charging a “carbon price support” element above the carbon price ‘set’ by the Emissions Trading Scheme. In each UK budget statement the Treasury calculates what the inflation adjusted target price will be two years ahead, and compares this with the futures price for ETS allowances two years ahead, and then creates a carbon ‘price’ to bridge the gap between them. See: http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/d/carbon_price_floor_consultation_govt_response.pdf

[vi] https://www.theguardian.com/environment/2010/may/14/cameron-wants-greenest-government-ever

[vii] ‘Forward Together’. Conservative Party General Election Manifesto. May 2017

[viii] ‘Forward Together’. Conservative Party General Election Manifesto. May 2017

[ix] ‘Forward Together’. Conservative Party General Election Manifesto. May 2017

[x] ‘For the many not the few’. Labour Party General Election Manifesto. May 2017.

[xi] ‘Changing Britain’s future’ Liberal Democrats General Election Manifesto. May 2017.

 

Related Analysis

Analysis

Texan energy crisis: Lessons for Australian electricity markets

In February Texas endured a winter storm that dragged temperatures well below freezing. Electricity generation plant and gas infrastructure proved unprepared for these temperatures and around a third of the state’s effective capacity went offline for some or all of this period, just as demand was spiking to a new winter record.

Apr 22 2021
Analysis

Every step counts: China’s marathon journey to become net-zero

In 1971, when asked to assess the influence of the French Revolution, Chinese Premier Zhou Enlai famously remarked that it is ‘too early to say’. So it is not surprising that after President Xi announced China’s aim to be net-zero by 2060, some commentators framed it as ‘the start of a marathon, not a sprint’. But is this assessment fair?

Apr 01 2021
Analysis

New US modelling points to solar

New modelling is behind an assessment that finds renewable generation is likely to account for as much as 60 per cent of new capacity in the US grid in coming decades.

Mar 25 2021
GET IN TOUCH
Do you have a question or comment for AEC?

Send an email with your question or comment, and include your name and a short message and we'll get back to you shortly.

Call Us
+61 (3) 9205 3100