Powering the UK 2014
Empowering UK growth, jobs and energy users through continued investment
The industry can meet many targets but deciding what is, or is not, affordable for UK citizens is one for government alone. So is the decision on the priority ranking of the ’trilemma’ of ‘affordability’, security of supply and decarbonisation. An honest debate is urgently needed.
Energy vital to the UK’s economy
The UK’s energy sector is integral to the its economic prosperity and stability, and delivers an absolutely fundamental service to all its citizens.
As it has throughout the recent economic downturn, in 2013 energy firms again, through investments and operations, generated significant economic value for the UK.
They provided energy to 26 million homes and millions of businesses, contributing £25 billion in direct economic benefits. This, in turn, generated an additional £71 billion of economic benefit elsewhere in the economy, and the sector delivered £96 billion in terms of Gross Value Added (GVA) in 2013 – around 6% of total UK GDP.
A major job creator
These firms also directly supported 131,000 jobs, with an additional 549,000 employed in their immediate supply chains and the wider economy.
These 680,000 jobs are equivalent to one in every 44 UK jobs. This employment is spread across the UK, with a strong presence outside London and the South East. In recent years, the majority of new energy jobs have been generated in regions most needing employment, such as the north of England.
And a major investor
The energy sector has also invested billions of pounds in capital projects as it transforms the energy system in order to deliver secure, low-carbon, affordable supplies.
The doubling in the amount of electricity generated from renewable sources since 2009 has lowered carbon emissions and reduced the UK’s dependence on imported fossil fuels, and over 10 million UK households have substantially reduced energy consumption as a result of insulation or other measures from their energy supplier.
In 2013 alone, the sector invested £13.1 billion in generation, transmission, distribution and supply – around one-quarter of all new infrastructure investment across the UK.
Unlike other parts of the UK economy, like transport and the social sector, all of this is private sector investment. This means that in 2013 the industry invested equivalent to £500 for every UK household.
Against a very challenging backdrop, the scale of new investment is remarkable. However, while it remains high, it is below what is likely to be needed to meet decarbonisation and renewable energy objectives.
A stable policy framework is essential
It also appears that new investment levelled between 2012 and 2013. Our survey of energy firms suggests a continued willingness to invest, but also a concern about future energy policy, with many emphasising the necessity for a stable, transparent, predictable policy framework to encourage investment. This is particularly important as investment will increasingly be underpinned by policy-driven incentives.
Many of the messages from last year’s Powering the UK continue to hold, with some becoming more acute.
There is a pressing need for even more investment in many parts of the sector to meet growing capacity requirements and the UK’s environmental obligations.
Whilst long-term objectives in terms of decarbonisation targets are clear, the level and timing of new policy interventions are not.
August 2014 saw the EMR reforms reach the statute book, intensifying the debate around energy policy and costs.
As EMR enters its delivery phase, with major investment decisions awaited, the question is whether this, and subsequent, governments will allow the markets to adjust, learn and deliver — or whether we will see post-implementation policy tinkering that could frustrate investors and asset owners alike.
Energy affordability still key
The past year has seen much discussion on the cost of living, with energy affordability key to the debate.
The drivers of energy affordability for individual consumers, and potential solutions to the challenge, are rooted in a range of issues, including incomes, and energy price and efficiency.
Change is happening
Small suppliers are growing, and newer supply market entrants are ambitious. Customer switching between and within suppliers has grown, and the industry has comfortably managed this increased mobility. The Energy Company Obligation scheme has been retained in modified form, and unit prices for electricity in the UK are broadly in line with (and, for gas, below) average European prices.
Energy efficiency key to reducing bills
A key driver of gas and electricity is consumption, which in the domestic sector is driven largely by the efficiency of dwellings and appliances.
High consumption is a particular problem for low-income households in inefficient houses, and for energy-intensive firms.
For these consumers, the most cost-effective way to reduce energy costs will be more efficient usage. The sector is actively engaged here, working with consumers to reduce consumption through better efficiency and the use of smart technologies which help them understand and manage usage.
Affordability challenges in the longer term will remain
An example is social and environmental policies and maintaining and reinforcing the energy infrastructure, which represent a large and increasing cost that cannot be significantly reduced without undermining efforts to transform the system.
This tension between the need for new investment and continuing pressure from consumers for lower bills is a challenge that will need concerted effort by Government and energy firms.
The challenge posed by the policy trilemma
Successfully decarbonising energy generation while ensuring secure, affordable supplies involves complex and interconnected issues that demand a commitment across society.
For many years, the energy sector has risen to this challenge with significant investment across the value chain.
However, contributions from government (to deliver a transparent, stable policy framework and protect society’s most vulnerable members), and from consumers (to embrace more efficient usage and engage with the market) are also vital.
The UK needs concerted action to meet its energy objectives to 2020 and beyond.