Benj Sykes: Green and cheap? Energy suppliers need policy signal to achieve both
Midweek View: To deliver cost cuts, we need economies of scale, and that can only be achieved with a strong pipeline of projects
Wednesday 29 May 2013
The UK energy industry can often feel confused over government priorities. While it is down to companies such as us at Dong Energy to run efficient, safe and cost-effective businesses that deliver the energy system the UK needs, we don't exist in a policy vacuum.
The confusion is a result of the changing priorities of the policy "trilemma": decarbonising the energy system while ensuring energy security and keeping prices as affordable as possible. Each of these issues is important and, while they can be resolved, there are challenges.
Some may argue that at a time of financial constraint, we cannot afford to keep investing in the development of renewables. This fails to recognise that the UK, as with much of Europe, has ageing energy assets that need to be replaced, and this provides a major opportunity to shape investment towards a low-carbon transformation. This opportunity has been recognised by the Government, and the Energy Bill, aimed at attracting £110bn in low-carbon investment by 2020, will help in creating a more stable, predictable and transparent framework for investors. However, a number of specific concerns need to be addressed if renewables are to flourish and deliver the green growth we all want.
First, there is a post-2020 policy gap. The UK has ambitious renewable energy targets to meet by 2020, and legally binding carbon-reduction commitments to hit by 2050. These commitments are "world firsts" and are welcome. But there are no near-term targets apart from the ones set for 2020.
This is of real concern to offshore wind developers and those involved in the industry's supply chain. Dong invests £1.5bn–£2bn annually and in most cases with an investment horizon of 25 to 30 years. As such, we, and other energy groups throughout Europe, have a strong need for clarity beyond 2020. Clearly we cannot undertake this type of large-scale, long-term investment if political and regulatory frameworks are too short-term and leave too much uncertainty on our planning horizon.
In addition, there are huge opportunities for manufacturing and investment in skills and jobs as a result of the offshore wind programme, but these will only materialise if the supply chain is confident of a market for its goods and services that extends well beyond 2020.
To ensure investor confidence in the market, a strong policy signal from the Government is required – a stepping stone between delivering the 2020 targets and meeting the 2050 decarbonisation objectives. We support the inclusion of a 2030 decarbonisation target in the Energy Bill for this reason.
Second, there is the question of cost. We have a clear strategy for cutting the cost of offshore wind to £85 per megawatt hour for projects we will be sanctioning in 2020 – a cost reduction of up to 40 per cent compared with today and a challenging target that we will meet by building bigger wind farms, using more powerful turbines, and continuing to make renewable technologies competitive with traditional energy sources.
In order to deliver these cost reductions, we need to capture economies of scale, and that can only be achieved by developing a strong pipeline of projects within a clear and stable policy framework. The Energy Bill is a big step towards this but it is only a start; much will depend on the secondary legislation, which needs to put flesh on the bones. A key element will be ensuring transparent allocation of contracts under a constrained budget. The Government is to be praised for securing funding for renewables to 2020 in the Levy Control Framework, but this funding must now be allocated efficiently and fairly.
The final part of the trilemma is security of supply. Many commentators have proposed an "either/or" approach on renewable and non-renewable technologies but we need a mix of both to provide energy security and a sustainable future. The proposed capacity mechanism in the Energy Bill is there to help ensure we achieve this – although we should not forget that energy efficiency and demand reduction are the most efficient ways of reducing carbon emissions while enabling customers to become more cost competitive.
That leaves one question: will the Energy Bill deliver a strong enough package of solutions to encourage the investment needed to meet the trilemma? The answer must be yes – but there's not much time left.
Benj Sykes is the UK manager for wind power at Dong Energy
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