How the cost of energy review can be integral to our industrial strategy
Last month the Government commissioned Professor Dieter Helm to review the cost of electricity. He’s tasked with recommending how to keep prices as low as possible and set the UK on a path to having the lowest electricity prices in Europe.
That’s an ambitious goal. Yet with the market changing rapidly due to trends in decarbonisation, decentralisation and digitalisation, this review could form the basis of the next phase of change to both the UK’s electricity system and the country’s emerging industrial strategy. As Chief Executive of a company that generates, transmits, distributes and supplies electricity, I hope the review will be assessed against three key criteria:
Firstly, does it support continued investment in energy infrastructure and avoid the trap of confusing cost with investment? SSE typically invests around £1.5bn annually into energy infrastructure in the UK and Ireland, which is generally more than we make in profit. This investment is largely in renewable energy and upgrading our electricity networks and has to be sustained as the UK replaces ageing, higher carbon assets. Barclays’ calculation that the UK requires over £210bn of energy investment by 2030 illustrates the scale of the investment challenge.
Secondly, does it help the UK to continue its remarkable low-carbon transformation? The progress since 2010 to bring cleaner energy into our mix is astounding but we have more to do. Our electricity transmission network in the north of Scotland is now supporting over 4,500 megawatts of renewable electricity capacity, a clean, home-grown source of energy that plays an important part in meeting customers’ electricity needs.
Taking these two points together, there is a lot of low carbon investment to deliver. By 2020 the UK’s energy networks will have delivered £80bn of investment since 1990, whilst reducing networks costs to the customer by 17%. What’s more, the costs of renewables are coming down significantly (unlike for nuclear, it seems). This investment cannot come for free and needs strong foundations. The Government, System Operator and regulator have spent the last few years creating bankable mechanisms to price carbon emissions, attract investment in the electricity networks, deliver low carbon electricity generation and to ensure security of supply. After a period of major upheaval, I hope that any recommendations complement and build on these world-leading mechanisms. Only then will the UK have the best means to finance a low carbon industrial strategy at a sustainable cost of capital – and a sustainable cost to customers.
Thirdly, does the review support sustainable investment? Energy is an essential service and there is no place for unfettered profits, but the sector is largely owned by investors and therefore must deliver some form of return on investment to attract the necessary capital, whilst of course controlling costs paid by consumers. I believe that this works both ways: the market frameworks must allow a fair and transparent return and, in turn, the market participants must act responsibly. That is one of the reasons that we have sought (and achieved) accreditation from the Fair Tax Mark for each of the last 4 years. We will continue to do so, so that customers can see we are transparent on tax and acting responsibly.
These are three tough, and perhaps contentious, questions. But Dieter Helm has extensive knowledge of the sector and if between him, the Government and wider society, we can deliver a framework that focuses on attracting investment; maintains the UK’s huge progress in modernising and decarbonising its power sector; and facilitates a sustainable (but not excessive) level of profit then I am optimistic that we will deliver a low carbon electricity system that contributes towards a successful industrial strategy.