When, in my late twenties, I gave up political ambition and devoted myself to a career in industry, I never dreamt I would have the opportunity to speak in Parliament. What an unexpected treat, what a dream fulfilled, what a privilege it is to be able to stand and speak in Parliament, without licking a single envelope, or canvassing a single street, or doing battle with bureaucracy on behalf of a single constituent. And in recognising the privilege, let me also say to the politicians here that I salute you. When I use the word politician, as I will do during this speech, it is as a term of endearment. I recognise that many people, and businessmen in particular, do not appreciate just how bloody hard politics and public service is. For those in business who can say "go" and they goeth and say "come" and they cometh, it can be difficult to understand how hard it is to get things done when people are elected to oppose your every action, when the press peruse your every move, and people around you are volunteers rather than employees. So, as Ali G would say ..... "Respect!"
However, respect should be a 2-way thing. If businessmen are naturally inclined to believe that politicians are dozy, idle and incompetent, politicians secretly believe that businessmen are overpaid, self-interested and generally incapable of making judgements that do not accord with their immediate self-interest. So let me ask you to grant me the favour of some respect when I talk to an issue which I know something about, and to suspend your disbelief for a few moments that I might not be talking my, or my company’s, own book.
I want to talk to you about Energy, and, specifically, about Electricity supply; forgive me if I lazily use the two words interchangeably. And I do this as someone who is responsible for managing a FTSE-100 company that provides power in over 100 countries in the world. In my job, I see daily the consequences for countries whose Energy Policies have not worked as intended. Customers come to us when they have run out of power; when they have power cuts for five or six hours a day; when hospitals operate by candlelight; when traffic lights don’t work; when sewage works stop.
What I am going to say in a few moments will be unpopular in some quarters, and I will be accused of heretical beliefs. I would therefore like to get my retaliation in early, and tell you what I do believe:-
- I believe that it is a bad idea to keep on pumping billions of tonnes of CO2 into the atmosphere.
- I believe that doing so is likely to contribute to climate change. Since I own a house on the West Coast which is within a few feet of the High Water Mark, I declare a very personal interest in not seeing the ice cap melting and sea levels rising.
- I believe that Scotland is advantaged in terms of renewable resources and can use them to build long term competitive advantage.
- I believe that demand for electricity, far from declining in rich countries, will increase quite substantially as we move to de-carbonise transport.
- I believe that in an uncertain world, it makes sense to have diverse sources of energy.
So far, so impeccably politically correct.
I also believe that in many countries politicians have found that Energy Policy is an irresistible sand-pit in which to play. Talking about Energy and CO2 reduction allows them to project all sorts of appealing political characteristics; clean, caring, modern, technically-savvy, far-sighted, broad-minded; and all this could be achieved without any real consequences, no matter how bonkers the policy. So far, politicians have had the luxury of sounding good by setting targets which are so far out in time that whether they are sensible or achievable or not, nobody can possibly know. A 20% reduction in carbon emissions by 2025? Don’t be a bloody Jessie, let’s make it 34% by 2020, and for good measure, let’s make it legally binding! The problem is that sooner or later the happy passengers on the good ship Energy Policy will meet the jagged rocks of the Three Great Truths of electricity generation and supply.
- The First Great Truth is that we cannot live without reliable and plentiful electricity. Like water, like air, like food, we cannot do without it, and even brief shortfalls would be catastrophic. So any policy has to be prudent and practical in terms of technology, engineering, resourcing and financing.
- The Second Great Truth is that everything about the equipment required to generate and distribute electricity takes a long time to build and is quite fantastically expensive. And the cleaner the source of energy, the more fantastically expensive it is.
- The Third Great Truth is that this fantastic expense has to be financed by Global Capital Markets and paid for by the consumers and businesses who use the electricity. There is no Third Way in Energy Policy.
These Great Truths mean that, in reality, Governments have much less room for manoeuvre than they like to think. For policy to work, it has to be able to convince some very hard-headed investors, for whom the UK is simply one of many countries who need to build a lot of infrastructure, that their clients and shareholders will make money if they build power stations here rather than elsewhere.
I wanted to set the background before I tell you why so concerned both for the UK as a whole and for Scotland in particular.
I am going to start by addressing UK-wide issues first, as Scotland is part of the National Grid, and Energy Regulation is set on a UK-wide basis
Down South, the Coalition Government is in my view doing a good job getting to grips with many of the issues,
and the review of future regulation by OFGEM is an important step forward. Ministers strike me as thoughtful, energetic, and seized by the difficulties we face,
But all this is happening ten years too late, and the good ship of Energy Policy is perilously close to the rocks.
Extending the nautical analogy, accidents at sea rarely happen because of a single event. It is not that the ship is close to rocks; it is that, while close to rocks, the navigator loses his bearings and then a storm blows up.
In the UK, we are already close to the rocks, because, over the next 8 years a third of our coal-fired capacity, two-thirds of our oil-fired capacity, and nearly three-quarters of our nuclear capacity will be closed down either through age or the impact of the European Large Combustion Plant Directive. Absent a massive and immediate programme of building new power stations, with concrete being poured in the next two years, we will be in serious danger of the lights going out.
At the same time, our regulatory and market system, which should be our navigator, has lost its bearings, and is using a map over which somebody has spilled coffee. It is an absolute pre-condition of attracting investment in new power infrastructure that markets be transparent, are supervised by independent regulators, and that there is trust between the investors, the government and the regulator. The UK’s wholesale market system was a beast of great beauty when first created, and was widely admired and copied in other jurisdictions. However, over recent years, it has sprouted terrible warts and pimples. The previous Government believed that it could achieve energy policy objectives by sending "signals" to the market – aka throwing bungs – at particular favoured technologies. So we had bungs for windfarms, bungs for micro-generation, bungs for solar, bungs for tidal energy, and then negative-bungs for coal and nuclear. And each bung is regularly tampered with or changed. Each bung, in isolation, trying to achieve a laudable goal. But, in combination, these bungs produce not a symphony to delight investors and lure them to our shores, but a confusing and discordant cacophony.
And in the meantime, a storm is brewing. The storm in the market is going to be caused by the fact by 2015, 25% of the world’s power stations will be over 40 years old. This means that, from Tokyo to Timbuktu, from Sao Paulo to Seattle, utilities are going to be buying new power generation and distribution. There seems to be the view in Government that there is an orderly queue of investors wanting to pour money into UK infrastructure. Wrong. International investors who specialise in Energy infrastructure are very experienced, measure risk and reward by country very carefully, and they have choice of where to invest their money. In my experience, if you want to borrow £200 million from a bank, you have to ask quite nicely, wear a tie, and have a good business plan. If, as Britain does, you want to raise £200 billion, you have to ask very nicely indeed, and have a very good plan; at the moment we as a nation are turning up to meetings with the bank manager wearing jeans and a tee-shirt that says "Jesus Loves You".
The great danger facing the UK’s Energy Policy is that the history of meddling with the markets; the persistence with which we re-iterate unachievable goals for emissions reduction; the wildly optimistic forecasts of the availability, cost and performance of new technology; all these leave the serious investors, the institutions who have the billions we need, shaking their heads. I think the UK is in danger of becoming unattractive as a place to build new infrastructure, and this at a time when we are going to lose around 30% of our generating capacity.
Is this alarmist? ...... Well let’s look at what the people responsible for building the UK’s power infrastructure are actually doing. In the last 12 months the construction of three major new power stations – Kingsnorth, Baglan Bay and Drakelow have all been put on hold. And of the 7,000 MW of windfarms that have planning consent, less than a third are actually under construction. Why might it be that people who have spent millions of pounds and several years getting consent to build windfarms, are not actually building them? At a time when the UK has the lowest level of gas storage in Europe (16 days, against 90 days in Germany and 122 in France), Centrica have just announced that they are putting on hold the building of the Caythorpe gas storage facility. Two days ago, E.ON, one of the UK’s largest energy suppliers, said that it was going to focus its investments in markets outside Europe, and plans to follow EDF in selling its UK power distribution business.
The evidence that something is amiss is plain before our eyes.
So what is the solution? I think one of the first things to acknowledge is that it is not easy; the problems we face are complex, and unintended consequences abound. As Lord Palmertson said of the Schleswig-Holstein question, "it is so complicated that only three men have ever understood it. One was Prince Albert, who is dead. The second is a German professor who became mad thinking about it. And the third is me, and I know the answer but have forgotten what the question was."
My prescription would be as follows.
First, as our ship heads towards the rocks, it is important that people who talk nonsense are not allowed on the bridge to distract the Captain and Navigator. Before anyone is allowed onto the bridge, they should be asked the following questions:
- Do you believe that we can de-carbonise power generation without significant amounts of nuclear power?
- Do you believe that we can cut domestic electricity consumption by over 30% by 2020?
- Do you believe that the first new nuclear power station can brought into full production by 2018?
- Do you believe that it is feasible that we could have more than 10% of our power generation coming from wind?
- Do you believe that tidal energy is going to make a meaningful contribution in the next fifteen years?
- Do you believe that the world is going to run short of gas in the next forty years?
If they answer yes to any of these questions, they should be banned from the bridge.
Secondly, we have to set about mobilising the finest brains in our diplomatic and civil service to either reduce the level of, or delay the dates of, our commitments to reductions in CO2 intensity in power generation. I hasten to add that I think the problem is more with the timescales associated with the targets rather than the targets themselves. Broadly, we need to add ten years to all of them.
Thirdly, I think we need to accelerate the current OFGEM work on the future regulation of the wholesale electricity market. I would favour two main actions. One would be to establish minimum pricing for hydro-carbon fuels used in power generation, with the difference between the world market price and the minimum price being a CO2 levy whose proceeds should be used to fund measures to reduce energy consumption. This would be the principle tool of encouraging use of renewables, without making choices between types of technology. Alongside this, I would encourage investors by offering them a minimum payment per megawatt of capacity they have available. This would help secure a minimum level of capacity availability to make sure we had enough to keep the lights on.
Turning to Scotland, I have a very specific analysis. And that there is a danger in some quarters of believing that if you wish things to be true, they will be true. Scotland has abundant wind resource, and one might wish that the largest offshore wind installation in Europe was being built off the East Coast of Scotland, but actually it is being built off the East coast of England,
which has shallower waters and is closer to the major centres of demand. Scotland might wish to be a major exporter of renewable energy to Europe, and might wish to see an interconnector built across the North Sea, but does anyone really believe that we can get one built in the next ten years? Scotland might wish to have an energy policy completely independent of England and Wales; but if we also want to sell energy to England and Wales, and enjoy the security of being connected to a National Grid, we should not ignore the energy needs of England and Wales. My worry is that policy-makers are so focused on the end of the road that they fail to see the large pothole 300 yards in front. In Scotland as in England, we cannot ignore the realities of what is possible in engineering and financing terms; if we persist in thinking only about 2030, we will end in deep trouble in 2018 for Scotland, and for renewables. I urge Policymakers in Scotland to more on the question of how Scotland is going to respond to the fact that the National Grid, on which we all depend, will lose 30% of its generating capacity by 2018.
We may wish the replacement to be wind; we may wish it to be tidal; but wishing isn’t going to make it happen. We need a plan B.
In conclusion: Scotland is a wonderful place to develop renewable energy but we cannot sit around dreaming of a carbon-free future that is at best many decades in the future. We need to move on and deal with the cold realities of financing, project management, power engineering to avert a very real energy crisis that will hit us in less than ten years time. And it is going to require considerable political leadership in Scotland, and more widely in the UK, to reset expectations of what is possible and help to steer the ship away from the rocks.