Rupert Soames speech to
Scottish Parliament 12th November 2010.
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.
But.
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.