Where next for energy policy? www.westbournecoms.com
Policy challenges This government faces the perennial trilemma of how to balance security of supply, affordability and carbon reduction. However, unlike her predecessor, who largely continued with Coalition energy policy (early coal phase out and the scaling back of renewables subsidies being two notable exceptions),
Theresa May has marked a decisive shift in policy with the creation of the Department for Business, Energy and Industrial Strategy (BEIS).
The Prime Minister hopes that the creation of BEIS will drive economic growth by both spurring energy innovation and keeping energy costs down for business. The department will need to devise an energy strategy which takes account of advances in technology and acknowledges the reality of a post-Brexit world.
Unlike the growth of renewables which has been largely driven by subsidy, consumer demand (fueled by falling prices and improved technology) is expected to increase the number of electric vehicles to nearly 6m by 2030. The Government will be hoping this comes to pass, and that innovation drives carbon reduction more generally.
Growth in energy innovation
Decrease in renewables subsidies
electric vehicles by 2030
Politics and personalities By both temperament and experience, the Prime Minister will put security of supply, and national security, above all other concerns. Theresa May’s quick decision to review the contract for Hinkley Point is indicative of her willingness to intervene when she thinks the national interest is at stake.
Greg Clark is the ideal Secretary of State for the newly created Department for Business, Energy and Industrial Strategy, given his background as Shadow Secretary of State for Energy in the run-up to the 2010 election. He will need to be decisive if he is to succeed in creating an industrial strategy fit for the 21st century. He’ll be assisted by his able special advisors Meg Powell-Chandler and Jacob Willmer, who have accompanied him from the Department of Communities and Local Government to BEIS, and Guy Newey who moves across from the Department of Energy and Climate Change.
Greg Clark MP
The creation of BEIS is another bold move. Whilst the promise of ‘green jobs’ isn’t new, the creation of the new department puts energy at the heart of industrial strategy. This may spur a mix of capital grants and tax breaks to drive innovation.
While May’s Chief of Staff, Nick Timothy, is famous for his opinion that the Climate Change Act has been a “a unilateral and monstrous act of self-harm…inflicted upon industrial Britain”, the Prime Minister’s moral compass will not allow her to back track on our commitment to reduce carbon emissions.
She may, however, consider alternative means to the same end. With the Prime Minister’s focus on those ‘just managing’, affordability will be a continuing concern, for both consumers and industry. Unlike the last administration, No. 10 will have more control over domestic policy than the Treasury, though Chancellor Philip Hammond will undoubtedly share his boss’s desire for the UK to decarbonize as cost effectively as possible.
Nick Hurd MP
Jesse Norman MP
New Energy Minister Baroness Neville-Rolfe comes without experience in the sector but is well respected in the party and will get to grips with her brief quickly. She is keen to put consumers at the heart of energy policy, something which is quite difficult in such a highly regulated sector. As a long-standing member of the Conservative Environment Network, Nick Hurd is the perfect choice for Climate Change (and Industry) Minister. Junior Minister Jesse Norman, also has a combined energy and business brief, focusing on nuclear and shale gas as well as aerospace and infrastructure. At No. 10, Georgia Berry will be leading on energy and infrastructure with support from Joshua Buckland.
Impact of Brexit The fundamental question for BEIS and the Department for Exiting the European Union is what relationship the UK will have with the internal energy market (IEM). Will we remain a member, negotiate access or leave completely?
Leaving does afford Britain greater autonomy in energy policy including power to regulate prices, reduce VAT on fuel and use state aid to support industrial and climate change policy. It also gives Britain more flexibility to focus on decarbonization rather than chase renewable energy targets.
But leaving the IEM also has downsides including potentially higher prices, lack of access to the European Investment Bank, the question of what to do with Northern Irelandâ€™s energy market and the risk to interconnectors, which would require bilateral agreements. It will also put our relationship with the EU Emissions Trading Scheme (EU ETS) at risk. If access to the IEM isnâ€™t secured, this will pose serious challenges for National Grid though generators and suppliers may be more relaxed. Another important consideration in Brexit negotiations will be export opportunities for low emissions vehicles and parts.
Policy risks Negotiating access to the IEM, whilst minimizing the regulations we are subject to, will occupy civil servants for the next few years. The chief overall risk for the Government is the lights going out. Given the narrow capacity margin, the Government will hope that increased incentives in December’s capacity auction will sufficiently incentivise new gas plant. This will, however, lead to higher prices in winter 2017/18, putting energy bills back in the headlines and putting pressure on ministers to ‘do something’. Doing something is quite difficult in the short-term as renewables subsidies are ‘built-in’ for the next 20 years, the Green Deal has been abolished and Eco is a relatively small burden on suppliers. Where else to look?
Hinkley Point is undoubtedly the biggest and most high profile decision on energy facing the Government.
Winter energy prices
Whilst an army of critics oppose the project on cost and national security grounds, its cancellation would pose a challenge and require alternative generation capacity to come forward. Would this mean the gradual end for UK nuclear or would it kick-start a new approach to nuclear procurement? With the smart metering rollout suffering yet another delay, ministers will need to get to grips with this complicated and costly project. When installations ramp up and data goes live, there will be a surge in customer complaints and the accompanying media coverage which BEIS and suppliers will need to manage.
The future can be summarised in two words: energy tech. With rapid advances in energy storage and demand-side response, the growing share of our power from renewables (forecast to be 50 gigawatts by 2030), and the move toward electric vehicles, we are facing a fundamental re-ordering of the UKâ€™s energy landscape.
The Government needs to take decisions with the decentralised energy grid of the future in mind. Will the UK need nuclear for base load? Can new gas plants (and shale gas) fill the gap until cheap energy storage comes on line?
Should the UK capitalise on its world leading position in offshore wind by doubling or tripling capacity? Does tidal power offer a similar opportunity for energy security? How will the energy networks need to adapt? How do regulations need to be amended to support technical innovations? Despite North Sea reserves continuing to decline, the UK is, perhaps unexpectedly, faced with the prospect of growing energy independence. The challenges for BEIS are many but the opportunities are immense.
James Bethell Managing Director Jennifer Powers Partner, Head of Advocacy Anouchka Burton Associate Partner for Reputation Matthew Sinclair Head of Economics Tom Wilkins Account Director
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