The transition to a green economy
The potential for innovation will be enormous in every area of the energy supply industry.
With the summer approaching, and the prospect of warmth and sunshine ahead, off goes the central heating and out come the t-shirts and sunglasses. It’s a time of year when attention tends to turn away from energy. Taking centre stage instead are warm weather records, droughts, hosepipe bans and water metering. But this year, energy seems set to stay in the spotlight for a while longer. Issues of how we heat our homes and offices, and power up our laptops and TVs, have rarely been higher up the national agenda. And crucial decisions are looming that will affect our electricity supplies for many years to come.
We take it for granted that a simple flick of a switch will provide the light or heat that we need. But behind that lies a vast energy infrastructure that makes it all possible – whether it’s the generator producing the power, the network of wires that sends it zipping around the country, or the company that finally supplies it to you at home. For most of us, it’s this last step that gets our attention – the gas and electricity bill arrives, and naturally we’d all like it to be lower. Beyond that, many people barely give a thought to our energy supplies and their future.
Even what makes up the bill you receive is not widely understood. Only about half of what you pay is for the amount of gas and electricity you consume day in day out. The rest is made up of a range of costs, including energy infrastructure, taxes, the cost of the meter, the cost of social schemes to provide support for vulnerable customers, and environmental initiatives to promote energy efficiency and bring down carbon emissions.
What’s also not well known is how gas and electricity prices in the UK compare to others across Europe. The latest index of prices across the continent’s capital cities, just published by the global energy think tank VaasaEtt, ranks London as having the cheapest gas prices, well below Germany, Belgium, Austria, Denmark, Italy and a host of others. And for electricity too, we are also ranked among the cheapest.
But there’s no denying that in recent years, energy prices have been rising in many countries. According to a recent factsheet ‘Why Are Energy Prices Rising?’, from the energy regulator Ofgem, the main reason for increasing energy bills in Britain in the last eight years has been rising gas prices. Britain enjoyed a period of falling gas prices until 2004/5, which was the first year we imported more gas than we produced from the North Sea. Becoming more reliant on imports made prices here more at the mercy of global events, such as political instability in oil-producing countries, since the price of gas is often linked to the oil price.
As well as declining North Sea supplies, there are a number of challenges ahead. Ageing coal and oil-fired power stations have to be replaced because they no longer meet EU air quality requirements, and most of our nuclear power plants are reaching the end of their working lives. And this comes as Britain faces legally-binding targets to reduce carbon emissions. By 2020, 30 per cent of our electricity supplies must be from renewable sources. To meet the challenge, it’s been estimated that £200 billion will have to be invested in the next decade. And this has to come from private investors at a time when money is hard to come by, and when those who have it are understandably cautious about where they put it.
But the challenge is also an opportunity. We commissioned a report from consultants Ernst & Young to examine the role of the sector across the country – as investor, employer, and as a creator of wider economic value for the UK. The report, ‘Powering the UK’, found the sector has the potential to be a major driver of innovation, with patterns of investment shifting away from traditional technologies to greener and smarter ones.
The sector already makes a significant contribution to the economy. Its direct Gross Value Added – the key measure of its contribution – was around £28 billion in 2010. But it also has a significant impact on other industries through increased consumption along the supply chain – Ernst & Young found that a pound spent in investment in this sector has a larger indirect effect on the rest of the economy than most other sectors. Including indirect effects, the sector’s GVA rose to £92 billion.
When it comes to jobs, one important characteristic of the sector is that much of its activity– power generation, distribution, and services connected to the home – necessarily has to take place in this country, and cannot be moved abroad. And each new direct job in the power and gas sector supports around three jobs elsewhere in the economy. Between 2008 and 2010, when the total UK workforce fell, the power and gas sector showed remarkable resilience, with the numbers in full and part-time jobs rising to 128,000.
The sector also shares the wealth around the UK, contributing more, relatively, to the various regions of the UK than almost any other sector, and acting as a counterbalance to the concentration of other sectors, such as finance, in the South-East. In all, excluding upstream oil and gas, the sector invested £8.5 billion in 2010 and was expected to invest around £11 billion in 2011. The shift to the Green Economy – and the need to upgrade ageing infrastructure – will require an even higher level of investment in the future. Investors in low-carbon technologies – such as nuclear, renewable, carbon capture and storage – and smart grid and smart metering developers will form part of a new expanded sector focussing on ’clean energy’.
It’s precisely to create the right framework to attract this investment that the Government is now undertaking its Electricity Market Reform programme - an ambitious agenda for reform, comprising of 4 key measures: new long-term contracts for electricity generation; a Carbon Price Floor, below which the price of carbon will not be allowed to fall; an Emissions Performance Standard, which sets limits to the amount of carbon dioxide that a fossil-fuel power station can emit; and a Capacity Mechanism, designed to ensure that our supplies are secure. Clarity is needed on some important details of the programme, and it will be important that the reform package is credible, without being overly complex, for the required investment to flow. The outcome could shape the future of our energy supplies – and the costs – for decades to come.
In the short-term, there is a challenge to us all to take control of the energy we use – it powers our homes, our hobbies, our economy – and it’s all too easy to take for granted. The new generation of ‘smart’ gas and electricity meters will help make that possible. The national programme to install these hi-tech meters in all our homes will get formally underway in 2014, though large numbers are being installed already.
Everyone will get a small display unit with their meter to put somewhere handy – perhaps on the wall, or the kitchen counter – that tells you how much energy you’re using throughout the day. My own has a traffic-light system that flashes red when usage is high - a handy warning that allows you to check, as you leave the house each day, if a power-hungry appliance has been left on. The same data could even be displayed on your TV or sent to your mobile.
The potential for innovation will be enormous in every area. No more waiting in for the meter reader to call. The reading will be taken remotely via regular data communications between the meter and your energy supplier. Bills will be accurate, based on your actual usage instead of an estimate. And you might choose a display that tells you hour by hour, day by day what your energy is costing you, and the carbon emissions.
Just as important as changes in the home will be the innovation behind the scenes in the energy supply industry. With more data on household energy use available, energy companies could offer targeted energy-efficiency advice and a new array of energy deals and services, which could be tailored to customers' changing energy usage through the day. It represents the start of a revolution in our energy world that will help speed the transition to the new Green Economy.