A pivotal moment for UK energy

We are at a pivotal moment for UK energy.

Understandably, the Government wants to take action to help alleviate the cost-of-living crisis and it expects industry to play its part.

That is fair. And it’s why we supported capping bills for customers this winter and proposed voluntary fixed price contracts for renewables far lower than current wholesale prices.

But Government’s decision to intervene so strong-handedly in the market to cap revenues of renewable energy companies, whilst well-intended, carries significant risks – not just for Britain’s energy security but for growth and jobs in communities across the UK.

Let’s start with the most pressing short-term issue.

If not carefully constructed, this policy could exacerbate energy security concerns this winter.

Take hydro for example. It is vital to keeping the lights on because it is flexible.

Unlike renewables and nuclear, flexible technologies don’t run all the time. They are designed to be deployed when demand is highest, stepping in when demand would outstrip supply – like when the wind isn’t blowing.

For these technologies, it is important that prices are able to go up and down. This provides the right incentives to switch on, when they are most needed.

A blanket price cap could encourage flexible technologies to be exhausted in normal conditions, rather than held back for critical supply in times of need.

And that’s not something you want to happen this winter, especially on a cold and still January evening.

The Government should explicitly rule out revenue caps for these vital flexible technologies. This winter we will need all the resources we can to be there “just in time” should they be?needed.

But the biggest concern over the government’s proposal is the message it sends to investors.

Currently, the UK is a global leader in attracting renewable energy investment; to be clear that is a result of more than a decade of clear and consistent government policy.

We have built the world’s leading offshore wind market and are pioneering innovations like carbon capture and hydrogen storage. As a result, we’ve created thousands of good jobs in communities across the country – not just the usual urban centres - whilst insulating us from the worst effects of Putin’s weaponisation of energy.

For example, one of the reasons wholesale prices have fallen recently is the abundance of wind energy coming online. If we avoid supply shortages this winter, we will likely have wind power to thank for it.

This progress was underpinned by robust policy frameworks that gave investors’ confidence the goalposts wouldn’t be moved, in turn making investments less risky and therefore cheaper to finance.

But now the world is looking to catch up. In the US, the recent $1Trillion Infrastructure Act has a strong focus on electricity infrastructure and the Biden administration has set out ambitious targets to build 120,000 turbines and install 950m solar panels.

In the EU, the Ukraine War and its impact has accelerated demand for more sustainable homegrown energy. And while the bloc has introduced a revenue cap on renewable technology revenues it has been set at a level – €180 per megawatt hour – that will strike a balance between preventing excessive profits and continuing to incentivise investment in renewable technologies needed to wean the continent off Russian gas.

Maintaining UK leadership in renewable energy is therefore not a given. Others are snapping at our heels.

The UK revenue cap needs to be closely aligned to the EU or we risk throwing away our global leadership, with renewables fuelling development on the continent rather than supporting UK communities and consumers.

The UK’s commitment to building a future energy system anchored in renewables must remain unquestionable, providing long-term energy security for this country for generations to come.

A country that can better power itself can better protect itself. The key lesson of the last few months is that energy security means national security, and this means building up our long-term energy defences.

That is why it would be perverse if any Government reforms made it easier to invest in declining oil and gas fields than sustainable energy.

And so, a lot is at stake.

That’s why I think we may look back at this as a pivotal moment.

A time when we chose to seize the massive opportunities presented by the enormous resources of clean energy we have in these islands – leading the world in the process.

Or a time when we squandered an opportunity for long-term energy independence, preferring instead to remain reliant on declining fossil fuels and the regimes that control them.

It is a stark choice: will we be a leader or a laggard?

Despite the risks – which are significant – I remain an optimist.

There is broad political support in the country for energy independence. And we have a history of getting the detail right.

We will work with Government to ensure whatever policy emerges helps make Britain stronger, not weaker.