Energy policy will be about cutting costs, not emissions, says Government chief

The Government’s energy policy will focus on cutting costs to business as a Whitehall official admits it has ‘neglected industry for too long’. Peter McCusker reports.

UK energy policy has been view through the prism of the ‘trilemma’ since Ed Miliband’s 2008 Climate Change Act, but that is changing under Theresa May’s Government.

Nigel Pargiter, acting head of energy supply chains at BEIS (Department of Business, Energy and Industrial Strategy), told a North East audience that the emphasis is now on cutting energy costs to homes and businesses.

In a question and answer session at the annual NOF Energy Conference at the Sage Gateshead, he conceded the Government had ‘neglected industry for a few decades’.

Responding to a question from John Bruijnooge, site director at Teesside industrial giant Sabic, he said Whitehall ‘has had to take a long hard look in the mirror’.

“We have neglected industry for too long and we now have to have a keen focus on costs.”

He went to say the previous energy policies, which focused on balancing a trilemma of reducing energy emissions, cutting costs and delivering energy security, ‘had been the result of tensions’ between two Government departments.

He said: “Under the Coalition, energy policy was split between two different departments, the Department for Business and DECC (Department of Energy and Climate Change), and there were tensions.

SABIC's Teesside site director John Bruijnooge
SABIC’s Teesside site director John Bruijnooge

“We got stuck on the trilemma. This became a sticking point, there was not one department to think holistically and this resulted in tension.

“Our view now is that decarbonisation has a cost to domestic users and businesses and our focus now is on ‘how much can industry bear before it is too much, and decides to go elsewhere?’”

In his earlier address to the conference he said: “The key challenge for us all is how do we get costs down and away from the subsidy regime. This is the biggest challenge we face and one that can be tackled by Government and industry working together.”

The North East has experienced the pain caused by measures to cut emissions with the introduction of the Carbon Price Floor in 2012 increasing costs at the Alcan aluminium plant by £30m, leading to its subsequent closure with the loss of over 500 jobs.

Mr Pargiter’s address echoed the Government’s Industrial Strategy Green Paper which talks about 10 key pillars for the UK economy; one of which is affordable energy and clean growth.

In this document the Government says it will continue to pursue a clean energy vision and is expected to confirm its latest Emissions Reductions Plan within the next few months.

Mr Pargiter said the Industrial Strategy will see Government ‘working with the devolved administrations and across all departments of Government’.

“The Industrial strategy is for the whole of the UK not just for London or specific sectors.

“We are trying to create networks and the right framework for business to grow and thrive, to deliver an economy that works for everyone, whilst also increasing productivity.”

He said the UK is good at research and development but often not so good at commercialisation of this knowledge. He said there will be an emphasis on deregulation and supporting exporters.

He went on to say there will be money available in a sector deal for energy and this will be focused on three things; energy costs, secondly to cut subsidies to zero and the third focus will be on innovation.

In working with business he said the Government ‘will favour an open door approach’ and businesses should ‘come forward and tell us what are the issues they face, that are hampering growth’.

Electricity pylons
Electricity pylons (Photo: David Cheskin/PA Wire)

“We want them to demonstrate a compelling case as to why they should benefit, one where it would be stupid for the Government not to get involved.”

Under the Coalition the industrial strategy for offshore wind said the Government would aim for a UK capital expenditure of 70%.

The average has been less than 30% and Mr Pargiter would not be drawn on the Government’s ambitions, although BEIS has previously told Journal Energy it is aiming for 50% lifetime UK content.

This a thorny issue for many who work in the sector, and has been cited as one of the reasons Newcastle offshore fabricators OGN went out of business, cancelling a £50m North East investment after losing out to Spanish-Government backed competitors for UK bill-payer subsidised contracts.

Mr Pargiter said: “We want to make sure UK companies are best placed and can operate on a level playing field.

“We are aiming up to open up the supply chain and more work needs to be done, there will be no percentage, but we are aiming to secure higher value contracts, not just ones for sandwiches and buses.”

This emphasis on cutting energy costs comes as further evidence of the UK direction of travel on energy has emerged in the last few weeks.

British Chancellor of the Exchequer Philip Hammond holds the Budget Box outside 11 Downing Street
British Chancellor of the Exchequer Philip Hammond holds the Budget Box outside 11 Downing Street(Photo: Getty Images Europe)

In the Budget Chancellor Philip Hammond said he will do all he can to prolong the life of the North Sea oil and gas industry.

Mr Hammond said he would look to resolve the tax issues slowing down asset transfers, with the current tax treatment of decommissioning making it harder for existing owners to sell mature assets.

False claims on low-carbon energy are damaging UK

The Committee on Climate Change was established by the 2008 Climate Change Act to act as the climate policy equivalent of the Bank of England’s monetary policy committee. Ministers and Parliament are required by law to rely on its advice. Arguably this role gives the committee more influence over Britain’s long-term prosperity than anyone else. A public body, funded by the taxpayer to the tune of £3.8m a year, discharging such a crucial role requires competence, honesty and objectivity.

The committee’s recent report on energy prices is deficient in all three, instead displaying similar ethical standards to Greenpeace or Friends of the Earth. Yes, low carbon electricity is more expensive than burning fossil fuels, the report conceded, but overall, low carbon policies were making people better off because energy efficiency policies meant that people were consuming less electricity.

Low carbon policies are making people better off because energy efficiency policies mean they consume less electricity

UK nuclear decommissioning debacle costs government nearly £100m

Business secretary orders inquiry into flawed tendering process for dismantling old reactors at 12 sites as US firms get paid for out of court settlement


The government has been forced to pay nearly £100m in a settlement with two US companies for mishandling the way it awarded a £6.1bn nuclear decommissioning contract.

Ministers have ordered an inquiry headed by the former boss of National Grid to find out why the procurement process was so flawed. Labour said the payout showed “dramatic levels of incompetence”.

The government body tasked with decommissioning old reactors will also terminate the contract it awarded for cleaning up a dozen of the UK’s old nuclear sites nine years early.

In a written statement, Greg Clark, business secretary, said: “This was a defective procurement, with significant financial consequences, and I am determined that the reasons for it should be exposed and understood; that those responsible should properly be held to account; and that it should never happen again.”

The debacle dates back to a 2012-2014 tender process by the Nuclear Decommissioning Authority (NDA) for dismantling 12 sites. They include old reactors at Sizewell in Suffolk, Dungeness in Kent and Hinkley Point in Somerset, where the UK is building the first new nuclear power station in two decades.

A 14-year deal was awarded to international consortium Cavendish Fluor Partnership in 2014, but the bidders who lost out immediately launched a legal challenge.

On Monday, the Department for Business, Energy and Industrial Strategy said it had settled with US-headquartered engineering companies Energy Solutions and Bechtel, for £85m and £12.5m respectively. Had their litigation cases gone to trial, Clark said the “very substantial costs” had the potential to rise much further.

Energy Solutions had claimed a scoring mechanism had changed at a late stage in the tender process and that there was inconsistency in the way bids were evaluated, among other failings.

Former National Grid chief executive Steve Holliday has been appointed to lead an independent inquiry into what went wrong. The inquiry will look at how the mistakes were made and by who, how the litigation was handled, and the relationship between the NDA and the government departments.

Holliday will report to Clark, with an interim report due to published in October.

The government now has the daunting task of starting a new tendering process for the 12 sites, as the deal with Cavendish Fluor Partnership will end early, in September 2019 instead of 2028. Clark said he wanted to stress the deal was “no reflection” on the performance of the consortium, which will continue clean-up work over the next two years.

The contract is being terminated early because the NDA underestimated the scale of the decommissioning required to clean up the Magnox sites, which form part of the UK’s first generation of nuclear power stations.

The share price of Babcock International Group, which has a stake in the Cavendish Fluor Partnership, has fallen by more than 3% since the government announcement.

Rebecca Long-Bailey, shadow energy secretary, said: “By cancelling just two years into a 14-year contact the government has shown dramatic levels of incompetence in the procurement process of this deal.

“British tax payers who stand to lose nearly £100m should be asking themselves not just whether they are willing to put up such ineptitude but also whether the government actually has a well thought out and long term nuclear decommissioning strategy.”

Unions said they were concerned at any potential job losses as a result of the contract ending early.

Mike Clancy, general secretary of Prospect, said: “This is an extraordinary situation given the scale and importance of the Magnox contract to the UK nuclear industry.

“The public, and our members, will want reassurance that the termination process and uncertainty over the future of decommissioning will not lead to standards deteriorating or the loss of UK expertise.”

The Unite union said the financial mess involved in awarding the contract showed the clean-up project should be taken into public ownership.

Stephen Thomas, emeritus professor of energy policy at the University of Greenwich, branded the NDA’s handling of the contract “an immense screw-up.” He added that there would be a further hit to the taxpayer because of the cost of a new tender.

The NDA has an annual budget of £3.1bn, two thirds of which is spent on Sellafield in Cumbria, which stores most of Britain’s nuclear waste.


SSE the latest ‘big six’ firm to put its prices up

Customers of SSE are set to see their electricity bills rise by 14.9% from 28 April, as the company became the latest of the “big six” energy suppliers to increase prices.

The firm, formerly known as Scottish & Southern Energy, said its typical dual fuel (gas and electricity) customer will see their annual bill rise by 6.9%, or £73 a year. It blamed its first electricity price rise in three-and-a-half years on government policies that require all energy customers to subsidise renewable energy, and the cost of a smart meter installation programme. Gas prices for the company’s 2.8 million customers remain unchanged.


Will Morris, SSE’s managing director for retail, said he “deeply regretted” having to put prices up. “We have seen significant increases in electricity costs, which are outside our control,” he said. “Without an increase we would have been supplying electricity to domestic customers at a loss.”

Four of the other big six suppliers have already announced price rises this year, while British Gas has held its prices until August. Scottish Power’s standard electricity prices will increase by an average of 10.8% and gas by 4.7% on 31 March. Npower is raising its standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%. EDF Energy cut its gas prices by 5.2% in January, but its electricity prices rose by 8.4% on 1 March. E.ON is increasing electricity prices by an average of 13.8% and gas prices by 3.8% on 26 April.

Mark Todd of switching service energyhelpline described the SSE increase as a hammer blow to households. “SSE lost 130,000 customers last year, and are likely to lose even more as customers switch to beat the hikes. The company announced in February that gas usage was up by 10% and electricity usage was up by 2% in 2016, meaning they benefited from higher usage last year and will now benefit from higher prices in 2017. Customers must not continue to stay loyal to the energy giants. Move to a low-cost fixed-rate tariff and you can beat these price rises.”


Todd says a typical SSE standard tariff customer will pay £1,141 a year after this price rise, yet could get a deal as cheap as £834 a year by switching.

A two-year investigation by the Competition and Markets Authority concluded last June that 70% of domestic customers of the big six were on expensive standard variable tariffs and could save more than £300 by switching. As a result, customers have been paying £1.4bn a year more than they would in a fully competitive market, the CMA found.

The government is expected to address concerns about the energy market when it publishes a consumer green paper in the spring. John Penrose, a former minister at the Cabinet Office and a Conservative MP, has called on the government to introduce a relative price cap, where the worst-value standard variable tariffs are no more than a certain percentage more expensive than the best-value fixed deals. He said: “We still get lots of competition, lots of choice, but it does mean the most vulnerable of us or those of us with least time to switch suppliers don’t get ripped off.”

Penrose secured a House of Commons debate this week on energy bills. “In most things in life, if you are a loyal customer you are valued and rewarded. But apparently for your energy bill, loyal customers in the view of big energy firms are there to be exploited and not rewarded – and that doesn’t seem fair,” he said.


Gas switch-on masks empty pipeline of new UK plants

A new £710m gas-fired power station opens on Monday, the first large-scale gas plant of its kind to come online in Britain for four years.
But a stone’s throw away, on the same spot in Carrington, near Manchester, there is a patch of weed-strewn concrete where a second gas station was meant to be. It is the latter wasteland, say critics of the UK energy market, that is the real monument to Britain’s ambitions of revitalising gas-powered energy generation. A combination of poor returns and the success of renewable energy has made investors turn their backs on gas, even though it is seen as vital to ensuring Britain has enough electricity capacity.

The new gas plant is an 884-megawatt power station owned by ESB, the Irish state-owned company. It will generate four times as much electricity as the disused coal plant, closed in 1991, that used to stand on the same sprawling site. But plans for an adjacent 1.9-gigawatt gas station, to be built by Carlton Power, stalled last year as the company struggled to raise investment. It ultimately had to give up a £450m government contract that required it to start producing electricity in late 2019.

A succession of energy ministers have been trying to encourage more gas-powered generation to keep the UK’s lights on, particularly during periods when renewables are not generating electricity as there is little wind or sun. But investors and utility companies have been reluctant: in recent years the margins between buying gas and selling the electricity produced to the market have been wafer thin
The reasons are linked to big changes in the UK’s energy market. Coal-fired power stations, which used to be relatively economic to run, have been closing at a rapid rate since the carbon price floor — a tax on emissions — was doubled in April 2015. As the government tried to meet carbon emission goals (it wants all coal plants closed by 2025) there was a surge in renewable energy generation, powered by subsidies.

This in turn led to calls for more large gas and nuclear plants to be constructed to ensure sufficient capacity for those times when intermittent wind and solar power is not available. But investors say there is no incentive to back a new combined cycle gas turbine (CCGT) plant without subsidy when they could plough their funds into a wind farm, which does receive government support. They also fear that rising renewables capacity will further undermine returns on capital from gas plants, which risk being left idle at times when there is plenty of electricity coming from wind turbines and solar panels.
“As you look forward, all [investors] can see is a power market that is hugely distorted by a whole series of government interventions,” says Peter Atherton, of Cornwall Energy, a consultancy.

For Carrington, ESB received finance from a banking consortium including HSBC, Royal Bank of Scotland, Lloyds, Santander, and BBVA. It obtained planning permission in 2008 but only went ahead in 2012.

Other companies, including ScottishPower, are keen to build new gas plants but will not do so without state support. A system of subsidy auctions was created in 2014 to try to incentivise large new gas plants but so far the price at which contracts have been awarded has been too low to encourage the likes of ScottishPower to press ahead.

Indeed, the auctions have had unintended consequences. Diesel generators and other small schemes have been able to bid at low prices, helped by extra subsidies known as “embedded benefits” that are available only to modest projects that connect directly to local distribution networks and bypass the national transmission system.

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Ofgem, Britain’s energy regulator, has proposed hefty cuts to such benefits. Without those distortions, it is hoped that future auctions could clear at a price that would encourage new large-scale CCGTs. Carrington Power has won two smallish awards, £6m for the winter of 2017-18 and £19m for 2020-21.

But critics of the system say it is broken, and that the lack of new gas-fired plants proves it.

The Institute for Energy Economics and Financial Analysis says that £3.4bn has been awarded through capacity market auctions but the scheme has yet to incentivise a single large new power plant.

Even ESB has shelved plans for new gas plants. Pat O’Doherty, chief executive, said he was confident Carrington would be profitable but it would be harder to justify building it today.

ESB wants to develop a 1.65-gigawatt CCGT at Knottingley, in West Yorkshire, but the project is on hold until prices rise. “There is a need for new plant but the annual capacity auction is now the material issue. We didn’t bid last time because the price was not good enough,” Mr O’Doherty said.

E.On to raise gas and electricity prices in April

Big six energy provider E.On has said it will increase its dual fuel standard variable tariffs by 8.8% from next month.

Electricity prices will rise by an average of 13.8%, and gas prices by 3.8%.

E.On said that 2.5 million customers would be affected by the increases, which come into effect on 26 April.

The average bill will rise by £97 a year. However it is the first such increase in three years.

E.On blamed the social and environmental schemes which support renewable energy, but which customers have to pay for through their bills.

Wholesale energy costs had actually come down, it said, thanks to its hedging policy.

But the announcement was criticised by some energy bill experts.

“E.On delivered yet another bitter blow to households this morning as it announced a monstrous price rise,” said Mark Todd the founder of Energyhelpline.

“This massive increase will be very tough for customers to swallow and once again it’s loyal standard rate customers who are hit the hardest.”

Three million letters

Three other big power companies have announced price rises this year, while British Gas has announced a freeze until August.

  • Scottish Power’s standard electricity prices will increase by an average of 10.8% and gas prices by 4.7% on 31 March.
  • Npower is raising its standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%
  • EDF Energy cut its gas prices by 5.2% in January, but its electricity prices rose by 8.4% on 1 March
  • British Gas is freezing its gas and electricity prices until August
boiler controlsImage copyright GETTY IMAGES

E.On said it would send more than three million letters this month to its customers, making it clear that cheaper tariffs are available.

In addition, some vulnerable customers – including those over 65 – will be offered special deals.

They will receive letters with a tear-off permission slip, which will enable them to switch to E.On’s cheapest tariff before the price rises come into effect.

Standard tariffs have come under criticism from MPs and the government, as they are more expensive than fixed-term deals.

The regulator has also put pressure on energy suppliers to get more of their customers to switch to cheaper deals.

At the moment about two-thirds of customers are on standard tariffs.

The Big Six and their 2017 price rises
Supplier Electricity Gas
Npower + 15% from 16 March + 4.8% from 16 March
Scottish Power + 10.8% from 31 March + 4.7% from 31 March
EDF + 8.4% from 1 March – 5.2% from January
E.On + 13.8% from 26 April + 3.8% from 26 April
SSE price freeze until 1 April price freeze until 1 April
British Gas price freeze until August price freeze until August
Base: standard tariffs