Investing in the UK s energy future Sam Laidlaw, CEO Centrica - Thank you Andrew and congratulations on the timing of this Spectator Energy Conference. Whether by accident or design you have assembled us in the midst of the most heated political debate about energy since privatisation more than twenty years ago. Yet despite the heat, the debate is not a new one. At its heart lie the core issues we have wrestled with many times before and which continue to define the energy challenge faced by this country. Three forces are coming together our growing dependence on an increasingly volatile world market; our commitment to make serious cuts in carbon emissions; and our obligation as a society to ensure that energy remains affordable at a time of huge pressure on household and business incomes. Those are my words. But I spoke them two and a half years ago at an energy conference very similar to this one (though sponsored by a rival publication which shall remain nameless). They are as true today as they were then. The trilemma how to balance the affordability, security and sustainability of future energy supplies - is something of which energy companies and commentators have been acutely aware for a number of years. Over the last half-decade and more, this conundrum has shaped the energy policy of successive Governments. In fact, until recently the energy debate in the UK was characterised by a broad consensus between the three largest political parties. Their 2010 election manifestos were all remarkably similar on energy policy. So, whether we realised it or not at the time, most of us voted for decarbonisation paid for by levies on household energy bills when we put our X on the ballot paper at the last election. Today, there is much more obvious political tension over energy policy. Domestic Prices may be amongst the lowest in Europe but with household incomes remaining stagnant, affordability has understandably become the major immediate concern. But I would argue that the recent political and public focus on the energy debate is still, at its heart, about resolving the trilemma. Indeed, the Government s announcement this morning, which Michael Fallon referred to, is an important step in refining the balance. Although the new measures may take a few months to come into full effect, we have confirmed that British Gas will pass on the full benefit of lower costs to our customers on 1 st of January. Together with the warm home discount rebate these changes will reduce the average annual household bill by 53. We welcome these measures, because they will both reduce the cost of energy efficiency measures and enable more households to benefit from the programs, while maintaining a commitment to decarbonisation and continuing to help those in fuel poverty. 1
The recent debate has centred on the interaction of two elements of the trilemma affordability and decarbonisation. However, as the theme of this conference reminds us, we cannot ignore the third element security of supply if we are to solve our long-term energy problems. As we have heard, investing for long-term security in UK energy is often couched in terms of what we can do to make sure that we keep the lights on. That s clearly vital. But my message today is slightly different. If I could sum it up in a few words it would be this: with all the debate about electricity, don t forget about gas. Nearly 70 years ago the leading Labour politician Nye Bevan described Great Britain as an island made mainly of coal. The energy landscape has changed a great deal since then. But if there is one energy source which dominates our current and future energy mix it is gas. Gas provides around one third of our primary energy. 8 out of 10 homes use it for heat. At a rough estimate, that is some 20 million households. It accounts for over a quarter of all power generated in the UK and it sets the marginal price for power. Gas is important for our future too. It plays a central role in every scenario that I have seen for the cost-effective transition to a low carbon electricity supply. Because of its flexibility, gas-fired power generation can be adapted to the needs of the system and is therefore a useful no-regrets option in meeting our carbon reduction targets. Gas is different from electricity. It is global, not local. Ten years ago the UK was selfsufficient in gas. Today we import over 50 per cent of our gas needs and that proportion will rise to over 70 per cent by 2020. As we source an increasing proportion of gas from abroad we will have to come to terms with the reality that its price and availability is something controlled beyond our own borders. This is not to downplay the significance of our remaining UK gas resources. In fact, quite the opposite. As we become more exposed to volatile global markets it makes sense to extract all the value we can from our own backyard whether offshore or onshore. Liberalised competitive markets have enabled us to build up a complex infrastructure to import gas by pipeline and ship to supplement our domestic production. The pipelines and terminals are in place, but in a global marketplace that is not enough to ensure that the gas comes to the UK. We will need a diverse range of contracts and supply sources to make sure that we keep our homes and businesses heated and our power stations fuelled. So, how do we ensure the investments are made to achieve that? I believe that there are three essential requirements. First, we need strong companies acting in the national interest who can make multi-year commitments. Secondly, we need a coherent and stable energy policy that has cross-party agreement. 2
And finally, related to this, we need to bring customers with us in terms of understanding the reality of achieving long-term, sustainable energy supplies. As the Chief Executive of one of Britain s major energy companies, the first of these essential requirements is clearly very close to my heart. But this is much more than self-interest, without strong companies with healthy balance sheets - and a drive to act in the national interest we simply will not be able to secure the long term supplies and investment that Britain needs. These are very substantial commitments and it is vital that they are made. We supply half the households in the UK. That is a tremendous responsibility. It would not be practical or wise for us to buy all our gas on the spot market, as some smaller competitors are able to do. That would reduce security and increase volatility - and our customers would not thank us for it. Let me give you some recent examples of how Centrica has made long term commitments to secure future supplies for the UK. We are continuing to develop our own gas production by spending over 1 billion a year to develop new reserves in the North Sea for our UK customers. Onshore, we have taken a stake in the Bowland Shale licence in Lancashire. Although the potential of shale gas in the UK is yet to be proven, this gives us and our customers an option on what could be a valuable addition to the UK s future supply mix. We have strengthened our traditional sources of supply, signing a 13 billion deal which extends our gas import agreement with Norway by ten years to 2025, and also extending our contract with Qatar for shipments of Liquefied Natural Gas until 2018. We are innovating to secure new sources of supply. Earlier this year we became the first UK energy supplier to sign an agreement to export LNG from the US. This is a 20-year deal, a 10 billion commitment, with first shipments expected in the autumn of 2018. If you add up these new international commitments, made over the last two years alone, they are capable of providing enough gas to meet the needs of around one third of Britain s households. I believe it is vital that the UK s energy companies are able to act like this to secure supplies and ultimately deliver the most sustainable and affordable long-term future for our customers. The impact of recent political events on investor confidence has been disturbing. The consensus on how to solve the trilemma has broken down. The immediate result can be seen in the share price reaction of those companies, like our own, which are listed in the UK. But the long-term damage to our nation s investment climate and economic growth prospects is far greater. Talk of breaking up energy companies threatens to impede their ability to attract capital for investment and enter into the long term contracts the country needs. The second essential requirement therefore to secure investment in our energy future is that we must work together industry and policy makers alike across the 3
political divide - to reach a clear agreement on how to solve the trilemma with a view both to short term needs and long term sustainability. So, in UK gas production this means that the Government needs to incorporate the recommendations of Sir Ian Wood s report on maximising the recovery of our indigenous offshore reserves. At the same time, we in the industry must continue to innovate and to control costs in the supply chain. If we are to test the potential of onshore shale we also need to make sure that the right planning and regulating environment is in place one that addresses the legitimate concerns of local communities whilst enabling progress to be made. But working together also means understanding the global nature of the gas market. The old world where we could control gas prices disappeared a decade ago when the UK became a net importer of gas. Today, whether we like it or not, in order to bring gas to the UK we have to pay the going market rate. Talk of capping prices domestically, when these are set by global forces, raises false hopes for customers and discourages investment leading ultimately to higher prices. In power generation, we need a strong and stable policy framework. There is broad agreement, for example, that new gas-fired generation is needed. But the capacity market to enable that to happen must be put in place as soon as possible. And the heightened political risk has increased the clearing price. For the power market to work properly, and for Electricity Market Reform to succeed, there must be creditworthy energy supply companies in order to underwrite long term pricing, whether through capacity payments or contracts for difference. Perhaps most importantly, there should be an honest acceptance of the realities of the debate. Recent claims that power generation is a highly profitable activity, when in fact gas-fired power stations are losing money, confuses the consumer and does little to restore trust. That brings me to my third essential requirement for ensuring investment in long term energy supplies; the need to bring customers along with us. The political events of the last two months have shown that there is still no widespread understanding or acceptance of the factors which are driving up energy bills. The cost of decarbonisation is estimated at some 150 billion over the next 15 years. That is equivalent to more than three High Speed Rail 2 projects over the same period. I wonder how many customers fully understand that. There is a big responsibility on us as an industry to be clearer in our explanations of why costs are rising. We re already making progress. At British Gas, for example, we now set out a breakdown of costs on customers bills. But there is always more we can do to explain what we do and how we do it and, above all, what customers can do to mitigate the impact. We need to pursue energy efficiency with missionary zeal, the changes announced today to the Green Deal and the ECO program will help. It is often said - but couldn t 4
be truer that the cheapest unit of energy is the one that is not used. Only a fraction of the saving available to the nation through greater energy efficiency has yet been realised. These are stories that need to be told. And those in the media, like the Spectator, have a role to play too in making sure that all aspects of the energy debate are properly aired. Every household and business in this country expects, quite rightly, that the lights will come on at the flick of a switch and that the boiler will fire up on a winter s day. This is our responsibility and we take it very seriously. Making sure that promise can be sustained well into the future is a complex task requiring long term solutions. That future will be achieved by concerted action - not by undermining the market structure that can deliver it - and by informed discussion that goes far beyond the convenient sound bite. It is a difficult task. But I am sure that, with rational debate and decision making on the major challenges which I have outlined, we can secure the future energy supplies which our country needs. Thank you for listening and I look forward to your questions. 5