Michael Fallon is filling in a pink form as I shuffle into a meeting room at the Palace of Westminster. His greeting, when he looks up from his papers, would serve equally well for a lobbyist: “What can I do for you?”
One of the hardest-working men in government, Fallon continues to act as business minister alongside his substantial energy brief, awarded on John Hayes’ departure from the Department of Energy and Climate Change in March. A question on how he unwinds draws a blank. “I have two full-time jobs… there isn’t time for normal life,” he says.
There will be plenty of industry figures making further claims on his time over the coming months as he hammers out the details of Electricity Market Reform (EMR). Those details will determine the viability, or otherwise, of power generation projects – and shape the energy mix for years to come.
Fallon is clear where his priorities lie: attracting investment to build the energy capacity he says “should have been provided years ago”. Climate change does not interest him. It is not that he is against the green agenda, it is simply not in his portfolio. Energy is an economic issue.
A veteran of the Thatcher era, Fallon cut his teeth in government on designing electricity privatisation, as parliamentary private secretary to Cecil Parkinson. Quarter of a century later, he is reforming the electricity market once more, but for very different reasons.
Back then, the Central Electricity Generating Board was split up and power put in the hands of private companies, but policy now necessitates state interventions to promote low-carbon forms of generation. Fallon does not accept that this is a move away from free market principles. “We need to reinvent the market,” he says. “We’re trying to encourage more home grown generation of all kinds – different technologies, different types of renewable – and more investment from all sides.”
He returns to the breach at a critical stage. Old power stations are shutting down over the coming decade faster than the next generation can replace them. The electricity capacity margin could fall as low as 2 per cent mid-decade, according to an Ofgem assessment released last month. It came amid a flood of announcements from Decc on “Super Thursday” choreographed to show the government’s commitment to infrastructure investment.
Meanwhile, debate is raging over the potential environmental and economic impact of shale gas. Fallon toes a cautious line over how much is recoverable of the 40 trillion cubic metres the British Geological Survey estimates lies beneath northwest England. “The potential is enormous but we simply don’t know yet whether it is recoverable as cheaply as in the US, or indeed whether it is recoverable technically,” he says. It would be “extremely irresponsible” not to find out, he adds.
The full draft delivery plan for EMR is due before the House of Commons rises on 18 July. ” sets out a framework in which generators can compete to provide the new capacity we need,” he says. “It gives them certainty and the clarity they need to make these investment decisions so that we can rapidly catch up with new capacity that should have been provided years ago. We are starting to do that, as you saw yesterday,” says Fallon, alluding to the official launch of the London Array, at 630MW the world’s largest offshore windfarm. He is silent on RWE’s decision, which emerged at the same time, to axe its 750MW biomass project at Tilbury power station.
In sync with Ofgem’s latest capacity warning, Decc confirmed it would be introducing a capacity market, where for a long time ministers had been only “minded to”. That will pay generators, principally gas plant, to be available to back up intermittent renewables – a proposition that might not otherwise be economic. It is intended to bring on plant in 2018 and complement regulatory measures to plug the short-term gap.
It is not yet clear what level of risk to the electricity supply government will accept, and therefore how much capacity will be called for. “Experts differ on the percentage of margin you need to have in reserve. I’m not sure I can give you a definitive answer on that,” says Fallon. “What you have to do is make sure that new generation is coming online, as it is. Clearly, it would not be acceptable to unnecessarily increase costs on customers by commissioning plant that is not needed.”
For now, he says: “The really important point is that people now know there will be an auction in the second half of next year and they can start planning ahead accordingly. We had plans to encourage new capacity and we have accelerated those plans.”
In tandem with the capacity market, contracts for difference (CfDs) will ensure stable returns for low-carbon generation. The government has published draft strike prices (the mechanism that guarantees revenues) for various different renewable technologies, but conspicuously absent from the list were nuclear and carbon capture and storage.
Fallon admits negotiations with EDF over the contract for its proposed Hinkley Point C nuclear plant have been “frustratingly slow”. He says: “In the old days, a minister simply ticked the proposal for new nuclear and that was it, it all came out of public money. This is a commercial negotiation, an incredibly complex commercial negotiation that involves proper commercial evaluation.”
However, he rejects the suggestion that the government should admit defeat and fund nuclear publicly. “I think we can get other people to pay for it and we don’t have to spend the taxpayers’ money,” he says.
The industry is “catching up” after 13 lost years under Labour’s “very destructive moratorium” on nuclear. “There would have been far more opportunity for British technology and British supply chains if the government hadn’t imposed this unnecessary moratorium,” he states.
He also insists that a deal with EDF is edging closer. “What happened on ‘Super Thursday’ is we confirmed the access eligibility for the UK infrastructure guarantee, which EDF will pay for. That will make it easier for them to finance the deal in international credit markets and build the consortium they need. However, we still have to negotiate on a number of issues, and critically, to confirm the right strike price.”
The cost of nuclear may not fall on taxpayers directly, but the strike price for all forms of low-carbon generation be paid for by households through their bills. Offshore wind is set to get £140/MWh, almost triple the wholesale power price.
The “home grown energy” line crops up again, as Fallon defends the framework. “We need a bit more of everything,” he says. “None of them come free, or indeed cheap.”
One of the cheapest forms of renewable energy, onshore wind, is not welcome too close to home, however. Fallon expects new developments to be mainly in Scotland. “The consent rate has dropped very sharply in England. It is harder and harder for developers to get consent now. A lot of the good English sites have been taken up.”
In June, Decc released proposals to make it easier for councils to reject windfarms in their area, a sop to rural England that bore the fingerprints of Hayes’ short time in post. Fallon endorses the move: “We have tightened the rules to make sure people don’t feel under siege from applications in particular areas.” This will prevent a backlash, he argues. “If we allow windfarms up and down the valley or all over their hillside, people can end up opposing all renewables.”
While happy to talk about the economic potential of low-carbon industries, Fallon is reluctant to discuss the climate change science that drives the transition. “My focus is entirely on energy and the economic side of the department. We have a minister who deals with climate change, that’s Greg Barker.”
Energy secretary Ed Davey recently announced a restructuring of Decc to address the perception that the department is split between “cold-hearted economists” and “tree-hugging environmentalists”. It is clear Fallon does not see that ethos of an integrated department applying to him. “I know the permanent secretary and the secretary of state are restructuring some of the senior officials in the department,” he says. “I’m responsible for oil and gas, nuclear, renewables, shale and delivering market reform. Greg Barker is responsible for energy efficiency and all the important climate change stuff.”
In a recent interview with Parliamentary magazine The House, he was quoted referring to climate change as “theology”. He clarifies: “I didn’t say it was theology, I said there are theological approaches to climate change. There are some people who believe absolutely in one theory or another.”
He is “not an expert” and accepts the need to meet targets the UK has signed up to. “We have to meet our international commitments but we have to do so in a way that is affordable for our constituents and does not put our industry at a serious disadvantage against its European competitors.”
Fallon says the debate “is becoming more nuanced”, however, citing green Conservative backbencher Tim Yeo’s remarks that climate change could be due to “natural phases”. It is a curious example to choose, given that Yeo denied that the quotes, picked up by The Telegraph in May, represented any deviation from his long-held view that it is “highly probable” climate change is man-made.
Whatever scepticism he may hold privately, Fallon does not wish to be portrayed as against the climate change agenda. “It is not a subject I have been looking at over the past ten or 15 years and I certainly haven’t had time over the past three months. I will endeavour, given you are almost admonishing me, to do more reading over my summer holiday. Can you recommend a single volume? I will ask Greg Barker for an easy guide to climate change.”
Is he going anywhere nice on holiday? “I am not.”
As the interview ends, four businessmen file in for their turn with the minister, one clutching a pad emblazoned with the name of a major generator. The biggest energy reforms in a generation won’t implement themselves, you know.
This article first appeared in Utility Week’s print edition of 12th July 2013.
Get Utility Week’s expert news and comment – unique and indispensible – direct to your desk. Sign up for a trial subscription here: http://bit.ly/zzxQxx