Next week the general election campaign begins in earnest as the major political parties wheel out their manifestos. They will have their work cut out following Theresa May’s decision to call a snap poll. Illustrating how much Labour was caught on the hop by the prime minister, the party’s members received an email just over a fortnight ago asking what they would like to be included in its manifesto. Industry bodies seeking to help shape the parties’ policy process have been caught equally off guard.
So how is the energy sector’s policy platform shaping up, and does its list of key asks match up with Westminster’s agenda?
The election campaign looks set to be dominated by the UK’s withdrawal from the EU. A continuation of the efficient trading arrangements delivered by the EU’s internal energy market must be a “priority outcome” from the upcoming Brexit negotiations, says Energy UK’s policy paper, published a fortnight ago. But for utilities, domestic issues will matter most in the upcoming election.
The bad news is that further regulation of energy prices looks like an even better bet than the thumping Conservative majority being predicted by the opinion polls.
May has pledged to take tough action to rein in energy prices. The Conservative manifesto itself is being drawn up by the joint chief of staff Nick Timothy, who is focused on bread-and-butter issues like energy bills, which matter to the lower middle class voters the party is seeking to detach from Labour. In its election manifestoes, the sector mounts a rearguard action against price-capping.
Energy UK argues strongly that competition remains the most “appropriate way to drive down prices” as well as a better spur for innovation. SSE backs up the trade body by arguing that competition should be “at the heart of” the government’s plans for the energy retail market. Further price regulation would create “huge uncertainty around future government intentions, putting at risk billions in investment and jobs”, adds Energy UK.
Phil Grant, partner at consultancy Baringa, agrees: “I’m not sure how many more politically motivated interventions the sector can withstand.” Investors have yet to be deterred from the UK energy market, he says.
But more regulatory meddling in the energy market could put off those seeking low-risk returns, like pension funds, which would drive up the cost of capital for the sector with knock-on consequences for bills, Grant warns: “Every intervention increases the cost of capital, which is not really desirable. Constant interventions are undesirable from an investor and consumer perspective.”
The utilities have been in this last-chance saloon, of course, when Ed Miliband unveiled his proposed freeze on energy bills four years ago. The issue was then kicked into the long grass, with the commissioning of the Competition and Markets Authority inquiry. In the meantime, falling wholesale prices fed into household energy bills, taking the political pressure off the government.
However, given the upward pressure on wholesale prices, Grant is not sanguine about the outcome this time round. “I’m worried they might do something this time,” he says.
In a move that could buy the industry time, Energy UK calls for careful consultation on any cap in order to avoid the “unintended consequences” of rushed policymaking.
Any fresh regulation should be “time-limited and subject to reviews”, it adds. Which? backs this up by calling in its Consumer Agenda for government for any retail energy market intervention to have a cut-off date.
The industry is much more on message with Westminster thinking when it comes to the industrial strategy, which was championed by Timothy long before he entered Downing Street with May.
Energy UK has identified “an industrial strategy built on a low-carbon economy” as one of its top five policy priorities for the upcoming parliament. And the Energy Network Association’s policy submission says its members can play a central role in delivering the industrial strategy. Renewables UK pitches in by pointing to how wind and wave projects can help to deliver an industrial strategy in deprived coastal areas.
Potentially more worrying are Timothy’s past comments on green energy. In a blog for the Conservative Home website about a year ago, he described the Climate Change Act (CCA) as a “monstrous act of self-harm”.
Energy UK calls for the next government to be more explicit through the contract for difference (CfD) auctions process about how it will support low-carbon technologies. SSE is more robust, calling for the government to put wind “at the centre of a modern industrial strategy”, adding that onshore turbines have a “major role in our future energy mix”.
Grant says ministers must make it clear whether they remain committed to the targets outlined in the CCA and how they expect to achieve them. “This government will take us into early 2020, when people will be making capital investment decisions that will determine whether we decarbonise, given that these assets have lives of over 20 to 30 years.”
A government with the kind of majority May looks on course to achieve could make brave calls that are driven by the nation’s long-term interests rather than electoral calculation, Grant says: “They could use the benefits of that majority to provide clarity by looking beyond the five-year cycle.”
The need for stability
The energy industry had hoped the previous parliament would have provided clarity; now it is hoping the general election will finally deliver it.
As far as the forthcoming general election is concerned, the message from Energy UK chief executive Lawrence Slade is clear – “give us a long-term framework and the stability that would bring, and the industry will deliver.”
The trade body was one of the first to publish an election manifesto last month, which set out a number of key policy priorities for whoever forms the next government. Speaking to Utility Week, Slade said the document’s key message to politicians is to “make sure you are involving industry in discussions”.
“If you look at the post-Brexit opportunities,” he adds, “if the government and the industry can get together, we can set an ambitious programme of decarbonisation for this country, which covers everything from harnessing the best renewable technologies to taking the lead on decarbonising heat. “All of the jobs related to those activities are highly skilled jobs,” he says. “That could lead to an industry that could be exported. It’s similar to what happened with the oil and gas industry in the 1970s and ’80s.
“If you look at how some of the small companies in Scotland back then were able to harness those skills and export them around the world, why can’t we do the same with the range of new technologies that a true industrial strategy, with low carbon at its heart, can deliver?”
The manifesto also warns against the consequences of a future government intervening in the market with an energy price cap and states that “competition is the most appropriate way to drive down prices”. It also recommends setting contracts for difference (CfD) allocation rounds on a rolling, one-year basis, and more coordination between the government and other agencies, such as Ofgem and the Environment Agency, with an “appropriate hierarchy of rules and priorities”. In addition, it calls on the next government to launch a major campaign to educate people about the benefits of polices, which are paid through customer bills.
“So, the challenge for government, in terms of looking forward, is how you set that framework, which allows all these different technologies to evolve and merge into a new system that can deliver for the next 50 years and beyond.”