The CBI is calling for a significant shift in the direction of UK energy policy, warning the current approach is making energy security harder to achieve and jeopardising our ability to meet climate change targets.

In a new report launched today (Monday 13th July) called Decision Time,the CBI warns that current policy is incentivising investments in wind power which will result in too little investment in other forms of low-carbon energy, such as nuclear and clean coal.

Instead the CBI wants the government to pursue policies that will deliver a more balanced energy mix that includes wind and other renewables, nuclear, gas, and clean coal. This will bolster energy security and help reduce carbon emissions more cost-effectively in tougher economic times.

John Cridland, CBI Deputy-Director General, said:

“Large chunks of our energy infrastructure urgently need replacing, and we have tough climate change targets to meet. However, the Government’s disjointed approach is deterring the private sector investment needed to get our energy system up to scratch, bolster security and cut emissions.

“While we have generous subsidies for wind power, we urgently need the national planning statements needed to build new nuclear plants. If we carry on like this we will end up putting too many of our energy eggs in one basket. But by moving government policy in a different direction we can achieve a good balance of wind, nuclear, gas and clean coal.

“With firms putting the finishing touches to their future investment plans, we need to act now if we are to achieve an energy system that is low-carbon, secure and sustainable.”

In order to shift to this more balanced energy mix, the CBI says the government needs to take the following actions now:

Reduce the percentage of wind power expected by 2020 under the Renewables Strategy, due this month, to encourage investment in other low-carbon energy sources.
Speed up the planning process by delivering the long-promised National Planning Statements, as well as pressing ahead with the regulatory frameworks for Carbon Capture and Storage (CCS) demonstration plants. Clear funding arrangements for CCS need to be in place by June 2010 and the timeline for new nuclear must not be allowed to slip.
Accelerate investment in the grid to ensure companies can invest in the connections and upgrades needed to support new electricity generation within the required timescales.
Introduce measures to improve energy efficiency in the electricity, heating and transport sectors, including fiscal incentives for consumers choosing more efficient products.
Set up a joint government-industry task force by September 2009 to explore whether an additional market mechanism is needed to incentivize the volume of low carbon generation that must be built.
In the medium-term over the next five years, action will need to be taken to mitigate the impact of price rises on energy intensive sectors to avoid damaging the competitiveness of our manufacturing base.

The CBI commissioned McKinsey & Company to undertake a comprehensive study of the UK electricity sector, analysing demand and supply of both electricity and gas. The report analysed the investment plans of energy firms based on existing government policy ('business as usual'), and an alternative ‘balanced’ pathway, where carbon targets are met cost-effectively and energy security is retained.
Business as Usual

Without taking the recommended actions, we risk continuing on a ‘business as usual’ pathway. This would see the UK heading towards an uncertain energy future based around intermittent wind power and ad hoc investments in gas-fired power stations, requiring large volumes of imported gas. While gas imports should not automatically be viewed as a problem, this would need large volumes of costly gas storage to be built and lock in another generation into using fossil fuel.

By 2030 gas would provide more than a third of the UK’s energy (36%); coal would contribute 1%; wind 24%; nuclear 20%; other renewables 12%; and clean coal 8%. That would mean 64% of electricity would come from low-carbon technologies, behind the Climate Change Committee’s 78% target, and leaving the UK struggling to meet its long-term carbon reduction targets.

The cost of this approach is estimated at £125-£173bn, and could lead to some of the highest and most volatile electricity prices in Europe.

Balanced Pathway

For the same level of investment, firms could shift towards a balanced pathway. Looking at firms’ intentions under this model, it was assumed:

The target for renewable electricity for 2020 was reduced from 32% to 25%, allowing firms to pick a cost-effective mix of low-carbon technology.
Regulatory frameworks for nuclear and CCS plants were completed quickly allowing early investment.
The recent EU Council amendments to the planned Industrial Emissions Directive was upheld, avoiding UK coal plants being shut prematurely.
Energy efficiency policy was implemented more aggressively, reducing electricity demand.
The results are encouraging with firms able to invest in a much broader mix of energy sources. With wind and gas making up a smaller proportion of the UK’s energy mix, the risks of relying so heavily on one or two sources of energy are greatly reduced, and less costly gas storage will need to be built. In addition, the electricity system should be easier to manage with possibly less price volatility.

Under this pathway, by 2030 gas would make up 16% of the energy mix; coal 2%; nuclear 34%; wind 20%; other renewables 15%; and clean coal 14%. That would mean 83% of our electricity will come from low-carbon sources, compared with 64% under a business as usual model. Meanwhile, power sector emissions would halve by 2020 and halve again by 2030, getting the UK back on track with its longer-term carbon targets.

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Stuart