What the frack?

Conservative energy policy and “keeping the lights on”

This morning the Energy Secretary made a speech designed to show the direction of this Government’s energy policy and where exactly our electricity generation is going to come from. The first few months of Amber Rudd’s role as Energy Secretary has arguably created more confusion than clarity amongst industry. Her first appearance in front of the Energy Select Committee suggested a roll back on state subsidy for renewables and a general conviction that gas is the way forward. George Osborne’s first Budget delivered with a Conservative majority created more uncertainty for renewables with the scrapping of the climate change levy exemption for production from renewables – something which hit company share prices hard.

This morning’s speech saw some clear lines laid out – the headline being no coal generation after 2025. This measure will be in part designed to play down the concerns of environmental groups who see this Government as abandoning its principals on the environment and policies introduced under the Coalition when the Liberal Democrats ran DECC especially ahead of COP21 and given legal obligations under the Climate Change Act, but also to start drawing the grand narrative of the Government’s energy policy going forward. Today’s speech emphasised that affordability for businesses and consumers should be the focus, alongside energy security and last but not least achieving these aims in a way that is as sustainable and low carbon as possible.

So, does phasing out coal and an energy system heavily reliant on gas produce this outcome? This morning I attended the annual Fracking Summit hosted by law firm Pinsent Masons. A room full of investors, lawyers and industry leaders, all with a mutual interest in gas exploration and production were understandably very interested in today’s speech. Coal currently produces about 30% of our energy mix and this will need to be replaced – consumers are using more and more electricity through more and more devices, a trend unlikely to end any time soon. Gas, which also heats the vast majority of our homes and work places, can certainly plug this gap and in doing so produce less emissions but there is a fundamental question of where this gas comes from. Will it be produced in the UK with all the jobs that go along with this – or will it be imported at greater financial and environmental cost?

The discussions were cautiously positive. The UK remains a favourable place to invest in onshore gas because we have the resources, it remains to be commercially attractive and (compared to many other markets) we have a tax and regulatory regime that is stable. The Government, as indicated in Amber Rudd’s speech today, are supportive of shale and want to see more exploration. The challenge for industry is to make the case for its commercial viability and to convince the public and the local authorities that represent them that the operations will be safe and of minimal impact and maximum benefit to the communities that surround them. Both of these cases can only be proven if projects can get started.  With new nuclear delayed and North Sea gas reserves aging, the potential for shale is enticing.

This morning’s event focussed on fracking, but the energy security implications are much wider. The energy industry as a whole understands that theirs is a role to play in achieving energy security at a good cost to the consumer – gas, nuclear, wind, solar – there is consensus on this. One of the takeaways from this morning’s meeting was that the case for this diverse mix needs to be understood.  Consumers (who are also voters) need to engage more with their energy usage. We all like to come home, flick on a light switch, boil the kettle and then consume information from our electronic devices – but how we feel about wind turbines, power stations or fracking wells in our immediate environment is often very far removed from these habits.

Industry, with Government support, needs to fill this information gap and communicate at the local level and then the public might be more supportive when a developer wants to set up in their neighbourhood. I’m not sure how Amber Rudd’s aspiration that “energy policy should be unnoticed” will help to bridge this gap.