Despite Brexit, the big challenges our industry faces remain exactly the same
It is a great pleasure indeed to speak to you today about the future shape and direction of the energy market. And I hope that what I say will stimulate the panel discussions that follow.
Of course we cannot talk about the future of our industry without first acknowledging the vote of the British people of June 23rd. Following the result of this vote, there are many questions to be resolved – but the big challenges our industry faces on behalf of customers remain exactly the same. More importantly, the need for action on climate change in the UK and all across Europe and the world is as urgent as ever.
Last week the Government adopted the 5th Carbon Budget, restricting the UK’s greenhouse gas emissions. That provides clear evidence of the continuing UK commitment to climate change action and certainty for the low carbon economy. I am sure the Energy Minister will say more about it later on today.
Over the past week, both the UK and French Governments have reiterated their support for our crucial new nuclear project at Hinkley Point. EDF said yesterday in a press release and I quote: “the vote does not change the fundamental features of the Hinkley Point C project, nor the willingness of those involved to go ahead with it”. And I still quote: “The full period of consultation required by law has reached its end and EDF reconfirms its confidence in the project which has now reached the stage for the Board’s final investment decision.”
The vote of June 23rd does not change the urgent need for our industry and policy-makers to address the energy trilemma, providing electricity which is reliable, affordable and low carbon. That need is not in dispute. And while these goals remain as relevant as ever, we can all see that the market environment is being impacted by rapid change.
EDF Energy is embracing innovation
There is real excitement about digital and technological innovation and speculation about its potentially disruptive effect. Some have suggested that large, established companies are threatened by innovation.
At EDF Energy nothing could be further from the truth. We welcome it. We believe that innovation is good for the industry and good for customers. It can help to continue the journey to rebuild trust.
For example our EDF Energy app is helping customers to look at their bill, check on the best deals and easily upload meter readings, something we know they want and expect to be able to do.
Now almost half of our customer contacts are via smartphone.
We have also launched a dedicated innovation platform called Blue Lab. It accelerates new ideas and solutions, moving them swiftly from concept to market. It brings a new culture and approach.
The best of our R and D teams are working with start-ups, entrepreneurs and academics who come into our business for short periods – bringing forward lots of new ideas and quickly moving the best forward.
Blue Lab will play an instrumental role in improving the lives of our customers by harnessing the latest technologies at home, including battery and digital solutions, finding the energy products and services that customers want.
Our teams in our Generation business are also busy looking at new technologies and new ways of working. In the short-term, their focus will be to use innovation to get the most from our existing assets.
Like the team at our West Burton CCGT plant who safely cut the time used to ramp down the plant, saving £600,000 a year in gas costs – an innovation which is now being shared with EDF worldwide.
We use innovation to address complex and technical challenges such as extending the lives of our existing nuclear plants. And we are also thinking about future technologies that could play a significant role in tomorrow’s electricity mix.
Storage has been heralded by many as having the potential to drastically transform the electricity system and its operation. We believe that electricity storage could become an important source of flexibility in the future. Today’s options tend to be for the short-term response, meaning they can store energy for days and hours. That means we still have to resolve the larger problem of affordably storing energy week to week or season to season especially in a country that is dark and overcast in much of the winter – and sometimes windless too.
Turning to nuclear, we recently submitted a bid to the Government’s competition to find the most promising small modular nuclear reactors, working closely with engineers in France. We have the sites, as well as the worldwide R and D and operational experience to put EDF Energy in a strong position.
We believe that SMRs have great potential in the UK as a future low-carbon technology, complementing large nuclear power stations and renewables as we decarbonise the power sector. We believe that the SMR project can be a beacon for Franco-British cooperation.
And of course, we are developing the UK’s first new nuclear project at Hinkley Point C – baseload nuclear is a crucial part of our future energy mix.
We are innovating in more efficient wind turbines and new construction methods for offshore including the first ever gravity-based foundations at Blyth in Northumberland – borrowing technology from the oil and gas industry.
In the Alderney race, where there are some of the strongest tides in the world, EDF is trialling sea bed turbines.
Future market vision
Some people may claim that one single idea, one single technology, would be a panacea.
Like those who say it about decentralised solar energy and storage today.
At EDF Energy we see a world where all technologies can play their part in addressing the energy trilemma.
So the question is not: “Which technology will win out?”
The question is: “What is the right mix of technologies so that we have a fair, affordable and robust low carbon electricity system?”
And we believe that the UK Government’s decision to establish the Electricity Market Reform was the right one to address this challenge with its three components: the Contract for Difference, the Capacity Market and the Carbon Price Floor. I am sure you know them well.
We need the Capacity Market to ensure we have enough reliable and secure electricity capacity. We have to make sure that the Capacity Market brings forward the investment we need, and operates fairly so that, for example, it does not give embedded generators an advantage as they have now.
The Government is currently working on this precise issue.
We also need a robust carbon price, which encourages investment in the low-carbon transition. That’s why we need to work to maintain and strengthen the carbon price floor; it works in tipping the balance towards low carbon generation.
Finally, we need the Contract for Difference to give investors the confidence they need in a volatile market to invest in low-carbon technologies – most of which have high upfront costs. The Contract for Difference is a balanced and well understood mechanism to deliver investment.
So the EMR mechanisms are there and they are good, and they will – of course – have to evolve over time to deal with changing circumstances.
But it is evolution that is the pragmatic solution and not revolution.
And we can see two key developments in our market. The first is the significant growth in the market for grid services. By grid services, we mean the ability to match supply to demand – balancing, frequency response and black-start to name but a few. Black-start in particular has been the subject of some debate recently. These contracts provide insurance against the risk of the lights going out.
But it's important that customers don't pay over the odds for this critical cover. From a grid perspective, large, centralised generation is relatively predictable and easy to manage.
But in today’s world of an increasingly fragmented and decentralised market, the network is going to have to work a lot harder and its operations becomes less predictable and more complex. So while grid services are not a new feature of the market, their growing importance means that they can be considered a fourth pillar of our electricity market design.
The assets we have traditionally relied on to provide these services – coal power stations – are ageing and will be phased out of the UK energy mix over the next decade. That means we need a clear view about how the system will be managed in the future and a transparent process for procuring and setting a value on grid services where costs are allocated fairly. Because in the end it is customers who will pay for them through their bills.
And I know that National Grid and policy makers are well aware of the issue, and we look forward to working with them to address these new challenges.
A fair charging system for decentralised generation
The second major evolution is the continued development of decentralised generation.
Decentralised generation is not a new phenomenon − we have had CHP for many years, and small scale renewables have been developing as part of the system since the industry was privatised in 1990.
Development of decentralised generation is not a further pillar in our electricity market design in its own right, but it is a good illustration of how energy continues to change and the need for the market to be up to date.
At EDF Energy we welcome this development, and we want to facilitate innovation in this space. We are already embracing these technologies on our own estate.
Our new national training centre at Cannington Court in Somerset, which I opened with Andrea Leadsom in November last year, is powered with a ground breaking energy system, designed by our R&D and Business to Business teams. It uses ground source heat pumps and solar thermal technology, coupled with solar photovoltaic technology, to generate electricity. A technological first, providing over 50% of the site’s energy needs.
It is a demonstration of how decentralised generation can make an important contribution towards our low carbon future. But for decentralised generation to contribute to the system in a sustainable way that drives investment in the most efficient generation mix, we need a level playing field and to ensure that the costs of the system are allocated fairly with no "free rides”.
For example, is it fair that someone who benefits from generous tariffs to put solar panels on their large house depends on a system disproportionately paid for by others? Is it fair? Why should a customer living in tower block pay a greater share than any other customer using the same grid?
In winter and on cloudy days those with solar panels will need that system as much as everyone else.
So we need to give some thought about how to achieve a fair socialisation of network and policy costs, and how to incentivise the efficient evolution of the electricity system for the benefit of all.
It is a crucial point, and we are not the only ones to share this view. The concept of fairness is something that the CMA has put at the heart of its remedies package. I first called for the CMA inquiry in 2011.
At EDF Energy we did not wait for their inquiry to take action for customers and that is why now, 42% of our customers are on fixed price products compared with the 30% average for large suppliers observed by the CMA. We have accepted the CMA’s demanding and fair remedies package.
All those who are genuinely interested in improving the market for customers should now implement these changes.
The Connected Home: helping our customers to use electricity more efficiently
Despite the challenges, we at EDF Energy are very excited about all the changes that are taking place around us. One of the developments we are most excited about is how technology can empower customers – like smart meters.
The Connected Home will put customers in control – making their homes more comfortable, and help them use electricity efficiently and effectively, saving them money. Helping them make the most of these new technologies and digitalisation is an opportunity for us to build and win trust. There is a risk that customers see digital as a means for companies or intermediaries to gain more power over them.
As I said to the CMA, digital must not take power from our customers; it must give power to them and can help us be more transparent.
We must always remember the people for whom we are innovating – our customers and develop technology which meets their needs rather developing technology for its own sake. Never losing sight of our original objectives – a low carbon, affordable and secure electricity mix – and ensuring that fairness is at the heart of the developing system.