The Price of Power: Reforming the Electricity Market Contents

Chapter 4: Reforms to restore competition

116.In this chapter we set out five reforms to make the market more competitive and improve the security and affordability of the electricity supply.

Reform 1: Reprioritise the objectives of energy policy

117.In Chapter 2 we set out the three objectives that make up what is referred to as the ‘trilemma’ of energy policy: affordability, security of supply and decarbonisation. We also considered how policy has developed to include decarbonisation and the tension between this objective, security of supply and affordability.

118.This section will examine the impact of having a statutory target for one of the three objectives and set out how the Government should approach future conflicts between the objectives.

Effect of a statutory target

119.The Climate Change Act 2008 mandates the reduction of carbon emissions.140 This, witnesses considered, gave decarbonisation a different status from issues of affordability and security of supply.141 Decarbonisation is the only objective which has the backing of a statutory target.

120.Ashley Ibbett, Director of Clean Electricity at the Department for Business, Energy and Industrial Strategy, partially acknowledged this:

“The challenge for us is that we have a legally binding decarbonisation target for 2050. That is, in a way, a given. We look at how we can minimise the burden and cost to the consumer and to business of achieving that 2050 objective and commitment.”

121.As discussed above, the achievement of the target has been at the forefront of the minds of successive governments in taking many of the policy decisions discussed in this report: the last Labour government’s preferential support for certain technologies within the Renewables Obligations; the coalition government’s administratively set prices of early Contracts for Difference; the present Government’s decision to proceed with Hinkley Point C. These are all examples where the trade-off between objectives has come down on the side of decarbonisation.

Achieving the correct balance

122.In Chapter 2 we considered the implementation of renewables policies and noted that these have not been achieved at the lowest cost to taxpayers and consumers.

123.Lord Turner of Ecchinswell suggested that a willingness to “pay a certain cost to get to a low-carbon economy” was needed, with compensation for those who were most adversely affected by this cost.142 Lord Lawson of Blaby disagreed: he stated that decarbonisation should be “subordinate to the objective of supplying the British economy and households with cheap and reliable energy”.143

124.Some witnesses suggested that each aspect of the ‘trilemma’ should be given equal weight. Jimmy Aldridge of the IPPR stated that whilst security of supply is “extremely important”, decarbonisation:

“is tackling an issue that is very significant for future generations as well. … It is important that there is cross-generational balancing of those different objectives … they should be given equal weight.”144

125.We do not agree. The overarching aim of energy policy must be to keep the lights on. Low carbon but chronically unreliable electricity is not acceptable. Similarly very cheap prices at the expense of frequent shortages would be unacceptable.

126.Security of supply should be the first and most important consideration in energy policy. Decarbonisation and affordability must be taken into account, but should not be prioritised ahead of security where there is any conflict. Successive governments are perhaps guilty of overlooking security at times: for example, the disincentives for private investment in electricity generation created by the growth of intermittent renewables. Moreover, affordability should not be neglected in the pursuit of decarbonisation.

Reform 2: Manage the path to decarbonisation

127.Professor Helm observed that the issue of the UK’s approach to decarbonisation is a “complicated political, economic and moral problem”.145 In this section we examine the route successive governments have chosen to lead to a lower carbon economy and consider what reforms would ensure future decarbonisation measures achieve the correct balance with cost and security of supply.

The Climate Change Act 2008

128.The Climate Change Act received Royal Assent on 26 November 2008. The Act received wide, cross-part support during its legislative passage.146 It provided for legally binding emissions targets and a new independent Committee on Climate Change to advise the Government and to set five yearly carbon budgets.147

Box 6: Targets in the Climate Change Act 2008148

The Climate Change Act 2008 imposes a duty on the Secretary of State to ensure that: 149

  • net UK carbon emissions are reduced by 80 per cent by 2050; and
  • by 2020 net carbon emissions are reduced by 34 per cent.

Both reductions are measured against a baseline of emissions in 1990. The Secretary of State has some powers to change these targets (see paragraph 143 below).150

The Secretary of State is also required to set a carbon budget for each five yearly period and lay this before Parliament. To date five carbon budgets have been set and approved exactly as recommended by the Climate Change Committee.

Global action on climate change

129.Prior to the introduction of the Climate Change Bill, the government considered whether it should include a clause making the Act’s provisions conditional on a global agreement.151 Lord Turner of Ecchinswell accepted that part of the background to the Climate Change Act 2008 was the expectation of a global agreement on reducing greenhouse gas emissions.152 The 2009 Copenhagen Conference did not produce the hoped for legally binding co-ordinated international action.153 At the 2015 Paris conference some global agreement was achieved. Following the conference, the then Prime Minister stated that “the whole world [is] now signed up to play its part in halting climate change”.154

Box 7: The Paris Agreement

The main elements of the Paris Agreement are:

  • countries agreed to keep global temperature “well below” 2.0C and “endeavour to limit” temperatures to 1.5C;
  • countries set and publish their ‘Intended Nationally Determined Contributions’ for reducing emissions which will be subject to review every five years;
  • a legal requirement on nations to publicly monitor and report on their emission reduction plans;
  • an enhanced transparency and accountability framework for monitoring emission reduction plans. There is no legal requirement for nations to meet their ‘Intended Nationally Determined Contributions’ and no independent body monitoring compliance with these targets.

130.Professor Helm considered that result of the lack of a legally binding global agreement is that the UK has a “unilateral climate change policy” with “our own unilateral targets and our own unilateral carbon floor price”.155 The concern about the unilateral target was that it is self-defeating: energy intensive industries move abroad leaving the UK with all the costs of the policy, but having little effect on global emissions.156 This led witnesses to question whether the UK policy reduced global emissions or simply redistributed UK emissions to other countries.157 The Energy Intensive Users Group considered that the “absence of meaningful global action on carbon emissions” meant that:

“emissions associated with industrial production and energy use are simply transferred onto other countries’ environmental balance sheets.”158

131.Richard Warren, former Senior Energy and Environment Policy Adviser at EEF, acknowledged that providing “exact figure on the level of carbon leakage” is tricky and would require much more detailed analysis by the Government.159

132.There is currently no robust and reliable data on whether measures to reduce the UK’s carbon emissions have in fact resulted in the same emissions being exported to other countries due to the closure or relocation of energy intensive industries. We therefore recommend that the Government conducts and publishes such an analysis to assess the success of existing policy and plan future measures.

Achieving the Climate Change Act 2008 target

133.The UK has met the interim targets for emissions reductions set out in the Act and its associated carbon budgets. This is due to the “great progress” made in the decarbonisation of electricity.160 Martin Pibworth, Managing Director, Wholesale at SSE plc, called this a “remarkable transition to a lower-carbon, lower-emitting system … that is to the country’s credit.”161

134.The decarbonisation achieved in the electricity sector is due to the decline in coal and the rapid growth of renewable technologies. Figure 7 shows the increase in generation from renewable sources since the late 1990s.

Figure 7: Energy Generation Shares, 1998 to 2015 (TWH)

Line graph

Source: Department for Business, Energy and Industrial Strategy, Energy Trends: electrcity: [accessed December 2016]

The path to the 2050 target

135.The UK is not on track to meet the targets set out in the fifth carbon budget. Matthew Bell, of the Committee on Climate Change, acknowledged that:

“The ones where we look like we are off track right now are the fourth carbon budget, in the mid-2020s, and the fifth carbon budget, which was passed by Parliament only in July. We are off track to those—unsurprisingly, when you look out at those time periods.”162

136.Professor Richard Green, Professor of Sustainable Energy Business at Imperial College, stated that the 2050 carbon target requires “transformative change across several sub-sectors of energy production and use. The largest in scale are the power sector, transport … and the heat sector.”163 The Drax Group noted that:

“Whilst the UK has made steady progress in recent years decarbonising the power sector, by comparison the heat and transport sectors continue to lag behind.”164

137.The progress made to date on decarbonising heating and transport has been “nowhere near as much” as the change in the electricity sector.165 Jimmy Aldridge of the IPPR pointed out that it was easier to “decarbonise a small number of very large units” in the electricity sector than “to go into individual homes” and change the operation of domestic heating.166

138.In the longer term the UK will not meet the 2050 target without substantial progress in the decarbonisation of heating and transport. The development of new technologies will be an important element of this. We consider further how to encourage research below.

Introducing greater flexibility

139.The Committee on Climate Change’s projection for the most cost-effective path to the 2050 target is a steady, consistent reduction as illustrated in Figure 8.

Figure 8: Path to the 2050 target

Bar chart / line graph

Source: The Committee on Climate Change, Fifth Carbon Budget (November 2015): [accessed December 2016]

140.The rigidity of the proposed pathway, and the intermediate targets it sets, were questioned by witnesses. Peter Atherton of Cornwall Energy considered that hard targets were “counter-productive”:

“a lot of our really poor policy decisions have been driven by the fact that we set very hard timetables in law—that we have to hit certain targets by 2020, 2030 and, subsequently, 2050.”167

141.Similarly, Rupert Darwall, of the Centre for Policy Studies, argued that setting a hard target for renewables led to “the system [saying] it is going to bury the costs and achieve the target at whatever cost”.168

142.The Secretary of State defended the targets stating that industry had “commended” their adoption. He stated that businesses benefited from “knowing the trajectory” as it allowed them to plan ahead.169

143.The Act itself does allow limited discretion to the Secretary of State to amend the targets and path to decarbonisation. He may amend the percentage reduction to be achieved by 2020 or 2050.170 These powers may be exercised if there have been “significant developments” since the Act received Royal Assent in scientific knowledge about climate change, or in European or international law.171 The explanatory notes accompanying the Act indicate that the latter reasons “might be used in the event of a new international treaty on climate change”.172 Following the Paris Agreement (see Box 7), the Committee on Climate Change advised that the UK should not immediately revise the emissions target. It argued that:

“The UK already has stretching targets to reduce greenhouse gas emissions. Achieving them will be a positive contribution to global climate action. In line with the Paris Agreement, the Government has indicated it intends at some point to set a UK target for reducing domestic emissions to net zero. We have concluded it is too early to do so now, but setting such a target should be kept under review. The five-yearly cycle of pledges and reviews created by the Paris Agreement provides regular opportunities to consider increasing UK ambition.”173

144.Alternatively, the Act allows the Government to “bank and borrow” between budget periods to meet emissions targets.174 The Secretary of State may “borrow” part of the next budget thus increasing the emissions target. This is limited to no more than one per cent of the carbon budget.175

145.A further option for flexibility lies in the hands of Parliament which could reject future carbon budgets.176 The Climate Change Act 2008 specifies that the level at which a carbon budget is set must be fixed by legislation.177

146.The Government should use the powers provided in the Act to vary the required pace of emissions reductions in the electricity supply. This flexibility would allow time for the development of new technologies which will increase efficiency and reduce emissions in a cost effective way.

Reform 3: Hold a neutral, fully competitive supply auction

147.In November 2015, the then Secretary of State for Energy and Climate Change, Amber Rudd MP, said she wanted to see “a competitive electricity market, with government out of the way as much as possible, by 2025.”178 The Government reiterated this wish, albeit without a target date, in its January 2017 ‘Building our Industrial Strategy’ green paper:

“Subsidies and other forms of state support have played an important role in creating markets for new technologies and driving down their costs. But it is important that we move steadily to an operating model in which competitive markets deliver the energy on which our country depends.”179

148.We would similarly like to see the return of competition to the electricity market. We accept that a return to the approach of the 1980s and 90s is not possible given decarbonisation and security of supply concerns—these aren’t problems a fully market-led approach can solve. Nevertheless, the Government can set a framework within which a competitive market can operate to achieve its energy policy objectives.

149.The Government has already made some welcome moves. The second Contracts for Difference allocation round, due to open in April 2017, will include competitive auctions for some technologies including offshore wind. Contracts for Difference compare favourably with the Renewables Obligation. BEIS said that the maximum price offshore wind will receive in 2020/21 is £105 and in 2025 is £85: “This compares to a Renewables Obligation equivalent reserve price in the first Contracts for Difference auction of £145.”180

150.Technologies however are not able to compete against each other in an auction. Several witnesses criticised this aspect of the scheme. The Drax Group PLC said it did not provide value for money:

“Renewables are not currently competing on a level playing field for government support. This does not lead to efficient economic outcomes in terms of value for money for bill payers or achieving the lowest strike price possible for successful bids. Instead it leads to government ‘picking winners and losers’, which creates regulatory uncertainty and risks undermining investor confidence.”181

151.The second auction for Contracts for Difference is due to start in April 2017. Solar and onshore wind, the two cheapest renewable technologies, will not be able to compete for contracts alongside other technologies. Box 8 explains how the auction process for Contracts for Difference works.

Box 8: The Contracts for Difference auctions

The first Contracts for Difference auction was held by the Government in 2014. Technologies were divided into two ‘pots’: established technologies (‘Pot 1’, which included onshore wind and solar) and less established technologies (‘Pot 2’).182 A budget was assigned to each pot. The budget split is displayed in the table below.

Table 5: Contracts for Difference allocation, first round proper183







Overall budget







Pot 1







Pot 2







Source: Department of Energy & Climate Change, Draft Budget Notice for CFD Allocation Round 1 (29 September 2014): [accessed February 2017]

The budget listed for a particular year is available for projects that will deliver electricity in that year; for example, £155 million was available for projects that would complete in 2019/20.

Projects were invited to submit bids and an auction was ran on a pay-as-clear basis. This means that all successful bidders are paid the clearing price set by the most expensive successful bid (rather than paying the price that they bid). No technology however could receive a price that was above its ‘administrative strike price’.

The administrative strike prices for each technology are set by the Government. Its stated aim is to set the price at such a level as to allow the cheapest 19 per cent of projects for any technology to qualify. The strike prices for some technologies decreased over the period: the strike price for offshore wind was set at £155 per megawatt hour for projects that would deliver in 2015/16 and £140 per megawatt hour for projects that would deliver in 2018/19.

An example from the results of the Pot 2 auction illustrates how this works. The clearing price for 2018/19 was £114.39 per megawatt hour. An offshore wind project and an advanced conversion technologies project received this price (both had strike prices of £140 per megawatt hour). An ‘energy from waste’ project was also a successful bidder but as the strike price for that technology was £80 per megawatt hour, it will be paid its strike price rather than the clearing price. A link to the full results of the auction is available in the footnote.184

A draft budget for the second allocation round was announced in November 2016. The Government only included a budget for Pot 2 technologies. This was £290 million for delivery in 2021/22 and £290 million for delivery in 2022/23.185

Reasons for not holding open auctions

152.The main justification for not holding open auctions is that less developed technologies need support if they are ever to become competitive. Hugh McNeal from RenewableUK said that UK support for offshore wind had enabled large cost reductions:

“Some of what we have seen in offshore wind, because of UK leadership, has been pretty remarkable in recent years. The doubling in the size of turbines and the 40% reduction in cost are not what you associate with multi-billion pound infrastructure projects; it is what you associate with TVs and computers.”186

153.Dermot Nolan said he was “not a fan of subsidies” but acknowledged that given there are now 11 gigawatts of solar power in the UK when the expectation for the period had been 3 gigawatts, “you could argue … that the subsidies seem to imply some learning by doing … there is some possibility that new technologies, if they are given a temporary leg-up, will be innovative—as long as ultimately that subsidy is removed.”187

154.Professor Helm thought however that the money that has gone towards subsidies for renewables would have been better spent on research and development:

“You have to ask how many tens of billions you want to spend to work out how to erect an offshore wind turbine compared with the other alternatives that are available, such as investing in opening up the light spectrum, developing solar film, and thinking about graphene and nanotechnologies for next generation solar.”188

155.Mr Nolan agreed that it was an exciting time for new technologies and despite the possibility that subsidies may allow the reduction of costs through learning by doing, he thought open competition between technologies was the best way to encourage their development:

“We are possibly on the cusp of a great degree of innovation in the energy sector in a way that we have not seen for 30 or 40 years, and I must say that I welcome that. It could be quite an exciting time. My instincts are that the best way for that to happen is through competitive technologies against a relatively fixed carbon price.”189

Designing an auction

156.Several witnesses agreed with Mr Nolan that open competition was the preferred solution. Professor Helm proposed a compelling design similar to that suggested by many other witnesses:

“I prefer the market route and I have proposed a way of balancing what the state needs to do, which is to fix the amount of carbon and to fix the quantity to ensure the lights stay on and we have a decent capacity margin, and then let the market get on with the component parts. That is a perfectly plausible public/private partnership.”190

157.We agree with this approach and with the greater support for research and development into energy technologies that we set out below (paragraphs 187–194), new technologies should receive the support they require.

158.The Government should set out plans to achieve its aim, as set out in 2015, of getting the government out of the electricity market as much as possible by 2025. The best way to do this would be through a single auction, designed to comply with the following principles:

159.An auction run on the basis of these principles would ensure that consumers are paying the lowest prices for low-carbon electricity.

160.The challenge is not to remove all government involvement. This is not possible given the present objectives of energy policy, which we accept as the correct ones. Our aim with the recommendation above is to identify a way for the necessary involvement of government to be limited to setting the parameters within which a market is left to identify the most cost-effective solutions. We believe our recommendation would lead to outcomes which would improve security, protect competitiveness and allow emissions reductions to be achieved more efficiently and at lower cost.

Reform 4: Greater scrutiny and independent oversight of competitive auctions

Current system

161.Numerous bodies have roles in overseeing and implementing energy policy. The main relationships, categorised by the Government’s objectives, are summarised below.

Security of supply

162.National Grid is responsible for ensuring there is a sufficient supply of electricity. The Government, through the Department for Business, Energy and Industrial Strategy, sets the security standard that National Grid has to meet. Ofgem ensures that National Grid meets the standard and does so in a cost-effective way.

163.The operation of the capacity market provides an example. The Government, advised by National Grid, identifies future capacity requirements. The National Grid then runs the auction to find generators who can provide that capacity. Ofgem is responsible for the rules of the auction and makes any changes.


164.The Committee on Climate Change was established to set five-yearly carbon budgets that would ensure a steady reduction in carbon emissions to meet the 2050 target. The Committee advises the Government on what the targets for each budgetary period should be and how they can be met. The Government then proposes draft legislation on that basis.


165.Ofgem regulates the wholesale and retail markets for electricity. It has powers to address anti-competitive behaviour. The Committee on Climate Change, when advising on carbon budgets, is mandated by the Climate Change Act to take into account economic, fiscal and social circumstances when making its decisions.191

166.As part of its role in scrutinising the value for money of Government expenditure, the National Audit Office examines energy policy decisions.192

Scrutiny of Government policy

167.The Competition and Markets Authority, following its recent investigation of the energy market, concluded that the existing structure set out above failed to provide sufficient independent scrutiny of government policy and called for greater transparency:

“In relation to the impact of government policies, we have considered whether there is a lack of independent and authoritative assessment of the costs and benefits of different proposed and existing policies, including the trade-offs between different policy objectives, and/or a lack of information and analysis regarding the energy markets on which to base robust decisions. While we noted that there are already several independent institutions that scrutinise these costs and benefits, we consider that clearer communication around these issues is necessary to increase the transparency of the information already available. This would improve the quality of the public debate and policy decision-making.”193

168.In particular they highlighted “the absence of any formal mechanism through which Ofgem can set out its views on particular DECC policy proposals.” They concluded this was “likely to harm transparency, the independence of regulation, and consumers’ confidence in the regulatory and policy decisions that are taken. This in turn is likely to undermine the robustness of policy decision making and implementation.”

169.We asked Dermot Nolan, Chief Executive of Ofgem, whether Ofgem should be able to scrutinise government decisions:

“Would I welcome it? That is a delicate question. Again, if government accepted that there was a role for the regulator, we would take it very seriously. “Welcome” is a strong word. I personally think that there is a role for a body to scrutinise such decisions. The CMA thought that Ofgem was a logical enough entity to do it and I would tend to concur with that.”

170.Neither Ofgem nor any other advisory body was involved in the decision by the Government to enter into bilateral negotiations with EDF over Hinkley Point. The involvement of an independent body—with a mandate to assess policy decisions against all three energy policy objectives—would have provided reassurance that Hinkley Point C did provide value for money.

A new Energy Commission

171.The Government should establish an Energy Commission to provide greater scrutiny of energy policy decisions. This would be an independent advisory body, reporting to the Secretary of State, tasked with advising on the best way for all the objectives of energy policy to be delivered.

172.It would be expected to monitor and advise on:

173.The Commission would cover all aspects of the energy market. It would work with those institutions that have been established through legislation such as the Committee on Climate Change. It would produce an annual report and studies of particular aspects of the market.

Reform 5: Fund research and development

174.“The prospect for the commercial development of electricity is boundless”, The Times’ engineering correspondent wrote in 1910, referring to the potential uses for the technology: “in opportunities for general industrial advance there is no trade … that can compare”.194

175.Advances in energy research and innovation could spur great progress towards low carbon electricity generation. In this section we consider how the Government can best facilitate and promote energy research and development.

The case for research and development

176.“We are in a period of extraordinary technical change”, Professor Helm told us.195 Scientists studying potential innovations agreed. Professor Peter Littlewood, Director of the Argonne National Laboratory in the United States, wrote that “it is clear that a renewable revolution is already upon us and that it has considerable momentum.”196

177.Professor Richard Friend, Cavendish Professor of Physics at the University of Cambridge, and Professor Richard Jones, of the University of Sheffield, wrote that a period of “disruptive change” in the energy industry was primarily driven by new technologies “that are … bringing unprecedented cost reductions and new business opportunities”.197

178.Whilst there are clearly exciting developments in a number of fields, there is also a danger of placing too much reliance on new technologies to solve future problems. Professor Grubb, Professor of International Energy and Climate Change Policy at University College London, cautioned, “there tends to be a caricature about existing technology not being very good and new technologies being wonderful”.198 Michael Liebreich, founder of Bloomberg New Energy Finance, considered technology would not create a “sudden rupture” but the current pace and direction of development would continue.199

179.We received evidence from companies and industry groups about the potential of individual technologies from anaerobic digestion to small nuclear reactors.200 Proponents of new technologies argued they present an opportunity for UK industry. For example, using the case of offshore wind, RenewableUK stated that new technology presented “opportunities, capitalising on the UK’s global lead to develop globally competitive businesses in key low-carbon technologies.”201

Funding for energy research and development

180.In 2014 the UK spent £377 million on energy research and development.202 Professor Sir Richard Friend explained that “the UK disinvested from R&D in energy in the early 1980s”. He attributed this to the “run down of nuclear technology and loss of R&D function after privatisation of the energy utilities.”203 Figure 9 below illustrates the fluctuations in investment in the sector since 1974.

Figure 9: Total energy technology research development and demonstration expenditure 1974–2014 (in £ million, 2015 prices)

Line graph

Source: International Energy Agency, ‘Data Services: RD&D statistics database’: [accessed December 2016]

181.The UK still lags behind other comparable countries in terms of the percentage of GDP spent on energy research (see Figure 10 below). The Government has “pledged to double spending on research and development in energy technologies” by 2021.204 Nonetheless, as Professor Littlewood pointed out, to match the US government’s level of investment the UK Government would need to double this pledge.205 The Government’s industrial strategy acknowledges that the level of investment in the UK in research and development generally is “below the OECD average” and “far behind” leading nations such as Japan, South Korea and Finland.206

Figure 10: Public Sector Energy Research and Development, international comparison

Line graph

Source: Written evidence from Professor Sir Richard Friend and Professor Richard Jones (UEM0088); data from the International Energy Agency

Deployment of funding

182.As well as sufficient funding, scientists in this field identified two, linked, issues. First the difficulty of translating university research into commercially viable technology. Dr David Clarke, the Chief Executive of the Energy Technologies Institute, said that in his experience “once you get into the commercialisation space it is really difficult, almost impossible”.207 Professor Grubb and others from the UCL Energy Institute explained:

“The challenge here is that technology proven at lab-scale requires further scale-up and commercial demonstration. However, private investors are typically unwilling to support projects at this stage, preferring to wait until they are demonstrably market-ready.”208

183.The Government appears to recognise this issue and the first pillar of it recent Industrial Strategy is research and development. The Green Paper states that the Government’s aim is for the UK to “become a more innovative economy and do more to commercialise our world leading science base to drive growth.”209

184.The second issue identified was the need for co-ordination and oversight of funding. This is currently channelled through a number bodies including the research councils, Innovate UK and Ofgem. Professor Sir Richard Friend told us that the current system lacks “clear ownership or a clear determination of that government spend”.210 RWE agreed that there is “a case for rationalising and streamlining the many sources of energy R&D funding to ensure better prioritisation and utilisation”.211

Recent and forthcoming reforms

185.In scientific research generally the Government has initiated reforms to the system of funding. The seven research councils and Innovate UK212 will be integrated under one body called UK Research and Innovation (UKRI).213 The Government has stated that this new body offers:

“an opportunity to strengthen the strategic approach to future challenges and maximise value from Government’s investment of over £6 billion per annum in research and innovation.”214

186.In the field of energy research the Government has announced a number of changes:

(a)In November 2015, the UK joined Mission Innovation, an international collaboration for clean energy research and development.215 22 large economies have promised to double their own public expenditure on energy research and development by 2020.216 In the 2015 Autumn Statement, the Chancellor stated that he was “doubling spend on energy innovation, to boost energy security and bring down the costs of decarbonisation.”217

(b)In November 2016 the Government announced the formation of an Energy Innovation Board chaired by the Chief Scientific Advisor.218 The Board’s role is to provide “strategic oversight of public programmes on energy innovation”.219 The Board has no power to distribute funding or “direct decisions on the use of individual funds or policies”.220

(c)In its Industrial Strategy, published in February 2017, the Government announced the creation of an ‘Industrial Challenge’ fund. One of the proposed “priority challenges” for this fund are “smart, flexible and clean energy technologies” (such as storage, including batteries, and demand response).221

187.The Government is also reviewing the case for a new research institute to “act as a focal point” for research on battery technology, energy storage and grid technology.222

A new Energy Research Centre

188.Professor Michael Grubb and others from the UCL Energy Institute stated that:

“The relevant challenge is to develop an effective integrated industrial strategy to accelerate both development and deployment of technology improvements as well as more radical, but plausible, innovations.”223

189.Drawing on his experience in the United States, Professor Peter Littlewood drew attention to the “flexible mechanism” of the national laboratory system which allows collaboration between academia and industry working on projects not suitable for a university environment.224

190.In written evidence Professor Friend and Professor Jones sought to translate this into a UK context. They considered that the UK needed an overarching body in the form of a new Energy Institute or National Energy Research Centre. Professors Friend and Jones emphasised that this new institute would need to have physical research facilities which would focus on research to “drive down the cost of new energy technologies and implement them at scale.”225

191.The closest analogy for such an institute in the UK is perhaps the Francis Crick Institute. Created in 2015, ‘the Crick’ is an interdisciplinary medical research institute formed by a partnership between the Wellcome Trust, the Medical Research Council and Cancer Research UK, together with King’s, University and Imperial Colleges, London.

192.Professor Friend stated that the purpose of a similar institute in the energy field would be to:

“produce a pipeline of investable opportunities. It will do this by driving the flow from science to engineering of new energy technologies, by supporting the underpinning technology competences and by providing trained technologists that together present the UK as a globally attractive investment destination.”226

193.The UK lags behind other countries in the proportion of its GDP it spends on energy research and development. The Government needs to ensure that the additional money pledged for energy research is used in the most cost effective way.

194.The recognition of the need for some oversight of research funding is welcome. Nonetheless we consider the policies put forward do not address the fundamental concerns about the co-ordination of funding and research.

195.Funding should be directed towards research that seeks to reduce the cost of new technologies and make them viable on a large scale. We support the proposal for a National Energy Research Centre, which would provide key leadership in the search for new methods of producing cheap clean energy and translating them into commercial applications. Much of the additional public funding for energy research should go into creating a world-class centre of this kind.

140 See para 128

141 Q 9 (Prof Dieter Helm); 42 (Rupert Darwall)

142 Q 24 (Lord Turner of Ecchinswell)

143 Q 27 (Tony Lodge) and Q 16 (Lord Lawson of Blaby)

144 Q 27 (Jimmy Aldridge)

145 Q 10 (Prof Dieter Helm)

146 At third reading in the Commons the Climate Change Bill was approved by 463 votes to three. HC Deb, 28 October 2008, col 835; CJ (Vol 264) (p 645)

147 Climate Change Act 2008, Part 1 and Part 2

148 Although climate change policy is set at a UK level, the Scottish and Welsh legislatures have passed their own legislation and receive advice from the Climate Change Committee on their progress. The Scottish legislation commits the Scottish government to a, more ambitious, 42 per cent reduction by 2020. Climate Change Act (Scotland) Act 2009, section 1 and section 2; Environment (Wales) Act 2016, section 29

150 These powers have been used once: to change the interim 2020 target from a 26% reduction to a 34% reduction. This change was a technical one and designed to ensure the methodology for calculating 2020 and 2050 target were consistent, Explanatory Memorandum to the Climate Change Act 2008 (2020 Target, Credit Limit and Definitions) Order 2009 (SI 2009/1258)

151 Institute for Government, The ‘S’ Factors lessons from policy success reunions, case study: The Climate Change Act 2008 (April 2012): [accessed December 2016]

152 Q 17 (Lord Turner of Ecchinswell)

153 United Nations, Copenhagen Accord (18 December 2009): [accessed February 2017]

154 David Cameron, Historic global deal on climate change (12 December 2015): [accessed January 2017]

155 Q 9 (Prof Dieter Helm)

156 Ibid.

157 Q 98 (Jeremy Nicholson)

158 Written evidence from the Energy Intensive Users Group (UEM0051)

159 Q 98 (Richard Warren); Mr Warren was referring specifically to the steel sector.

160 Q 124 (Phil Sheppard)

161 Q 87 (Martin Pibworth)

162 Q 54 (Matthew Bell)

163 Written evidence from Professor Richard Green (UEM0058); see also written evidence from Dr John Rhys (UEM0011) and Q 141 (Dermot Nolan)

164 Written evidence from the Drax Group (UEM0010)

165 Q 124 (Phil Sheppard)

166 Q 32 (Jimmy Aldridge)

167 Q 74 (Peter Atherton)

168 Q 42 (Rupert Darwall)

169 Q 161 (Greg Clark MP)

173 Committee on Climate Change, UK climate action following the Paris Agreement (13 October 2016): [accessed January 2017]

174 Q 161 (Jeremy Pocklington); Climate Change Act 2008, section 17

175 In the event of an emissions surplus the Secretary of State may ‘bank’ the capacity and add it to the next carbon budget.

176 Q 10 (Prof Dieter Helm)

177 Climate Change Act 2008, section 4; the Act specifies that that this is to be achieved by laying a draft statutory instrument before Parliament, sections 8 and 9.

178 Amber Rudd MP, Speech on a new direction for UK energy policy, 18 November 2015: [accessed December 2015]

179 HM Government, Building our Industrial Strategy, January 2017: [accessed February 2017]

180 Written evidence from the Department for Business, Energy and Industrial Strategy (UEM0083)

181 Written evidence from Drax Group PLC (UEM0010)

182 The technologies listed as being able to compete are offshore wind, advanced conversion technologies (with or without combined heat and power), anaerobic digestion (with or without combined heat and power), dedicated biomass with combined heat and power, wave, tidal stream and geothermal.

183 Contracts for Difference, Allocation Round One Outcome (26 February 2015): [accessed February 2017]

184 All prices are in 2012 prices. This was the first round following the Energy Act 2013 which introduced Contracts for Difference but the Government had already awarded some contracts for difference without price competition (discussed at para 46).

185 Pot 1 technologies were onshore wind, solar photovoltaic, energy from waste with combined heat and power, hydro, landfill gas and sewage gas. Pot 2 technologies were offshore wind, wave, tidal stream, advanced conversion technologies, anaerobic digestion, dedicated biomass with combined heat and power, geothermal and Scottish islands onshore wind.

186 Q 109 (Hugh McNeal)

187 Q 135 (Dermot Nolan)

188 Q 4 (Prof Dieter Helm)

189 Q 135 (Dermot Nolan)

190 Q 4 (Prof Dieter Helm). For example RenewableUK said “Ultimately the role of Government should be to set the overall objectives on decarbonisation and security of supply – most likely in the form of a carbon intensity target and a Loss of Load Expectation (LOLE) respectively – and then task agencies with delivering these objectives by procuring the volumes of low-carbon generation and capacity services needed to meet those targets”. Written evidence from RenewableUK (UEM0075)

191 Climate Change Act 2008, section 10(2): “economic circumstances, and in particular the likely impact of the decision on the economy and the competitiveness of particular sectors of the economy”; “ fiscal circumstances, and in particular the likely impact of the decision on taxation, public spending and public borrowing;” “social circumstances, and in particular the likely impact of the decision on fuel poverty”.

192 For example, its recent report on Hinkley Point C. See para 33.

193 Competition and Markets Authority, Energy Market Investigation, Final Report (24 June 2016): [accessed January 2017]

194 ‘Electrical Notes’, The Times (14 September 1910):–09-14/13/6.html#start%3D1879–01-01%26end%3D1910–12-31%26terms%3Delectricity%26back%3D/tto/archive/find/electricity/w:1879–01-01%7E1910–12-31/3%26prev%3D/tto/archive/frame/goto/electricity/w:1879–01-01%7E1910–12-31/27%26next%3D/tto/archive/frame/goto/electricity/w:1879–01-01%7E1910–12-31/29 [accessed December 2016]

195 Q 5 (Prof Dieter Helm)

196 Written evidence from Prof Peter Littlewood (UEM0093)

197 Written evidence from Prof Richard Friend and Prof Richard Jones (UEM0088) and (UEM0094)

198 Q 45 (Prof Michael Grubb)

199 Q 109 (Michael Liebreich)

200 The Anaerobic Digestion and Bioresources Association told us that this technology could “reduce the UK’s carbon emissions by 4%” (UEM0034). The Department for Business, Energy and Industrial Strategy stated that small modular reactors offered a “different route” to nuclear powered electricity that could “transform the economics of heat networks” (UEM0083)

201 Written evidence from RenewableUK (UEM0075)

202 International Energy Agency, ‘Research Development and Demonstration Statistics’: [accessed December 2016]

203 Written evidence from Prof Richard Friend and Prof Richard Jones (UEM0088) and (UEM0094)

204 Q 156 (Ashley Ibbett)

205 Written evidence from Prof Peter Littlewood (UEM0093)

206 HM Government, Building Our Industrial Strategy (January 2017): [accessed January 2017]. The UK invests 1.7 percent of GDP; the OECD average is 2.4 percent and South Korea, Israel, Japan, Sweden, Finland and Denmark invest over 3 per cent of GDP.

207 Q 45 (Dr David Clarke)

208 Written evidence from the UCL Energy Institute and Institute for Sustainable Resources (UEM0064)

209 HM Government, Building Our Industrial Strategy

210 Written evidence from RWE (UEM0050)

211 Q 113 (Prof Richard Friend)

212 Formerly the Technology Strategy Board, Innovate UK aims to accelerate economic growth by stimulating and supporting business-led innovation.

213 Higher Education and Research Bill, Part 3 [Bill 97 (2015–16)]

214 Department for Business, Innovation and Skills, Case for the creation of UK Research and Innovation UK (June 2016): [accessed January 2017]

215 Department of Energy and Climate Change, ‘UK joins new international clean energy initiative’ (30 November 2015): [accessed February 2017]

216 Mission Innovation, ‘About Mission Innovation’: [accessed February 2017]

218 Department of Business, Energy and Industrial Strategy, ‘Greg Clark speech at Energy UK’ (11 November 2016): [accessed February 2017]

219 Energy Innovation Board, ‘Role of the Board’: [accessed December 2016]

221 HM Government, Building Our Industrial Strategy

222 HM Government, Building Our Industrial Strategy

223 Written evidence from UCL (UEM0064)

224 Written evidence from Prof Peter Littlewood (UEM0094)

225 Ibid.

226 Additional written evidence from Professor Richard Friend and Professor Richard Jones (UEM0094)

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