IEA commends UK energy policy for supporting investment and energy efficiency, but outlines challenges on future security of supply

(Paris) — 1 March 2007

“The UK’s energy industry is working in a well-established framework of market regulation, in which it has sufficient incentives to provide new investment when needed,” Claude Mandil, Executive Director of the International Energy Agency (IEA), said today in London. Presenting the publication Energy Policies of IEA Countries – United Kingdom 2007 Review, Mr. Mandil stressed it was commendable that the UK government was not just focusing on the supply side, but had also created “a robust and simple framework with the Energy Efficiency Commitment in which energy companies are encouraged by market incentives to deliver energy efficiency improvements.”

“However, there is room for improvement, particularly in the area of gas dependence,” Mr. Mandil added. As new investment in energy supply is focusing on gas-fired power, the country’s dependence on gas is increasing. “The UK government needs to monitor this situation and should keep all options open for potential developers of power stations to use other fuels,” Mr. Mandil said. “Furthermore, the planning system under which large infrastructure projects are licensed, permitted and built, is a significant barrier to energy infrastructure developments and can become a risk to security of supply.”

UK policy of letting the market provide investment is successful
The gas supply crisis of winter 2006 raised serious concerns in the United Kingdom. On the other hand, it clearly demonstrated that the UK market worked. It delivered short-term demand reductions in reaction to increased prices due to an unexpectedly fast decline of UK gas production, and spurred new long-term capacity developments to ensure that a repetition of the crisis is unlikely. One year on, new LNG and pipeline capacity is on stream and wholesale gas prices have now fallen to half the level in continental Europe, while several increases in power generation capacity have been announced over the past year. This willingness to invest in the UK’s energy market shows that its foundation is sound.

Nevertheless, the UK government could become more proactive in providing certainty about future policy directions, as well as improving the availability and transparency of data, particularly on energy supply, but also on demand and pricing, and in allowing demand to respond as much as possible to prices and/or supply tightness. Long-term planning should also take into account the decline of gas production by 2015, and plan for the investment required to replace it.

“The UK government’s Energy Review is a significant step in the right direction on these matters. The IEA agrees with the UK government that no technology should be ruled out on principle, but that it should be up to market participants to decide on the fuels of their new power stations,” said Mr. Mandil.

The Energy Efficiency Commitment is a model for other countries in Europe and worldwide
In 2002, the United Kingdom introduced a very innovative energy-saving programme under which suppliers must achieve efficiency targets in households: the Energy Efficiency Commitment (EEC). Following a successful first phase, it was considerably expanded for the period 2006-12. The EEC is a model programme in that it combines a system of market-compatible incentives with a very simple administration, and the IEA strongly commends the UK government for the creative approach to energy efficiency taken with the Commitment. Challenges, such as the requirement that 50% of savings come from low-income households, remain. Other areas where the EEC could be improved include high-consuming customers and the way in which new technologies can be brought into the programme.

Security of supply requires government action in streamlining planning
Streamlining the planning and consent process for new energy infrastructure is another major challenge. The UK government should address this issue, to facilitate the provision of renewables as well as other energy infrastructure for which the market signals a need but which cannot be tackled due to planning problems. The steps suggested in the UK government's Energy Review are appropriate, and the government should now consider implementing these.

In the case of renewables, “the IEA believes that the Renewables Obligation is an innovative and smart way to support green electricity generation, which is suffering mostly from the inability to get projects developed,” said Mr. Mandil. Here as well, the steps suggested in the Energy Review should help to move the sector forward. Increasing the share of renewables in the United Kingdom is crucial as it is very low compared with other IEA member countries, despite a very good resource base.

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