Energy & Carbon Prices: Creating the correct strategic response

Monday, January 10, 2011

18:00 - 21:15

Thanks to the efforts of many, Cancun has strengthened the hand of policy makers which will benefit the policies that are currently on the drafting table. The Energy Market Reform (EMR), will go into consultation in the next few weeks, with 2011 promising to see the biggest overhaul of the energy sector since privatisation 20 years ago With rising underlying energy prices, this is a good time to review energy strategies.

Carbon floor prices, the extension of the Feed in Tariff and a new emissions performance standard, will all increase the unit price of energy and the complexity of energy management. Energy Managers need to understand the specialisms of their roles, and senior management needs to weigh up the merits of self operating versus outsourcing this non-core function.

The panel: We have an excellent line-up of speakers, designed to give you the insight track on policy and case studies and ideas that you can take back into the office. These include:

    Steven Fawkes - Head of New Energy at Matrix,Steve has advised companies and governments in this area for over 20 years, and he will discuss share his views on how companies should respond.
    Department of Energy & Climate Change - we are awaiting confirmation on a senior representative from Lieb-Doczy, Head of Energy Markets, Economics Team, DECC - who will discuss the array of policy instruments, their inter-relation, the consultation around the EMR and the way forwards.
    Stephen Barker, Head of Energy Efficiency & Environmental Care, Siemens plc - A leading corporate, who will explain their strategic take on this new energy paradigm and the immediate changes it has for their business.

Speakers

David Kennedy Committee on Climate Change

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Dr Enese Lieb-Doczy DECC (Department for Energy &...

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Stephen Barker Siemens plc, Industry Sector ...

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Steven Fawkes Matrix

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Round Tables

Built Environment

How do you begin to price increased energy costs across your corporate estate?

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In order to answer this question, delegates considered whether energy costs are driving changes to their energy management strategy, the relationship between landlords and tenants and what that means for energy management and the changing nature of Facilities/Energy Management. The discussion ended with a clear call for Display Energy Certificates to be rolled out to all buildings.

1. Do you know what your energy costs are across your estate? Are increasing energy costs a driver to change your energy management strategy?
Energy measurement varies depending on the scale of the organisation; some companies are only just beginning to check and understand their bills properly for the first time, whilst others have a far more comprehensive strategy to reduce their energy usage. Delegates agreed that you must measure before you manage energy use. Energy bills are not high enough to drive changes to energy management at this point in time. Whilst the energy cost to a company can look like a large figure in isolation, it is often tiny in comparison to a company’s overall operational costs and therefore energy bills rarely feature in the considerations of a Financial Director.

2. What does the relationship between tenants and landlords mean for energy usage?
Consideration for reducing energy use in a tenanted building often falls between the two parties. The tenants on the one hand often don’t have sight of their energy bills and have little incentive to reduce their emissions, whilst landlords pay the bills but have no ability or desire to impact on their tenants’ energy habits. Standard clauses around energy management for inclusion within draft contracts would be helpful for the industry to clarify responsibility for reducing energy consumption in managed buildings. Continuing delays and confusion around the shape and structure of the Carbon Reduction Commitment Energy Efficiency Scheme further complicates this picture and one participant cited increasing numbers of tenants contacting landlords to refuse to participate in the CRC EES as they view it as the landlord’s responsibility.

3. Do businesses need more specific skills in order to manage energy more effectively? How is the role of Energy Manager changing and is there a role for increased outsourcing?
Proper commissioning of a building is key to better operational performance. Facilities Managers must be responsible for ensuring proper commissioning, which is often a problem when kit is installed in a rented property. Discussing renewable energy generation, the group agreed that renewable systems are often not integrated properly into the whole system of a building and that energy efficiency and the building fabric must be tackled. With a trend towards increasingly complex energy management requirements and increasing energy prices, it is vital that those managing a building have the appropriate skills to do so effectively – and more specialised skills will be required over time. The Energy Performance Contracting model which is common in the USA (whereby a third party is brought in to manage energy usage, improve building energy performance and guarantees to reduce energy bills in order to pay their fees) is likely to become more popular in UK.

4. If energy is not a material cost, what are the incentives to reduce energy usage across the corporate estate?
Competition between building owners who want to be seen to be leading in sustainability is driving landlords to implement comprehensive energy management strategies. Many benchmarks and initiatives already exist and the link between sustainability and value is key to driving change in the sector. Those who develop BREEAM buildings are seeing the benefits of shorter void periods and greater tenant satisfaction. If applied to the commercial building sector, the Green Deal will incentivise energy efficient refurbishments but only if all the measures meet the ‘Golden Rule’ of payback through savings on energy bills in a specified period. Forthcoming European legislation, enshrined in future iterations of the EU Energy Performance of Buildings Directive will continue to drive energy efficiency, as Energy Peformance Certificates will be required when commercial properties are advertised for sale or rent. Display Energy Certificates are driving greater understanding of energy performance in operation and the bigger landlords are already producing DECs voluntarily for their estates. When a DEC is lower than expected, it is often because the building hasn’t been commissioned properly. Elements of DEC’s are too simplistic and need to be improved but the group agreed they should be rolled out to all buildings over time.

ACTION:
Display Energy Certificates should be rolled out to all buildings over time to drive better understanding of energy usage and building performance.

Supply Chain

How do energy prices and carbon costs affect your organization and its supply chain?

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The discussion started by considering the risks and opportunities presented by the EMR and it was clear that the perspectives of different stakeholders on this issue would be quite distinct. Policy makers and NGO’s tend to highlight the accountability of multi-national corporations for the actions of their suppliers. While this had not always been directly supported by legislation, it was reinforced by new standards such as the scope 3 and product sustainability standards from the World Resources Institute. The question was asked: why do more corporations not see these issues as potential opportunities? More specifically why are companies not picking up the favourable financing deals associated with investing in energy efficiency? On a strategic level it was felt that corporations might see additional costs of energy as a relatively marginal or tactical consideration but would be more concerned by the potential for legislative change to disrupt their supply chains. The capacity of suppliers to respond to new regulatory complexity would vary, with SME’s often struggling to manage the issues. This could therefore cause strategic risks such as security of supply for their corporate customers. Given these challenges the group asked: how best should organisations engage suppliers on this issue?

It was suggested that amongst the supplier population there often existed best practices and yet these were not very often shared. The challenge then was one of sharing knowledge and best practices. The group therefore debated how to motivate the various participants in the value chain to collaborate and share such knowledge? This included consideration of different kinds of collaboration. Firstly collaboration among indsutry peers where it was recognised that several strong cross-industry initiatives do exist: for example the Sedex Progress initiative in retail sector, the E-TASC initiative in Electronics Sector and the Sustainability Consortium. These initiatives were judged to be effective in setting common goals and standards but often very slow to create solutions.

The group asked whether addressing these issues was a collaborative task or a competitive one. It concluded that while it was more a collaborative space it could, in its implementation and relationship to their brands, have a competitive dimension. There was also a suggestion that collaborative solutions were starting to extend beyond the usual standards setting activity into shared solutions: for example the development of shared smart logistics between otherwise competing retailers. Collaboration between large corporations and their suppliers was considered and the consensus was that it was in the interests of large corporations, to provide collaborative engagement with their suppliers. The challenge was to motivate suppliers to collaborate with each other and it was agreed that corporations have an important role in encouraging and even facilitating this kind of knowledge sharing.

In conclusion:
• EMR like many policy changes presents complexity that contains both opportunity and risk
• The capacity of MNCs and smaller suppliers to manage the risks varies hugely and if SME’s fail to manage them this could threaten their viability and their customers’ security of supply
• All parties’ understanding of the business opportunity is incomplete and therefore take up of financing with clear ROI is low
• Best practices exist but need to be disseminated
• Industry collaborative initiatives are one way to share best practices
• Supply chain collaboration is another mechanism for sharing best practice, this can be challenging to get but corporations can have a facilitating role
• The future of collaboration may extend beyond standards setting and best practice sharing and into a shared solution space e.g. shared smart logistics in retail sector

Stakeholder Engagement

How do you successfully foster awareness of the impact of higher energy prices internally?

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The participants talked at some length about the difficulties of engaging employees on energy efficiency issues.

The chair tried to frame a discussion around whether the higher energy costs could raise the profile but the consensus opinion was that it would not.

The chair introduced the idea that there was a clear misalignment between energy costs as a percentage of operational spend vs impact from energy consumption as a percentage of total environmental impact.

There was little interest in discussing the implications if this and the participants reverted to talking about what the government should be doing.

Carbon Strategies

What has government and business done and what could it do to advance carbon management in the UK?

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We had a great line up of participants for this month's roundtable which produced some passionate and enthusiastic discussion. We were scheduled to discuss COP16 and its effects on the carbon market, however the group wished to pursue a more general discussion building on the points made in the plenary session, so we agreed on the topic above - resulting in some interesting insights.

Our discussion began with members of the group picking up on comments made in the plenary talks by citing successful local energy generation and management programmes in Germany and Sweden and the combination of finance, legislation, culture and expertise that underpins them. This was contrasted with the lack of these components in the UK over the last 30 years and our corresponding underachievement. Members of the group expressed frustration at this as energy efficiency is not a complex area and is something that many countries in Europe do very well. The general feeling is that, at least historically, the UK has made the area unnecessarily complex. A related comment was that the UK's "first past the post" electoral system - which leads to frequent overhauls of policy, initiatives being stopped before completion and expertise being regularly lost - is unhelpful for a consistent approach to energy management. Our system, which contrasts with the majority of Europe where proportional representation is used and therefore coalitions and cross party cooperation is more common, may go some way towards explaining our performance .

On a positive note, the £38 million cost savings that Royal Mail secured by implementing their carbon management plan was cited as an excellent example of what can be achieved by strong leadership inside a business. Another example of incentives from one participant was a competition run internally for energy efficiency projects with the best ROI - the winning projects would share a £25 million fund for implementation. Another interesting tip was for organisations to look outside of their boundaries to their local communities. By taking this approach participants had increased the number of opportunities for energy generation and energy efficiency measures whilst also improving the standard of living for local people and decreasing the cost associated with the reduction of one tonne of carbon. Something one participant called "local offsetting".

Key take aways
• When looking at carbon management policy or business ideas there are great insights to be gained from exploring experiences in other parts of Europe
• Give some thought to how our election system is helping or hindering progress in sustainability
• There are huge savings to be made in businesses - it's up to us to provide the leadership needed to get these savings through
• Be innovative in your approach to carbon management – using internal competition can really engage and excite your teams and colleagues
• Reconsider the organisational boundary and work in partnership with your local community or further afield, recognising and utilising the concept of external emission reductions.

Finance & Corporate Sustainability

How do you convince investors you are ready for a new energy future?

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The plenary session had provided us with some interesting data as a frame of reference:
• UK has potential for £10-15bn of energy efficiency investments with IRR of over 50% (generally much higher than the cost of capital / IRR on the core business for most entities)
• A systems thinking approach to energy efficiency investments increases the returns from the investment by a factor of 3-4 (which we took to imply that looking at individual investments based on MAC curves may not generate the optimal result for the investor)
• Fewer than 25% of profit centres measure their energy use so it is unlikely that they are managing their energy cost or efficiency

The group included sustainability managers, policy makers, investors and consultants so we had a good discussion around the issues from different viewpoints. We interpreted the question to include all potential budget holders as investors – so internal budget holders / finance as well as external investors into businesses.

With so many apparently “low hanging fruit” of energy efficiency investments with returns far higher than the return on capital employed in the core business, we re-framed the question to focus more on how you convince investors that they should support your vision for the new energy future.

We saw many barriers to investment, each of which must be addressed to ensure that action is taken. We believe that these relate to risk of investment, and whether the risks are understood and therefore priced appropriately:
• Gov’t policies impact the market. With uncertainty on long term policy direction or consistency and timing, the risk of investment is increased (cf RHI). With uncertainty, either the investment returns required are increased or investment decisions are delayed.
• Rapidly changing technology. Whilst we recognise that this is not exclusive to clean tech, with many clean tech / energy efficiency projects requiring high levels of capex it may be harder to evaluate the technology or diversify risk by using multiple alternative technologies, thereby making it rational to delay making an investment until the leading technology is proven – VHS vs Betamax
• Energy is often a small line item in many cost centres so is not a focus for management; it may be hard to get the “mind space” from the budget holders who want to focus on the core business. With the increased status of sustainability managers we see this as improving. We also recommend trying to change the frame of reference: energy may be only say 4% of total costs but a 25% saving will add 1% to net profits – a business with 10% net margin will find a 10% increase in net profits quite attractive!
• Focus on finance and not sustainability. Unless the leaders have a strong environmental agenda then the FD / budget holders may be turned off by sales with an environmental / sustainability focus. Show them the money and they’ll be interested.
• Try to package the risk and allow those who understand the technologies / policy / returns to invest in the areas they understand. We noted that many of the large projects (eg CCS) require significant investment of long term money but has technology risk that long term investors are not geared up to evaluate or back. Where possible package the risk appropriately for investors – this could include outsourcing / ESCOs; ensuring that opportunities are presented to investors that are consistent with their knowledge and desire to invest.

Communications

How do you successfully foster awareness of the impact of higher energy prices to customers?

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Ed kicked off the session by asking everyone to name their own energy provider and whether they were aware of how this compared price-wise with the rest of the market. The results were revealing! Scottish and Southern was by far the most popular energy provider, but even amongst a group of 'environmentally aware' participants there was considerable lassitude. Some were sceptical of 'green tariffs' beyond the Good Energy/Ecotricity's of this world. Others had simply continued the account of the previous occupants of their property. Over all it was interesting to see that most people took little interest in WHO was providing their energy and were generally unaware of how much they were paying and whether this was good value or not.

The group felt DECC's energy price rise predictions were too small – perhaps to avoid 'scaring the horses'. We also discussed whether the relative percentage of personal income spent on energy had gone up or down. We felt it had gone down – but this had been the explicit aim of Government policy – to deliver cheap, affordable energy. The question is how to communicate that 'the brief has changed' and the aim is now the delivery and provision of 'sustainable energy'.

There was concern about how the public might react to rising energy prices – with the example of lorry drivers and the fuel protest cited as evidence of a possible hostile/disruptive reaction. However we also felt that fuel prices were much more visible – as you see what you are paying at the pump, whereas energy use in the home is more 'below the radar' and less visible. This is perhaps changing with the introduction of SMART meters and greater understanding of energy use in the home as a result. 'O' Energy in the USA was also put forward as an example of a company that benchmarks your energy consumption against similar properties in your area – so you can effectively compare your energy consumption with that of your neighbours – strong social proof. Other visible techniques include the infra-red images of 'energy-leaky' houses etc.

What about those who 'simply don't care'? There were suggestions that hooking in children in a family context or the resident 'energy nazi' in flatshares as a way to influence household energy behaviours. We then asked well, should energy prices rise? Are they too cheap? Simplistic price hikes were agreed to be regressive and the use of incremental tariffs, where energy is cheap up to a threshold of reasonable use and then prices hike steeply with increasing energy profligacy.

The group felt business customers would respond well to logical, rational, financial arguments around energy prices, especially in the current environment of business survival or rapid growth. It was felt that even very compelling business case arguments such as those put forward by Siemens on short payback periods for baskets of investments in energy savings often failed as financing failed due to poor communication between sustainability and finance managers. Solutions lie in 'telling the compelling stories' of successes in this area and aligning the projects with CEO's company narratives to get greater traction. This could help to overcome the narrow-mindedness/shortsightedness of some Project Managers who show little interest in what can often feel like 'more work'.

The final suggestion was for the effective Carbon Disclosure Project to introduce a 'tiered' process, that would rank companies further depending on how far they had progressed their disclosure to include key suppliers etc. Thanks to all who participated in a punchy but provocative session!

CSR Reporting Best Practices

How do you start the shift from annual reporting to continuous engagement?

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CSR reporting is typically undertaken annually and provides a snap shot of the performance against objectives set out in previous years. Many companies use this methodology, derived from the financial reporting/auditing model, to communicate to interested parties, typically shareholders and other stakeholders, including the workforce. The question posed this evening for discussion is the “next logical step” towards a continuous engagement with these stakeholders, and as a result the format and content of reporting will need to be adapted accordingly, not only in style, but also content and context, to take advantage of the 24/7/365 information dissemination potential. The discussion point therefore is how do you start this process, more specifically do you start the process at all or are the methodologies of “communication” performing different needs?

Some of the key discussion points raised:

• Information overload is a real risk in the modern communication process. If based on a continual stream of information the information and target audience need to be established and defined correctly before the type and style of the information is provided. The risk is over reporting for reporting sake, and missing the valuable information through dilution.
• CSR factors are better reviewed periodically rather than continuously, however the periods may be shorter than annually, an example of the frequency expressed financial analysts position was quarterly would be a benefit.
• If continuous engagement is required, better to approach this via “news items” where information can be provided in sufficient detail to be of relevance and interest.
• There is a place for both continuous and annual or periodic CSR reporting, as these fulfil very different roles in the communication package to stakeholders.
• For very large organisations, using stakeholder events dedicated to CSR messages and promotion have a very significant impact, Unilevel, M&S, PepsiCo etc specifically with CEO presence and engagement at the event is critical.
• Use of “invited focus panels” to identify and guide what information is beneficial to the stakeholders, inclusive of relevant NGOs, etc to provide a “strategic” focus on the delivery of the company’s message.

In general it was felt that there was a need for both forms of communication, the annual report still has its place and purpose, alongside the financial reporting, however the continual engagement is addressing different aspects and at a different level, therefore better via specific news items and sustainability/CSR dedicated events.

As there are no rules for what should and should not be included in the CSR reports, Sustainability and CSR reporting continues to be a pick and mix approach to communicating information to the stakeholders. As there is still not accepted “standard” format, style or content guidance, companies will continue to find a style and structure that suites them best. This will remain the main obstacle to undertaking “like for like” comparisons, especially on the annual CSR or Sustainability reports.

Technology

How does the business case for green or clean energy procurement change in the light of new energy and carbon policy?

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The “Sustainable Technology Solutions” table planned to discuss “How does the business case for green or clean energy procurement change in the light of new energy and carbon policy?” This focused on the changes suggested by the Energy Market Reform Consultation, which included carbon prices, demand side management and capacity payments.

Discussion themes:
• Investment in distributed generation which would reduce the need for investment in new centralised generation is not supported by the existing CRC structure for corporates. If a company receives the FIT support their generation is no longer considered to be renewable from a CRC perspective therefore reducing investment potential. This needs to be changed to increase investment.
• We should look at the US example of aggregated demand management. There aggregators pull together large and small customer demand reduction commitments to bid into a live system in return for $. This is a good investment opportunity and a great way of reducing demand rather than building new power stations.

Concluding thoughts; the technology generally exists to manage demand and generate electricity at source but we need the right policy frameworks and information flows to realise a number of these opportunities.

Energy Effeciency

Too good to be true? How do new energy and carbon policy instruments improve the business case for energy efficiency projects?

Sustainable Transport

How will medium term energy and carbon pricing affect the relative cost of different modes of transport?

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• Transport sector is still not part of ETS or carbon pricing
• There is no tangibility with transport sector
• Carbon pricing is currently indirect and will probably remain so by 2020
• It will be affected by the increase in fuel pricing
• There is still area for pioneers with electric vehicles, business case is still weak, it is being driven by the Government
• The initiatives around transport are new
• Companies are interested but not yet ready to invest, though developments and projects that include different modes of transport are a better choice
• Transporting containers in the UK still requires a lot of road transport
• If the tonne/km price changes, the carbon price of transported goods will become very influential and will force companies to move 100% load all the time
• This will affect the modal split
• There are infrastructure issues though – bigger boats require bigger ports...
• The new DfT/Defra freight guidance now covers shipping and rail aswell
• The solution might be in asking suppliers to be greener and make transport fully optimised – this is still working within existing structure
• This will affect the supply chain and will become management and operations issue
• There has been movement in the last 12 months, with forums and committees about the decarbonisation of the supply chain
• There is a lot of buy-in and a massive appetite from the retailers to reduce the amount of CO2 emissions from transporting goods
• There will soon be action from everyone in the supply chain
• Retailers will support and influence a project that would take the trucks from the road
• How much new technology is brought into use will determine the effect of price rises and different fuel options
• Government is still indecisive about the bio-fuel issue
• Carbon footprinting should be tailored for business – motivating employees and stimulating competition
• People have to be engaged
• It is getting harder to reduce carbon per unit once you started measuring
• Carbon pricing is going to happen!
• Road pricing should also include carbon impact of vehicles
• The problems arise when choosing who pays carbon taxes and how do you offset
• Fuel prices are definitely increasing and this is an opportunity
• The long-term plan is to collaborate
• We should take into account the embodied carbon in roads and rail as well
• Transport is a small proportion of building projects footprint
• Some experiences show that modal shift saved great amount of money and CO2
• But cost and politics of development are still much more important than carbon
• Some local councils are stating targets already and that will become a standard in 5 years time
• Can the infrastructure cope if we move everything to rail?
• Is high-speed rail a solution for decarbonising? It will be designed for people, more than goods
• The costs will be passed on to different parts of the supply chain
• Cultural change is needed
• We need more regulation, but it is definitely happening
• It will have only a small-scale impact in the medium term though
• Innovation should be stimulated through incentives and regulation
• The Government should drive change through legal instruments

Corporate Strategies

How Centrica is responding to new energy and carbon policy instruments?

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Outline of the discussion:
I. Electricity reform
II. Centrica overview
III. British Gas initiatives
IV. General debate and commentary

We opened with a recap of the Electricity Market Reform (EMR), specifically:

The UK government has committed to tough carbon reduction targets and DECC has also targeted 30% of the UK’s electricity to come from Renewables by 2020 (up from 7 % today).

The four proposed reforms proposed by DECC include:
1. A carbon price floor to encourage investment in low carbon generation by providing a clearer long-term price for carbon.
2. Long-term contracts for low-carbon generation through a “contract for difference” feed-in tariff. An alternative ‘premium’ feed-in tariff is also part of the consultation document.
3. Additional payments to encourage the construction of reserve plants or demand reduction measures to mitigate intermittency.
4. An emissions performance standard that will reinforce the existing requirement that no new coal-fired station is built without carbon capture and storage.

Given this backdrop, Centrica’s focus is in three key areas namely security of supply, mitigating climate change and overcoming affordability issues re fuel poverty. All the players in the industry agree that the UK needs to de-carbonise the power industry, but this requires the right policy framework - once this is in place, the utility firms will move rapidly.

It was felt that there are significant business opportunities in the energy efficiency space for both small and large firms and particularly for ESCOs and Microgeneration companies. Centrica/ British Gas have developed a significant pipeline for ‘dull’ type energy efficiency services like insulation and boiler upgrades. As Centrica is very large player in the UK with approx 15 million customers and approximately 45% market share, their aim is to develop new products & services growing value share, not necessarily grow volume share.

Centrica has developed upstream capability under the leadership of Sam Laidlaw, to complement the existing holdings e.g. British Gas. Upstream includes a gas fleet, a wind portfolio and nuclear capability (with 20% holding of British Energy) in order to better manage the energy value chain.

One of the key questions is whether Centrica’s strategy will enable energy prices to fall over the long term, particularly as renewable technologies mature and benefit from economies of scale. We debated the future of energy pricing and if and how the electricity price could be de-linked from the Carbon price, as mentioned by David Kennedy. There was however no clear consensus on long term pricing trends. It was however agreed that innovative financing mechanisms are required to help make the business case and to provide affordable energy. We briefly discussed ‘pay as you save schemes’. As an aside, Centrica has set aside a £30million reserve to invest as the picture becomes clearer regarding the Green Deal.

We debated how household energy data was at the core of providing new products and services to UK homeowners and how the market could be disrupted by new players. The feeling was that once the ‘rules of the game’ are clear to the existing incumbents, then greater innovation will take place. Regarding innovation, the Group discussed if and how the UK could move to a fully renewable energy supply. There was debate as to whether this was financially and technically feasible - has this been fully costed and could Renewables alone support the base load required?

Our group also talked about the brand and how consumers interface with British Gas engineers and the importance of the brand experience – the need for a reliable and trustworthy service. Regarding new services, British Gas has launched a service called EnergySmart, as a precursor to full smart metering. The service provides:
• accurate monthly billing,
• online management tools
• free electricity monitor
• Can be added to most of tariffs also a fixed rate tariff, giving one certainty until October 2012.
• Graphs and online tools help reduce energy usage, saving as much as £150 pa.

An interesting remark was that Centrica is approximately one third of the size of the large European utility providers such as Eon, EDF and RWE and while it is difficult for UK energy companies to penetrate Germany, France, Italy etc., European operators clearly have a grip on the UK energy market, thus it is important to keep competition in perspective.

In summary, the electricity reforms are welcome and with a clear framework, new business models particularly in the Renewables space will emerge.

Energy Policy & Strategy

Creating a correct strategic response to to the energy market reform

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BACKGROUND
The concerns of today’s energy markets are vastly different from those twenty years ago when privatisation of the electricity industry last heralded changes as significant as now being envisaged in our energy policy and energy system. Market participants must wrestle with a diverse range of issues including: Security of supply, affordability, market design, decarbonisation agenda, future of the EU ETS, emissions performance standards, CCS clusters, supergrids/interconnectors, smart meters, in-home technologies, demand-side response, renewable heat, energy efficiency, electrification of transport, connections challenges, financing challenges, managing variable output, financial support schemes,

In the context that decarbonisation objectives are unlikely to be met under current market arrangements and material risks to security of supply in the future, the Government in its Electricity Market Reform (EMR) consultation is proposing a radical package of measures:
• Carbon Price Support or carbon floor price
• Long term Contracts for Difference for low carbon generators
• Targeted Emissions Performance Standard to discourage unabated coal
• Targeted Capacity Tenders to provide additional capacity for back-up

However, the details of policy implementation have yet to be determined and a number of hurdles to Electricity Market Reform will need to be overcome. So how might participants approach the right strategic response to EMR and engage in the debate about our energy future?

DISCUSSION NOTES
The discussion at this Green Monday Energy Policy round table on 10th January 2011 focused on two particular challenges and questions raised by the chair, as follows:

“The costs of electricity market reform in the context of current energy policy designed to achieve a deep decarbonisation of the energy sector whilst maintaining security of supply will be large. What is likely to be reaction of consumers and how should the industry respond?”

• The introduction from the chair noted some of the estimates of the investments required in the UK generation sector (including Ofgem’s Project Discovery estimate of £200 bn, DECC’s estimate of £110 bn in generation and grids by 2020) and the impact of EMR on consumers (DECC - £160 a year rise in electricity bills by 2030, uSwitch – reported as £500 per customer using different assumptions and comparators)
• The group discussed the impact of EMR on affordability for consumers (domestic, commercial and industry) and the wider context of energy policy. The table acknowledged that for EMR to be successful in achieving its goals, price signals and therefore energy costs will need to change.
• There was consensus that investment decisions by large energy users would be impacted given the scale of investment envisaged. There was less consensus around the impact of international competiveness with a number of the participants noting that there was quite some way for the proposals to go before their full implications could be ascertained.
• It was noted that experience from the US showed better demand side response with the right market arrangements and incentives and this would be something to be considered further during the EMR process. An example of the investment made by a large retailer had made in recent times in energy efficiency showed that an appetite remained if the right incentives were in place.
• There was some discussion around whether electricity suppliers would (or indeed could) simply refuse to buy (and sell) renewable power given the financial risks, appetite for risk and alternative investments that the Big 6 in particular have. Furthermore, planning delays were cited as another roadblock to achieving the goals of EMR.
• Given the highly uncertain policy and implementation background, there was some, natural, hesitation to reach consensus on the appropriate strategic response. However, the group agreed that the business model and relationships of the future for utilities, investors, industry and consumers changing business models would be fundamentally changed under EMR.

“Consumer engagement will be critical to meeting the costs of UK energy policy and the effectiveness of EMR. How can the case be better put to consumers for meeting the cost of investments to support decarbonisation and to respond appropriately to energy policies?”

• The discussion moved more specifically on to how consumers might be engaged during this reform process given the critical role consumers will play in underwriting the costs. In terms of the exploiting the opportunities for energy efficiency, there was debate as to if a tipping point would be observed for mass consumer participation in energy efficiency measures and whether cost or other drivers would push us towards this tipping point.
• The group discussed how the need for EMR might be communicated to consumers and the related open conversation required around the costs of decarbonising the energy sector. Challenges with the Green Deal economics were noted. Perhaps more fundamentally, the group noted the need to re-engage consumers (and voters) on climate change being the platform on which EMR and future energy policy was being built. It was felt not enough was being done currently in this area but that future climate events would influence public opinion. An open question was raised as to whether there was simply a credibility gap and that trust had been lost.
• There was some discussion on the role of local communities in making government energy policies effective through energy efficiency. There was no consensus established on the right way to engage but a number of interesting ideas based on international experience were raised. The role of social networks and peer to peer influence was also discussed as well as changing attitudes as the influence of groups working to educate local communities and through schools begins to have an impact.
• With so many policy initiatives, there was a belief that confusion could reign. There was unanimous support for a coherent and consistent vision to be established which links energy policy, market reform, the role of consumers and investors and the industry...in short a clear vision for our energy future set out by Government.

CONCLUSION & FURTHER STEPS
It was agreed by the group that the following actions would, whilst challenging, offer a starting point for a strategic response to EMR:

i. Government to announce that prices will rise by 5% (or similar) for the next 15 years in order pay for the decarbonisation of the energy sector and maintain security of supplies and that this is a price worth paying!
ii. Present a coherent set of policies and a vision for our energy future and industry
iii. Offer local and national prizes for innovation and community action to support energy efficiency and decarbonisation (perhaps sponsored by industry) and get communities engaged build partnerships.

Venue Detail

Bank of America Merrill Lynch: King Edward Hall

King Edward Hall | 2 King Edward Street | London | EC1A 1HQ

Directions

Bank of America's offices are a very short walk from St Paul's tube station (Central Line). Exit the station at Cheapside/Newgate Street. Go past the BT centre, with it on your right-hand side and take the first available right down Edward Street. Continue down this road for 80m and the entrance to the venue is on your left-hand side.

Do not go to the main reception desk at their offices when you arrive. You are looking for an entrance that leads you directly into the King Edward Hall.