Posted by

Tom Nolan, Policy Adviser

31 May 2012

The Paris-based International Energy Agency (IEA) is arguably the most authoritative global voice on energy issues. Their opinions are held in similar regard by those involved in energy policy as the International Monetary Fund (IMF) opinions on economic matters are held by those involved in economic policy. The organisation was formed in the aftermath of the 1973-74 oil crisis by the world’s largest energy consumer states. And each year the member states are subject to a review of their energy policies by the IEA. The review of the UK was published this week.

Overall their assessment of the UK long-term vision for energy policy is positive. It acknowledges the huge challenges the UK faces in updating its ageing energy infrastructure and praises the government for their ambition in addressing these challenges. However, the assessment also contains warnings about the possible negative impact of “untested” policies if the government fails to get the design right.

I am sure the IEA would have liked more time to evaluate the recently published draft energy bill which. This complex and technical bill includes many of the measures to introduce large scale reform of the country’s electricity market. The report describes the overall package of measures as “pioneering” but reminds the government that it will be “closely observed” by other countries. It underlines the vital importance that UK businesses are able to remain competitive in the drive to create a low carbon economy. It is unlikely that other countries will follow the UK’s lead if the reforms resulting in forcing companies to relocate overseas.

The IEA are concerned that the reforms may not be cost-effective and that some of the measures proposed – such the Feed-in Tariff with Contract for Difference, the Carbon Floor Price, and an Emissions Performance Standard – are “more than is strictly necessary” if all three worked. In particular they can see difficulties with the introduction of unilateral policies such as the Carbon Floor Price, saying that they will only remain “politically sustainable” if other countries follow the UK lead. This assessment follows the House of Commons Energy and Climate Change Select Committee warning in January that UK industry faces a “devastating effect” from the government’s decision to set a unilateral price for carbon. Despite these concerns the government is adamant it will be introduced. They have pledged to introduce a package of measures to compensate businesses impacted but it is clear the need to go further than the package that was announced in last year’s autumn statement.  

Elsewhere the IEA looked at the Green Deal, and again their assessment mirrors many of the concerns of organisations based in the UK. Everyone accepts that the scheme has huge potential, both in improving efficiency and creating economic opportunities, but there is still too much uncertainty about how it will work in practice. The IEA are unsure if consumers have the level of awareness required to take it up in sufficient numbers. This is especially true for businesses and something that the government must address over the coming months.

The IEA also say that the transition to a low-carbon economy will take time, so they encourage the UK to maximise its remaining potential for oil and natural gas production. It is good to see them recognise the large amount of reserves still available in the North Sea and the potential for the fledgling shale gas industry. Achieving energy security requires a diverse energy mix. Oil and gas need to remain part of that mix.

Considering how active the UK government has been in the area of energy policy of late it’s hard to imagine if any of the other IEA members reviews would have required as much time and resources. This level of activity is to be welcomed but as the assessment warns they are dangers in being the first to attempt something new.