EDF CEO: Another Energy Crisis is Coming

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1:18Hello, welcome to Big Boss Interview. I'm Sean Farrington and on today's interview, our business editor, Simon Jack, has been speaking to the boss of one of the biggest energy firms in the UK. Simon, hello, who have you got? Hi, Sean. Yes, Simone Rossi is the boss of EDF Energy, one of the biggest energy suppliers in the UK. He told me we are walking into a second energy crisis just four years after the last one that was triggered by Russia's invasion of Ukraine. He says the government should extend the VAT cut on residential bills. It runs out in April at the moment. And interestingly, given this has been a big theme of the Labour Party conference this week, that the government's re-industrialisation ambitions are not compatible with its current energy policies.

2:01Energy policies he described as ideological rather than economic. And we should maximise our own oil and gas resources rather than port from overseas. So approve. Gas and oil fields, Jackdaw and Rosebank. And remember, this is from someone who is very keen on low-carbon electricity. EDF owns the UK's nuclear fleet, including the new plants being constructed at Hinkley Point and Sidesville. Gave us a bit of an update on that. and also says we need to value engineering skills more like they do in Germany, saying you can't weld a pipe with an iPhone, at least not yet. And he covers a lot of ground in a pretty rare on-air interview.

2:35Let's take a listen then.

2:42Simona Rossi, thank you for talking to the BBC. The question I'm asked by our audiences more than any other is why is it that UK energy bills seem so expensive and more expensive than other countries? Give me your explanation for that to our audiences. Thank you for your question. I'd like that it was a simple answer, but there are several components. Maybe there's an overarching element that over the last maybe 10 or 20 years, we've always made an objective where energy policy, or maybe to cut emissions, which is very loadable, or to increase jobs, which is very loadable, or to pursue other specific targets.

3:23But we've never put at the centre, front stage, the objective to make it more affordable per se, which might require trade-offs in other areas. So I think our energy policy has been quite ideologically driven, not so much technically and economically driven. I think this is a matter of mindset and probably the fact that we are now getting into several energy crises. It's a good opportunity for us to maybe reset this mindset and look much more at the facts, at the science, at the reality, and try to produce responses which are less ideological and more practical. What do you mean by ideological?

4:02Do you mean net zero? Is that the rush to net zero? Is that what you mean by ideology? Where are the holes or the mistakes in energy policy right now as you see them? I think that now with hindsight, we realise that over the last 20 years, we've built an energy system to serve what we expected to be an increased demand for energy. But indeed, what happened in Britain is that the demand of energy has decreased instead of increasing. So the result is that we now have some fixed costs into this system, and these fixed costs need to be absorbed by a smaller base. It's interesting to say it's bizarre that the energy demand has decreased in Britain because over the last 20 years the economy has grown by about 30%.

4:48And the population has also grown from 60 to 70 million circa. So why is that the energy divorced from the economic growth or the population growth? And the answer is deindustrialization. Deindustrialization. Yeah. So it means that even if we never forecasted for it, perhaps we never explicitly wanted any industrialization to occur, indeed, factories, steel factories, refineries and many other industrial installations have been shot over the last 20 years. The economy has more than recovered that through expanding in other sectors, which are actually thriving, but are less in need of energy. So as a result, we built an infrastructure for an energy demand that simply hasn't materialized.

5:38Okay. Because what I find strange is these three things can't be true at the same time. Renewable energy is cheap and reliable. We have one of the largest renewable energy installed bases in the world. Number three, we have some of the most expensive energy in the world. How can those three things be true at the same time? Oh, I tell you what, because is it true that the cost of producing with renewable energy is low? Absolutely, yes. It's the lowest cost source of energy. But bear in mind that cost doesn't translate automatically into value. The electricity, we're talking about electricity now, is a peculiar good.

6:22It doesn't travel very well and it doesn't stock very well at all. You can't store it easily. Which means that you cannot store it easy, which means that the value of what you produce depends on where you produce it, close to consumption, close to the grid or far from it, and when you produce it, when you need it or when you don't need it. This explains why introducing renewables into an electricity system is very easy and very rewarding at the start, because you're just introducing a very diverse source, which really adds true value. As the penetration of renewables increases, and the dislocation of the renewables potentially goes further and further afield compared to where the body center of the consumption is.

7:11and as a correlation in winds and sun creates more and more excess energy at certain times of the day and lack of energy at others, what it does, it reduces the value of this energy which tends to be produced maybe in not where and when you would like it. Which means that although the cost, as it would appear, looks not expensive, in fact the value shrinks which means that actually to make this energy available you need to spend so much more in cables, grid, storage so that this energy can be then linked to the need of the consumer. Okay so although the the wind is free and the sun is free linking it to where it's actually needed can be incredibly expensive and there's a lot of upfront cost in that.

8:01Yes I would say there is a good news Simon because for example let's see electric vehicles okay there are a couple of million electric vehicles on the roads in Britain today. The electric vehicles not only are a better form of transportation compared to petrol cars, and cheaper also to run if you can charge it overnight, for example. But also they can store energy. They are batteries on wheels. And if we had many more electric vehicles connected to the grid, they could easily store energy when it's produced in excess. And having 10 million electric vehicles would be equivalent to be to have several gigawatts of capacity to store this energy, at least a few hours of it, to then use it later.

8:49So the demand is changing and can help better absorb the variability of these energies. Returning to bills, people are going to get a big shock this week about what their bills are going to be. It's going to go 4 % up on Thursday. We're expecting a further 20 % in January. People will just look at that and say, I just can't pay. People feel powerless about it. What is your message to them? What can they do to cope with such high bills? So you are absolutely right. We are all concerned about the fact that we are actually walking into a second significant energy crisis after the one we've experienced just four years ago.

9:34However, I'd like to distinguish two things in the bills that you mentioned, Simon. There are two components, electricity and gas. If you take the electricity component in the quarter four of this year that we are getting into right now, the price of electricity is still slightly lower than at the beginning of the year, like minus 4%. The gas price, however, has increased by 25%. So I'd like to say the first message is that if you can choose between using a little more electricity or a little more gas for your energy needs, privilege electricity, which is holding off much better to the pressure of the geopolitical situation.

10:17And this is also thanks to the initiatives taken by this government and by the previous government to reduce electricity, some components of the electricity bills. True, in January we expect further increases and electricity will probably also increase maybe by about 10%, but gas increase will be higher than that. People will get an almighty shock this week. Do you understand why they're going to find it so shocking? First, the current situation, as we walk into the winter, quarter four, I would say a small piece of good news, can I? Yes. Is that electricity prices in the quarter four of 26 are still slightly below where they were at the beginning of the year.

10:55And I'm talking about the price cap. So for the households that use electricity, it will be still 4 % less expensive in Q4 rather than the beginning of the year. But not from January onwards. However, you're right, from January onwards, and we don't have a crystal ball, so we don't have a clear number yet, but we have forecasts, and currently we envisage an increase of the bills or the order of about 20%. So it's true, Simon, we are probably walking into another significant energy crisis following the very big one we had just four years ago. Okay. People will be scared of this. We are also a bit concerned about it, as this is unfortunately to a great extent the result of geopolitical forces that we do not control really.

11:42the fact that there exist major wars affecting the two biggest suppliers of gas, Russia and Qatar, at the same time, is almost unthinkable. I mean, it is true. So the good news is that we think we will have the energy that we need. The bad news is that it's going to be much more expensive, particularly for petrol, diesel and gas. We think electricity will hold off much better. and so we think it's a good moment for everybody in the country to think again about the opportunity, possibility to switch away from fossil fuels and to use electricity when this change is practical, possible. There are many opportunities to do so and I think it's really a strong signal to go in that direction.

12:29And what can people do to do this? So you're saying try and use a bit more electricity than gas. That's one thing. Some people, the outstanding arrears on people's bills from the last energy crisis, four years ago, is over£5 billion now. So we know there are many people who can't pay. What is the answer to this? Yes, I would say there's no simple answer to that. You're absolutely right. And we know because also our clients, we have some of our clients which haven't been paying their bills for some time. I would say that our point of view is that we would really need the equivalent of a social tariff or something that can cater for the households that really struggle to get on with life based on those who are on benefits, those who really objectively deserve to be supported.

13:20And maybe the other question for the government to consider is whether to go further and complete the job they started a few months ago in removing certain parts of the policy costs from the bills onto general taxation, which means that those who pay are those who can afford to pay, as opposed to everybody. OK, so the government has already taken some of the renewable obligations and other green taxes off the bill into general taxation. They've also cut VAT by 5 % to zero, from 5 % to zero. But that runs out in April. Should they renew that? Yes, they should renew it. I think for electricity in particular.

14:00Why do I insist on electricity, Simon? Because, as I said, you know, just think about it. Last year in the UK, we've curtailed 90 watt hour of wind production, which means that they could have produced this electricity. So this is paying people to switch off, basically. Paying people to switch off. At the same time... Sorry, paying producers to switch off. Producers to switch off. At the same time as a country, we've imported well over 40 billion of energy fuels from abroad. How that paradoxical is, because, for example, if we had more electric vehicles, they could have charged our cars using the electricity that we decided not to produce, as opposed to consume diesel or petrol that we need to largely import.

14:44And at the same time, we create bigger electricity volumes that would better absorb the fixed cost that we have created. So we need really to boost electricity demand. That's the most important thing. And to get the game going, we need to insist and the government needs to go further and complete the job in reducing the charges that are on the electricity bills. And then promote all the usage of electricity, including welcoming the data centers that we need to power our digital economy. You talked about importing and we still rely on fossil fuels for 75 percent of our overall energy demand when you include heating your home or fueling a factory and all that kind of stuff.

15:28Some people say the only way to get through this off the roller coaster of fossil fuels is to maximize renewable production. And what we've seen recently is proof that's what we need to do. Other people say what we see about hugely rising gas prices, oil prices, means we have to make the most of our own resources in the North Sea and elsewhere. Which is the right answer? I would say both, believe it or not, but on two different time horizons. Here and now, certainly we should use all the fossil fuel resources that we've got in our country. you'd rather use the money to create jobs in our economy and tax receipts in our economy as opposed to send it elsewhere.

16:12This is also good for the planet because producing oil or gas just next to the UK shore is less polluting than having to transport it from further afield. So that's a no-brainer. But the second point is that... Sorry, let me just ask you that question. So on that basis, the government sitting on their desk right now are two decisions, one on Jackdaw, one on Rosebank, a gas and oil field. You say approve them? Green light. Absolutely. No doubt about it. And do you understand why people say we've just had wildfires across Europe and sweltering temperatures? So the case for that, they say this is, you know, the economic consequences go hang?

16:52Simon, no matter what we do, that's going to happen, unfortunately, because the climate change is driven by global dynamics. and in the UK the only way which inquiry reduce emission is to genuinely reduce the usage of fossil fuels at the point of use. But for now it is fair to say the larger majority of our homes are heated with gas, the vast majority of our cars are powered by petrol or diesel, so it will take decades to wean off from that dependency. So whilst this is happening we should rather use the resources that we've got rather than importing them from afar, for me, it's really a no-brainer.

17:31It is not in contradiction. It's not by doing so. We're not making the planet any worse. In fact, we're making it better. We are also improving our own economy and create resources, maybe, to use them, I don't know, maybe to support the bills of those who can't pay, etc., etc. So, that's absolutely point number one. Point number two, over time, their only solution is called electricity because electricity is producing more performance in the final usage okay those who use electric appliances experience the silent quite clean effortless secure performance of electricity devices think about the efficiency of a heat pumping it's incredible the efficiency of an electric vehicle and electricity can all be produced here in britain using the assets that we've got, which is the shallow seas, the breezy weather, also the nuclear skills, and linking it all together.

18:27But today we are in a bit of an odd place because we got a little bit ahead of ourselves. We built a big system. Electricity demand has not followed through. So we now need to rebuild the electricity demand, switch away from fossil fuels. It's going to take time. And we just need to plan for this transition over a sensible period of time. Ed Miliband, when he was Energy Secretary, promised that bills would be£300 lower by the end of this parliament. And yet you've said bills will stay stubbornly high till 2030, the end of this parliament. Was he always going to be wrong? I don't know. Maybe I don't know the origin, the precise origin of this maybe political promise.

19:11But the reality is that we've all realised a bit in the industry. in America, it was not so obvious maybe three or four years ago, that this decline in demand has put us into a very difficult position in order to keep the bills down. As I said, with this increased fixed cost on a smaller base, it's very hard. Somebody's got to pay for those costs. And either it is the taxpayers, which would imply a different choice of organisation of the system, or it's going to be the consumers. And if it is the consumers, no matter how fast we get ourselves off the roller coaster of hydrocarbons, we still have exposure to the increased fixed cost.

19:51Plus, if the usage of gas continues, and it will continue for some time, there's no way in which we can recover from the gas part of the bill. On the electricity part of the bill, maybe we can work more. But on the gas side of the bill, there is not so much that we can do. You have said in the past about your own investments. You've been a massive investor in the UK, both on nuclear, offshore wind, etc. Billions and billions. Yet recently, you've said that debt, for example, consumer debt, which is hard to recover, other things are making it harder to invest in the UK. Is the UK a friendly place to do business?

20:29Is this a government that is business friendly? I remain confident in the fact that the UK is a business friendly environment. I would say that notwithstanding some volatility in government, etc. Well, I'm Italian, so I'm used to a lot of historic volatility in Italy. It's all changed recently. It's all changed recently. But, you know, for me, it's still quite strong. If you see the civil service is a powerful machine, there is some stability in the fundamental rules. For me, it is still an attractive place where to invest. Certainly, there are areas where there are certain problems. But, you know, in investing, it's also a way to improve the country and to leave a positive impact.

21:11You talked about one of the reasons why energy demand has gone down is deindustrialisation. We've seen refineries close, factories close, steelworks close. And yet we import all of those goods anyway from countries with potentially a higher carbon footprint than we do. This government is making reindustrialisation one of its key targets. Can it do that with the energy policies and prices we have in the UK? It's a good question because you probably need a lot of stuff. You need maybe a cheaper electricity in particular. Yes, but you also need maybe technical training. You need, you know, also I would say a mindset change.

21:55We need to learn to like certain sectors. Such as? for example I see in our activity we are now building these nuclear stations we are fitting them out we need a lot of welders a lot of mechanical trades a lot of electrician trades and we do find these people in the UK but not as many as we would have liked we pay very high salaries it's very hard to attract people to these jobs if you go in Germany or in Switzerland Now, there are certain countries in Europe which have done a better job in maintaining the social status, I would say, and the desirability of jobs such as manufacturing and heavy industry, etc.

22:37For us, I think we've nearly demonized these jobs a little bit, put them kind of in a second class. So I think, you know, we need to really relearn to appreciate. And some of these jobs, frankly, are not going to be eaten up by AI anytime soon. You cannot weld a pie through your iPhone or anything like that. So there are jobs in our economy that are quite solid, will be there for a long time. And I think we need to have an overarching desire to see these sectors go back and not just focus on the sectors where we excel naturally, but also not forget the sectors where maybe we are not as good as we would like.

23:16Do you think that trying to decarbonise the electricity grid by 2030 is compatible with re-industrialisation? I think it's not compatible with re-industrialisation. I think that it is a very noble ambition to have. And it certainly sparks a dynamic that otherwise maybe wouldn't have been there. So I think these are interesting points. But I think the pace of this transition is a key element that we need to master in order to ensure that the costs are reasonable. And I tell you what, also to reduce the last amount of carbon in the economy is the most expensive bit. We've already done a lot in Britain, maybe more than most.

24:01I think we should be quite happy about what we've done, certainly remain ambitious in trying to do more, but obsessively trying to eliminate the last molecule of carbon by a certain date is not going to do any good in terms of making the electricity system cheaper. So the current net zero targets are incompatible with re-industrialisation? Well, I'm not sure because there is also a net zero target for 2050, which is a bit of a different story. I think the point is that reality will prevail, Simon. So we can wish every problem away to say 2050 is far away. We're going to get there. We're going to make it happen.

24:42But let's look at the realistic development of certain things. And let's make a decision on the basis of what's realistically possible, not make decision on the basis of what we dream to be true. They would say set ambitious targets. It gives it urgency. It makes people try harder. If you don't set ambitious targets, then everyone just relaxes and doesn't do anything. I think we all agree on that. And we know this is normal, I would say, in the business or for everybody. But there is a limit to that, because if those decisions then translate into very expensive decisions that really don't match with the reality on the ground, then we all end up paying the cost for those decisions.

25:26Can I take you back to your thought? You said we need a proper a social tariff and decide who qualifies for that. Now, that would mean that either the government subsidises this or the people who don't get the social tariff end up paying more to help pay for the social tariff. What's the answer on that one? Who should bear that burden? Of course, I'm not a politician, so I think this is a political question that refers to topics of equity, equitability in society. And there are different ways to look at it. In general terms, I would say that the bills have become a tool to pay for a lot of stuff.

26:05And in a sense, they become a bit regressive in our economy, which means that they tend to have those who cannot afford to pay more probably than they should. The rich person is paying the same bill as the poor person, whereas if you did it through the tax system, you can adjust it to be more And I would say so. And also the fact that maybe some people which are very smart and have the ability to do it, they can provide to produce their own energy to a large extent and reduce the bills and the amount of distribution charges that they pay. But somebody's got to pay for distribution charges. So I would say everyone else ends up paying.

26:43So there are complex topics around how this transition comes about and how to make sure it is equitable for society. You've said that bills will stay stubbornly high till 2030. Can you give us another scenario, a hopeful scenario that, you know, that gas prices will come down, oil prices will come down? What happens in the Middle East? Could you? Is there a rosier scenario you can paint? I don't know. Maybe there's a, you know, a set of variables that need to happen. is let's see that over the next five years or so, if we had 10 million electric vehicles instead of two on our roads, which is not impossible, quite ambitious, not impossible.

27:22If we had the 2 million heat pumps instead of half a million like today, if we had, say, maybe six to eight gigawatts of data centers, today there are about two. Now that would create quite a bit of additional demand for electricity. And actually, instead of increasing the bills, that would actually help to dampen the bagels. Some people will say that's so counterintuitive. That's so counterintuitive. More demand will lead to lower prices. But the new electricity is all fixed costs. It's all fixed costs. And today we are curtailing, last year we curtailed 9 terawatt hour of wind that we could have used and we decided we couldn't.