Energy industry experts say the Government’s Gas Generation Strategy has failed to address investor uncertainty.
Representatives of the gas sector, climate change advocacy groups and renewable energy associations gave their reaction to the document, released in December last year, before the Energy and Climate Change (ECC) Select Committee yesterday.
The Department of Energy and Climate Change produced the document in the hope it would provide reassurance for the gas sector in the face of electricity market reforms.
Despite reaffirming the Government's commitment to decarbonising the UK’s energy industry it highlighted a vital role for gas in ensuring capacity in the interim – predicting a need for investment in up to 26GW of new gas capacity by 2030.
But experts claimed the report had failed to make decisions on investment any easier due to a lack of detail and uncertainty over the content of the Government’s Energy Bill, due to go to a vote in the coming weeks.
David Kennedy, Chief executive of the government's climate change advisors the Climate Change Committee, said: “For investors looking at this, they just can’t say how the system is going to develop. How the system is going to develop depends on the Government and the Government doesn’t have a clear view.”
In the Energy Bill’s current format the Government is not required to set a decarbonisation target for 2030 until 2016 and the commitment is not binding.
DECC dropped a target from the bill in return for £7 billion of funding for renewable energy up to 2020 from the Treasury, but it is feared a lack of a specific emissions target will prompt a “dash for gas” when incentives making low-carbon projects attractive dry up in 2020.
“We need a new pipeline of projects coming through in the period after 2020,” said Mr Kennedy. “It’s hard to say who would put a very big sum of money into developing a project when they don’t know if there will be any money there.”
An amendment put forward by Conservative MP Tim Yeo, who chairs the ECC Select Committee, and Labour MP Barry Gardiner, the party’s climate change envoy and also a member of the committee last week could force the Government to set a target by April 1 next year.
But Mr Kennedy expressed his concern that the strategy would not be of any use to investors in either gas or renewable energy projects until a firm decarbonisation target had been set and any delay could cause an “investment hiatus”.
He said: “It’s a very small price to pay and one we should be willing to pay, but the government says it won’t. That is very unhelpful from an investor profile perspective.”
For the representatives of the gas power sector, the fact that the document addresses scenarios for low, medium and high gas use, each implying different approaches and carbon targets, means investors have been left without a clear picture of the future of the industry.
“The strategy as a standalone document doesn’t really take us that far forward,” said Keith MacLean, head of policy and public affairs at Scottish and Southern Energy. “It is essential we get longer term clarity about the likely volume that is going to be required to let investors make the appropriate decisions.”
With a potential “capacity crunch” predicted to hit the electricity market towards the end of this decade as old coal power stations are decommissioned and new cleaner but less reliable forms of energy come on stream, the Government is planning to introduce a “capacity market” in which providers will bid to deliver electricity capacity at times of high demand.
Gas, which is seen as more reliable than renewable energy, is expected to be the major contributor to this extra capacity, but details of the mechanism are not expected until later this year and the first auction not due until 2014.
Mr MacLean said this change of emphasis for gas power could be positive, but firmer details of what the mechanism would look like would be needed before investment decisions could be taken.
He said: “What it (the strategy) does make clear is the role of gas going forward. It will be to provide capacity. If we are providing capacity and being remunerated for providing capacity then we will be far less needy for earnings from energy production to remunerate investment.”
Another key plank of the strategy is Carbon Capture and Storage (CCS) technology that could drastically reduce the C02 emissions from fossil fuel plants, including a commercialisation competition with a £1bn prize.
But Jeff Chapman, chief executive of the CCS Association, said the government was not doing enough to encourage growth in the sector, highlighting the slow progress in selecting the winner of the competition.
When asked if the Government was taking CCS seriously enough, he said: “In statements yes, but to date not really. I think we need to see more action, more quickly from government.”
He also called for greater thought to be put into the location of gas-fired power stations as the majority of capacity for carbon storage is in the North and Irish Seas.
“We are very concerned that there are a large number of gas fired power stations being built unabated where it is too expensive or impractical to retroactively fit them with CCS,” he said. “We would like to see more planning in the system to enable power stations to be built in appropriate locations where carbon can be captured and transported away to storage.”
Professor Roger Kemp, member of the IET’s Energy Policy Panel, agreed with Mr Chapman’s assessment that more needed to be done to promote investment in CCS technology.
“It’s not very obvious for me at the moment that there is an incentive for CCS,” he said. “If you were to reduce the maximum allowable CO2 per kWh clearly that incentivises a lot of low carbon technology, including CCS.”