UK gas plant

Big bills and blackouts could make energy an election issue

Mark Venables looks at government options for maintaining Britain's power supplies.

For the first time since the 1970s, energy policy could influence the outcome of the next UK Parliamentary election. With the current predictions of worsening energy shortages, Britain's energy crisis looks set to hit customers just as the current Coalition government reaches the end of its term.

Neither party is yet grabbing the energy dilemma by the horns. The Coalition has failed to send stable signals to the market, lurching from renewables to nuclear and latterly gas, eventually presenting an Energy Bill that, if anything, only further muddies the waters. With the cost of nuclear escalating, the Conservatives are looking towards gas for redemption, while their Lib Dem partners continue to yearn for a renewable alternative. The Labour party, as opposition parties are wont to do, promises a solution but gives no detail.

Tony Lodge, energy analyst at the Centre for Policy Studies (CPS), insists that the energy crisis is real and is near. "The Conservatives risk being hit at the ballot box as energy bills soar," he argued. "They should move to retain some older coal and oil generating plant in an 'emergency power reserve' and get on with delivering new nuclear as a priority.

"Politicians have kicked the energy can down the road for too long. That can is now going to blow up: households will end up paying the price in higher energy bills and maybe even energy outages. This was both predictable and unnecessary. We'now urgently need a clear policy designed to meet the twin aims of lower energy costs and greater security of supply."

Alistair Buchanan, chief executive of energy regulator Ofgem, warned in a speech that falls in Britain's power production capacity are likely to lead to more energy imports and customers paying more.

While insisting that 'Blackout Britain' is a remote possibility, he said that deferred investment is putting new supply at risk. He puts the figure needed at £95bn to ensure that the lights stay on – less than the £200bn widely reported but still a vast amount.

Writing in the Daily Telegraph on the day of his presentation, Buchanan said: "On Wednesday January 16th, due to unplanned outages and cold weather, National Grid had to find power to supply roughly a million homes to keep the lights on. Fawley, an oil-fired plant in Hampshire, was one of the power stations that responded. Next winter Fawley will not be there. Indeed about 10 per cent of our current generation stock goes next month as coal and oil-fired power stations close earlier than expected to meet environmental targets."

For a regulator who has been accused of being apathetic at times, Buchanan seemed eager to provoke alarm. He pointed to two key European Directives that will either clean or close UK fossil power plants in coming years. The Large Combustion Plant Directive will come online by 2016 while the Industrial Emissions Directive will be felt from 2021 to 2023. Both will force closures of ageing power plants.

The current carbon reduction goals set by Brussels and Westminster were made in times of financial boom and are constricting in the current climate of austerity. We are now in a predicament with the options curtailed by legally binding commitments. Out go unabated coal, old or low-tech gas and oil, leaving us with renewables, nuclear and clean coal and gas to replace them.

"If you can imagine a ride on a roller-coaster at a fairground, then this winter, we are at the top of the circuit and we head downhill - fast," Buchanan continued. "Within three years we will see the reserve margin of generation fall from about 14 per cent to less than 5 per cent. That is uncomfortably tight."

Even in the best-case scenario, consumers will be faced with higher and far more volatile prices. The situation will worsen if the economy recovers and energy demand rises.

The government has put its faith in a multifaceted Energy Bill. All the main technologies – renewables, nuclear and gas – are offered olive branches but none have been given enough incentive to speed up implementation.

The wind power sector, blighted by the financial crisis, is developing more slowly than anticipated. Nuclear new-build plans are still bogged down in a morass of financial and regulatory confusion and will not come online until well past 2020. And as for coal, its holy grail of carbon capture and storage is still in its infancy and will be even later in restoring coal to the power mix. That leaves gas.

Buchanan predicts that up to 70 per cent of power generation will need to come from gas by the end of the decade, up 30 per cent from current levels. The big concern is the volatility of gas prices given the huge global demand. "Britain will have to compete for gas on a global worldwide market," he added.

Dr Simon Harrison, chair of the IET's energy policy panel, agreed that gas is the only short-term solution – at a price. "Coal stations will be closing at a time when coal prices are low and gas prices higher," he said. "Gas is plentiful, but the pipeline and liquefaction infrastructure does not exist to allow it to be freely transported.

"Other options such as new nuclear are some time from being available, and renewables in the UK are mostly relatively costly at present, although the industry is confident it can reduce prices if it can see large scale orders," Harrison continued. "A stable policy regime and confidence around decarbonisation targets is required to bring this investment forward. So in the short term we have little choice. We need gas-fired power plant to replace coal closures."

A look at the gas market confirms the volatility concerns; prices for liquefied natural gas (LNG) in Asia are at present 60 per cent higher than in the UK. The US may be thriving on the back of a shale-gas revolution, but regulatory and environmental issues will hinder any similar revolution in Europe.

So we are left relying on the government's electricity market reforms and its emerging gas strategy. The declared aim is to promote a diverse portfolio of sustainable sources of generation. In the short-term that will see a heavy reliance on gas but in the mid- and long-term, renewables and nuclear will bear the brunt of the load.

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