Energy burnout: Can we keep the lights on at UK plc?

Unless Britain sorts out its energy needs - and quickly - the inglorious spectre of power cuts may be with us again.

by Andrew Saunders
Last Updated: 21 Sep 2015

When a water pump failed early in the morning of 22 March this year at the Bacton gas terminal in Norfolk, the UK, which relies heavily on imported gas to keep the lights on and the heating working, was reminded of just how precarious its energy system has become.

Within a couple of hours, the daily spot price of gas hit a record 150p per therm, amid fears that the UK might be on the verge of running out.

Bacton is where the UK-Belgium interconnector comes ashore - one of three major pipelines carrying gas into the UK from as far afield as Russia.

Thanks to the cold weather, this pipeline, as well as others, was working at full stretch - residential gas use was up 18% for the first four months of the year, according to Centrica - and Britain's already miserly 15-day stored gas supply had been run down until only a couple of days' back-up remained.

Were the lights really about to go out? In the end, no candles were required. Liquefied natural gas reserves - shipped in by tanker from the Far East - covered the immediate shortfall and the pipeline was working again by 3pm.

The power stayed on, as it (mostly) has done since the dark days of the 1970s and the three-day week.

What the price spike did betray, as such spikes usually do, was nerves. Global demand for gas is rising fast and the market is clearly not convinced that the UK is up to the challenge of competing for its share.

'The gas market is increasingly global, and what happens in Japan now has an effect on Europe,' says Tony Cocker, chief executive of E.ON UK, the UK's second-largest gas and electricity supplier.

As well as owning gas and coal-fired stations, E.ON is a big player in wind power and has a 30% share in the £1.8bn London Array, the world's largest offshore wind farm off the Essex coast near Clacton, due to become operational this summer. 'One of the benefits of wind is that you don't have to import it, so you are less exposed to the gas price,' he says.

The UK's track record on long-term energy planning isn't good - faced with the certain knowledge that the North Sea's natural bounty wouldn't last forever, instead of taking decisive action, the powers that be dithered for years over how to square the conflicting demands of climate change, economics and energy security. Importing more gas covered for this chronic indecisiveness, and now we are paying the price.

Gas is no longer cheap in Europe: the average domestic energy bill has risen by 29% over the past three years, according to regulator Ofgem, and its outgoing head, Alistair Buchanan, who steps down in July, has described the gas supply squeeze facing the country as 'horrendous'.

Contrast this with the situation in the US, where energy security is taken very seriously.

Thanks to the shale-gas revolution, energy prices there are falling rapidly. The threat to the competitiveness of UK industry is real, says Dorothy Thompson, CEO of Drax Power and one of the most senior women in British business.

'I think it's very clear that the US is going to benefit hugely in terms of competitiveness from having very cheap energy from shale gas. Americans are paying only a third or a quarter as much for their gas as we do here in the UK or Europe. That difference would support an awful lot of industry,' she adds.

Drax - which operates the eponymous power station in North Yorkshire, the largest coal-fired plant in Europe - has already converted one of the plant's six generating units to run low-carbon biomass in the form of wood pellets.

It has, says Thompson, funding in place to convert another two, which will make it 'probably the largest renewable electricity plant in the world'. Despite the troubled global economy, interest in the £225m project has been brisk. 'We've been very appreciative of the support of our shareholders. Biomass is desirable because it's reliable, flexible and one of the cheapest renewables available to the UK,' she says.

The firm is also working on a carbon capture and storage test plant, burning coal in a pure oxygen atmosphere and pumping the resulting CO2 into impermeable underground rock formations - tapped-out gas fields have been suggested.

Such technology would enable coal and other fossil fuels to be used without releasing carbon into the atmosphere, but is at least a decade away from being commercially viable, reckons Thompson.

The UK's stand on reducing carbon emissions ought to be good news for climate change, and with the global level of atmospheric CO2 rising beyond 400ppm, that's just as well. But even here we have managed to get in a muddle - despite the fact that it's the only proven currently available 24/7 low-carbon technology, no new nuclear power stations have been built in the UK since Sizewell B came on the bars in 1995.

What we have done instead is provide large subsidies (paid for ultimately by customers) to encourage the building of wind turbines, onshore and more recently (where the nimbys can't see them) offshore. While these undoubtedly have their place in the energy mix, they are no panacea.

The aforementioned London Array covers 20 square miles of sea but is rated at only 1,000MW, less power than is produced by a single coal-fired station.

And then there's the price - the unsubsidised cost of offshore wind power is currently around three times the wholesale electricity price, although as Cocker points out, improvements in the technology will close that gap.

And that's when the wind is blowing. 'CO2 emissions from power generation in the UK have gone up, not down, because you have to have back-up capacity for when the wind isn't blowing,' says Peter Earl, chief executive of AIM-listed Rurelec, which operates power stations in Latin America. And in the UK that back-up is usually carbon-intensive coal or gas-fired plant.

Thankfully 'The lights are going to go out in five years' warning is a myth.

The other major consequence of all this dithering is that many of the UK's current coal, gas and nuclear power stations are reaching the end of their (often already much-extended) lives. Twenty per cent of our 80GW capacity is due to be retired in the next decade, more than half of that (about 11GW) within the next five years.

This is the source of those 'The lights are going to go out in five years' stories that we read from time to time.

Thankfully, this is one energy-related doomsday scenario that is not going to happen, says Drax's Thompson. 'When people say there will be a capacity squeeze, the irony is that we still have capacity to cover it. The issue is that a lot of our gas-fired generating capacity is old, not very efficient and therefore not economical to run in the current environment. A lot has been mothballed as a result, but it's still there and could be cranked up if we need it.'

But that would be at best a short-term fix, at the expense of more carbon emissions and greater reliance on imported gas.

Bridging the generation gap longer-term will require, by the government's own reckoning, investment totalling some £110bn. And since direct public funding on such a scale is hardly part of the austerity agenda, the private sector is being asked to pick up the bill.

Hence the much-vaunted Energy Market Reform Bill. EMR is intended to create an investor-friendly environment and encourage the super heavyweights of international finance - the sovereign wealth funds and other institutions with pockets deep enough to tackle major infrastructure projects - to put their money here in the UK rather than anywhere else.

'For me the key reason for EMR is to ensure that we get new capacity on the system, and the right mix of new capacity,' says E.ON's Cocker. 'There's a difference between the wholesale price of electricity today and the price required to justify building new plant. If you want carbon-free generation, that costs - there's no cheap way of doing it.

'My view is that the EMR framework is the right one. It provides the assurance for the developer of baseload capacity - whether that's nuclear, offshore wind or large-scale biomass - that the kit will be rewarded over its lifetime.'

The EMR reforms are predicated on providing long-term price support for generators, and also mean a return of the capacity payment mechanism, whereby generators are paid what amounts to a retainer to ensure that there is always enough capacity to boil the nation's kettles at half-time in the Premier League final, and to provide back-up for those wind farms on calm days.

A complex web of procedures running to 28 pages in even its most heavily summarised official form, EMR is nonetheless an important statement of intent by the Government - the return of capacity payments in particular. These were peremptorily abandoned during the last major regulatory reform, much to the disgust of many investors, says Earl at Rurelec. 'Private investors haven't trusted UK electricity generation since the government moved the goalposts back in the 1990s.'

The first big test of the mechanism is the controversial and enormously expensive proposed new nuclear power station, Hinkley Point C.

Not only is this £14bn, three-way deal (between the Government, French giant EDF and a range of private investors, which are supposed to be providing all that cash) subject to the usual tensions that go with such a large contract, it's also got to prove the legislative regime under which all new generating capacity will be built in the UK. No pressure then.

'Nuclear power is the best choice for low-carbon baseload generation,' says Keith Parker, chief executive of the Nuclear Industries Association. That makes it an obvious candidate for providing that crucial back-up power to offshore and onshore wind.

But the stakes are high, and not just for nuclear. 'Failure to get it over the line could undermine investor confidence in the whole UK renewables market,' he adds.

EDF has sunk £1bn into Hinkley Point so far, but construction has yet to begin and negotiations between it and the Government over the long-term price guarantees under EMR are rumoured to be approaching breaking point.

EDF - whose share price has tanked by over 70% in the past five years - is reckoned to be seeking a guarantee of as much as 100p per MWh, whereas chancellor George Osborne would prefer a price closer to 50p, guaranteed in either case for no less than 40 years. Osborne has said he is a supporter of nuclear, but not at any price.

Perhaps its best chance of success lies in the number of high-profile careers at stake - EDF's UK boss, Vincent de Rivaz, has threatened to quit the country if a deal cannot be done.

Numbers like this demonstrate the real problem with nuclear in the current economic climate - financing. It might be demonstrably in the British national interest to build more nukes, but there simply aren't takers for £14bn up-front investments with an uncertain construction time of at least a decade, even if they are promised a guaranteed return (and who knows what a government 40 years hence will do).

The simple truth is that there are smaller, richer and quicker pickings to be had elsewhere, such as E.ON's offshore wind farms, or Drax's biomass conversion, where individual projects tend to be reckoned in the hundred of millions or low billions price range, and returns are generated within a few years.

By contrast, the nuclear industry is trying to graft a 1970s style French grand projet construction model onto a 21st-century private sector funding base, and it is simply too slow, too risky and too expensive for modern investors' appetites.

One possible way to address this failing would be to build a larger number of small off-the-shelf nuclear plants, each a much more manageable financial mouthful, if still subject to the same basic long-term economics: the so-called Small Modular Reactor concept.

This would not be without its own problems, of course - not least finding enough sites in our crowded island where the local populace would not object - but it is technically feasible and inherently more compatible with the way we do business in other sectors.

There's little doubt that a reasonable split between nuclear, renewables like offshore wind and biomass, and high-efficiency gas plant to supply the peak load would set the UK on course for a sustainable, low-carbon electricity future.

But without a more palatable way of spreading the various financial risks and rewards - especially when it comes to nuclear - the chances are that we'll end up more rather than less reliant on imported gas in the years to come.

And in that case, events like those at Bacton on 22 March are likely to become both more frequent and more severe. Better check there's some candles in the cupboard after all.

SHALE GAS TO THE RESCUE?

Britain has already been saved from one impending energy crisis by the sudden emergence of a new natural resource - North Sea oil and gas in the 1970s. Surely it's too much to hope that shale gas will spare us from another?

'I would say that what we have in the UK is a world-leading shale. It's got everything you look for,' says fracking expert Dr Christopher Green of GFRAC Technologies. Green co-authored the Government-commissioned report into the fracking activities of Cuadrilla in the Bowland shale near Blackpool, published last year.

Shale gas is gas arising from organic matter trapped within layers of rock deep underground. Extracting it calls for the injection of water with around 1% of polymer additives under very high pressure to fracture the shale and release the gas. Compared to traditional extraction, says Green, it's expensive. 'Shale gas is capital-intensive from the get-go.'

Widely used in the US for 30 years, 'fracking' has been linked to earth tremors and the contamination of groundwater supplies. Green reckons that such risks are minimal, provided the correct procedures are followed.

'It has the potential to be a great resource, and exploiting it really is a no-brainer, provided it's done in a sustainable and responsible manner,' says Green. 'These people who say no to shale gas and no to nuclear - I want to know where they think our energy is going to come from in future.'

However, the jury's out on exactly how much there is and what proportion of it could be got at. One issue will be geography - much of the UK's gas-bearing shale is under the densely populated south-east of England.

While clearly valuable, it seems unlikely that shale gas is a bonanza on anything like the scale of North Sea oil. Most estimates suggest that there isn't enough to make the UK self-sufficient, so importing energy on the wholesale market (and at the wholesale price) is here to stay.

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