Will the lights go out? Energy supply
David Hunter, an Analyst at UK energy consultancy and utility management firm McKinnon and Clarke, Dunfermline, UK, discusses energy supply.
The recent cold weather took centre stage in the news across Europe. Gas supply in the UK became critical and provision to some industrial users was restricted in January. The problem is global and the scramble for energy has already begun. Although the recession may have bought us a year or two by lowering demand, the UK must be prepared to fight for its share of finite energy resources in the future and the battle will be intense.
Power supplies in the UK are still largely based on hydrocarbons, in particular natural gas. For the past 30 years, the country has been relatively insulated from the global market and concerns over energy security. From the 1970s, the UK Continental Shelf provided plentiful supplies of oil and gas for both domestic consumption and export. Taken together with our long history as a coal producer, this meant the country was awash with fossil fuel energy.
North Sea gas production peaked in 2000 at 115bcm and by 2005 the UK had become a net importer of natural gas. This import reliance became apparent earlier this year as the UK’s energy network operator issued four gas system balancing alerts in a matter of days, cut off supply to almost 100 industrial users, called for emergency imports, and asked power companies to turn off gas power stations in favour of coal. While this showed that the system worked, prior to 2010 only one such alert had ever been issued. However, supply was maintained because we could switch on coal-fired plant – but by 2015 many of these will have to close as a result of the EU’s Large Combustion Plant Directive, which aims to cut CO2 and other emissions. In the meantime, they have to run on restricted hours.
The proportion of gas in the UK energy mix has increased considerably in the past decade, from 40% to between 50% and 60% today, and may rise to as much as 75% by 2020. Other European countries are also net importers so the UK has to compete for expensive liquified petroleum gas supplies from around the world, in addition to pipeline gas from Russia and Norway.
Nor is gas clean enough to meet our emissions objectives. The predicament of future UK energy supplies is a menu of imperfect options. Gas is relatively cheap and easy, but unfortunately supply sources are far from guaranteed and we are in great danger of becoming completely reliant on one fuel. There are also carbon emissions to be considered. Unabated coal emissions will not meet future legislation, and clean coal is a nascent technology that is years away from economic production on the scale required. Renewables, primarily wind, are being developed at a furious rate with generous subsidies. Yet reliability is a major issue – the intermittency of supply inevitably means that flexible back-up (fossil fuel) will be exceptionally expensive.
The UK Government energy White Paper in 2003 noted that there were no plans for replacing the aging nuclear power plants, and argued, ‘their current economics make it an unattractive option for new, carbon-free generating capacity’. By late 2005, however, Sir David King, the Government’s Chief Scientific Adviser, followed by the Prime Minister, spoke in favour of a reappraisal of nuclear generation. In 2006, the resulting White Paper confirmed that a new generation of nuclear power stations was on the agenda as part of a future mix of energy supplies – but the private sector would have to cover the cost of investment, decommissioning and waste storage. Greenpeace was furious, and won a court action ruling that the subsequent consultation process was inadequate. The government consulted again, and came to the same initial conclusion.
At the end of May 2008, a series of coincidental power station outages – including at Sizewell B, the newest UK nuclear reactor – caused ‘brown outs’ (managed power cuts) to hundreds of thousands of people. This brought into sharp relief the problems caused by the lack of investment in infrastructure over the preceding 20 years, but did little to dampen the Government’s new-found enthusiasm for nuclear – plans were announced for a new generation of eight plants in July of the same year. Then, in September, the Government sold its controlling stake in British Energy (operator of most of the UK’s existing nuclear stations) to EDF, the French state-owned utility, for £12.4bln. The Government expects EDF and Areva, its French mining and industrial partner, to deliver four of the 10 now planned stations.
It is clear that nuclear is right at the heart of the UK energy agenda, and mountains are being moved in order to clear the path for new build. The National Policy Statement of 2009, for example, incorporates radical legislation to shorten the planning lead time to as little as one year – the Government appreciates that it simply does not have the luxury of time. Sites for the new planned stations have been identified, and energy companies are keenly buying up land.
Other countries have come to the same conclusion – to avoid power cuts, reduce carbon exhalation and to maintain energy security, nuclear is the preferred option. Around 52 nuclear reactors are under construction worldwide, and another 135 are firmly planned while 295 are proposed.
However, the question remains, can these plants be built in time to meet the projected energy shortages in the UK by 2015 as old coal power stations are forced to close to meet EU regulations? The news from Finland is not encouraging. The Olkiluoto reactor, being built by Areva with turbines by Seimens PG, is due to come on stream in 2013, four years late and 13 years after conception, with costs rising from US$3bln to US$6bln.
The UK energy regulator, OFGEM, estimates that £200bln is needed over the next decade to prepare the UK’s energy infrastructure for future demands. It is clear that this cannot come from a state wrestling with record budget deficits, and so the private sector must deliver.
To do so, it will demand clear pricing signals and a stable investment climate. The bill, inevitably, must be borne by the customer. Renewable projects in the UK benefit from generous state subsidies in the form of the Renewables Obligation and other environmental levies. Gas-fired power benefits from a low carbon price that currently places an insufficient cost on emissions from fossil fuel plants. Nuclear supporters argue that to create a level playing field will require the public subsidies available to ‘green’ power also be made open to nuclear, and that the carbon markets should reflect the true costs of emissions to balance those charged to nuclear power (in the form of decommissioning provisions).
Last but not least, if the UK is to build nuclear stations in time, it must address the skills gap, and resource the Nuclear Installations Inspectorate and Health & Safety Executive sufficiently to ensure that all the cogs of the planning wheel keep turning safely.
However, even if all the obstacles can be overcome, the consumer will have to accept a price premium for keeping the lights on – but angered that, with greater foresight, the bill could have been substantially lower.
McKinnon and Clarke