WHEN Russia turned off the gas supply to Ukraine in January, Brian Wilson’s first thought was: “Our chickens have come home to roost.” The former energy minister had always thought it was wrong to make Britain dependent on gas. Now everyone could see the folly of the policy.
Wilson, minister for energy and construction from May 2002 until June 2003, said: “Being very dependent on one fuel is a security-of-supply issue. And even if supply is maintained, our control over price is limited.”
The stand-off between Moscow and Kiev over new terms on Ukraine’s gas contracts did not last long. But the problems with Britain’s dependence on gas go on. Erratic supplies from the Continent during the winter and high wholesale prices have sent energy bills soaring.
The touch-and-go nature of gas supplies was one reason the government decided to tear up its energy policy and launch a review in December. The consultation on the review closed last week.
But whatever the outcome, there is a risk that Britain’s energy bills will continue to climb, particularly if investment in new infrastructure and cutting-edge technologies takes place against rising demand for energy.
Nuclear power, once firmly on the backburner, is about to stage a comeback, with ministers expected to give the go-ahead for new reactors this summer. They are also likely to emphasise the importance of clean coal technology and other methods that reduce carbon emissions.
A new wave of atomic energy and cleaner fossil fuels will require heavy capital spending. Deloitte, the professional- services firm, has estimated that Britain faces a £50 billion bill if by 2020 it is to develop a diversified, low-carbon electricity sector that includes nuclear power.
Vincent de Rivaz, chief executive of EDF, the French energy group that has become one of Britain’s biggest electricity providers, said: “If the energy review leads to a clear roadmap, it will create the right framework for investment. Investors will have clarity. It can only be good.
“What is contributing to the volatility in prices is uncertainty. Transparency, efficiency and liquidity can be achieved if the review is right but will be jeopardised if it is not right, and prices will continue to be volatile. That will damage UK plc and our customers’ budgets.”
Britain can ill afford more rises in the price of energy. Industry is already feeling the strain. Sir Digby Jones, director-general of the CBI, the employers’ body, recently told The Sunday Times that energy prices were the “biggest immediate issue” facing British business. “What the civil servants have failed to realise is that many of these companies have production sites across Europe or across the world. They can switch production away from Britain, and once it is gone it’s not likely to come back.”
Reliance on gas has been a central plank of the government’s energy policy since the last energy review in 2003. It was envisaged that 70% of Britain’s energy would eventually come from gas.
But the country’s gas reserves have declined more rapidly than expected, while global energy markets have become volatile. The situation is threatening to widen the “energy gap” that will be created by the retirement of many power stations. From 2016, electricity generation could drop by 40% of current capacity after the closure of ageing coal, gas and nuclear plants.
At the same time ministers have realised that renewables will contribute less than expected.
It has also become obvious that Britain is unlikely to meet its carbon-dioxide targets, which stipulate cutting greenhouse gases by 60% by about 2050.
A rethink of Britain’s energy policy was urgently needed. In January Malcolm Wicks, the energy minister, launched a consultation entitled Our Energy Challenge: Securing clean, affordable energy for the long term. Wicks will set out his conclusions this summer.
At present Britain generates about 40% of its electricity from gas, 19% from nuclear, 33% from coal, 4% from renewables and 4% from other sources, including oil, according to EDF.
EDF’s De Rivaz said: “If we do nothing, the energy mix will change dramatically in the wrong direction. The resulting over-reliance on one source of energy will be detrimental to security of supply and to climate-change objectives. It will also be detrimental to the price of energy.”
The government is likely to go for diversity. Coal, gas, renewables, micro and local generation could all play a role. However, the resurgence of nuclear energy will hog the headlines.
Once expected to be run down, nuclear energy is now regarded in government as the low-carbon energy option of choice. Wilson said: “At the very moment in history when carbon reduction is such a pressing requirement of energy policy, it would surely border on the eccentric to continue with the strategy of ridding ourselves of the only substantial carbon-free source of electricity currently at our disposal — the bird in the hand, nuclear.”
Replacing the nuclear power stations that are coming to the end of their lives would cost up to £20.5 billion for 10 new plants, according to Deloitte. The government wants to leave it to the market to fund a new building programme.
Ross Howard, Deloitte’s energy partner, said: “Industry can find the cash, and there are plenty of interested investors such as the big utilities, which would be happy to build new stations. Private equity could also be interested.
“The problem is not finding the money, it is dealing with the structural issues so that investors have the confidence to dip into their funds.”
Laborious planning processes are one of the biggest hurdles. De Rivaz said investors would be reassured by political consensus, and a robust, reliable, efficient planning process.
Coal has featured heavily in the energy review, thanks to its abundance. Proven reserves worldwide are expected to last 200 years. However, coal is one of the dirtiest of fuels in terms of greenhouse-gas emissions, and the technologies required to make coal clean are expensive or still in the early stages of development.
Capturing carbon emissions and storing them underground, for example, would cost about £34 a tonne using today’s projections. With carbon costing about £19 a tonne in Europe’s carbon-trading scheme, there is little incentive to invest in the technology, according to the Energy Intensive Users’ Group. BP and Shell are both working on pilot carbon capture and storage projects.
Investors also complain that they have no idea how much carbon will cost after 2012 under the European trading scheme. Rivaz said the long nature of the investment cycle and the current mechanism of carbon pricing were “totally mismatched”. He said: “We need carbon-price market mechanisms that go beyond 2012.”
Ministers seem determined to help develop the fledgling carbon-capture technology, however, as well as other clean coal initiatives.
Whichever energy sources are picked to supersede gas in government policy, time is running out to get them in place, according to Deloitte’s Howard. He predicted an energy gap would become apparent in the next three to five years.
Once the government has set out its thinking, winning public approval is vital if the planning process is to proceed as swiftly as possible.
Failure to bridge the energy gap could send energy bills soaring even higher. The onus is on the government to stop that happening by choosing the right energy sources, and setting a clear framework in which they will operate.
The Russians are taking over
LOCATED 550km north of the Russian mainland in the iceberg region of the Barents Sea, Shtokman is remote from Britain. But the giant Arctic gas field could bring Gazprom closer to its goal of supplying more gas to Britain.
Gazprom delivered 4 billion cubic metres of gas to Britain last year. The world’s largest natural-gas company wants to increase that to 10 billion by 2010.
Western firms that are competing to partner Gazprom in developing Shtokman are offering stakes in North Sea fields as part of their bids.
Norsk Hydro has offered Gazprom as much as 10% of its Ormen Lange field, which will deliver 20% of Britain’s gas supplies from next year.
Gazprom’s ambitions for Britain do not stop at increasing market share.
It has signalled an interest in buying Centrica, the utility company.
It also wants to buy North Sea gas projects, boost its share in the interconnector pipeline that links Britain to Belgium, buy into distribution firms and expand storage capacity.
Gazprom will select its partners for Shtokman, estimated to contain 19 billion barrels of oil equivalent, this month. Five have been short-listed: Norsk Hydro, Statoil, Total, Conoco and Chevron.
