Two big challenges we have got the power to win

In recent years, the topics of competitively priced energy, security of supply and climate change have pushed energy policy to the top of the international political agenda. This has prompted both the UK government and the European Commission to come up with comprehensive sets of policy proposals, covering issues ranging from market liberalisation to the share of renewable energy in our fuel-mix.

So what are the key considerations we need to weigh in the balance, as we look to identify a route to a low-carbon energy future and to guarantee a secure energy supply? And what role do energy companies need to play in meeting those challenges?

Tackling climate change

On climate change, the UK is right to be proud that it is the first country to commit to twin targets:

Reducing domestic greenhouse gas emissions by 60 per cent from 1990 levels by 2050; and

Hitting the EU’s 20/20/20 targets (20 per cent reduction in greenhouse gas emissions and 20 per cent of energy produced by renewables by 2020).

However, setting targets and meeting them are completely different aspirations. Delivering reductions at these levels will not be achieved without some dramatic policy changes. Whether we like it or not, natural gas must play a vital role in building a bridge to a lower-carbon future.

UK policy-makers clearly expect that significantly more renewable energy and a new fleet of nuclear power stations will be required if these ambitious targets are to be achieved.

For renewables, the challenge lies in how quickly new technologies can deliver energy at commercially competitive rates. For nuclear, senior managers from one of the firms most likely to feature in new-build nuclear, EdF, stressed at last year’s party conferences that the earliest they could deliver their first new plant is 2017 with two or three more onstream in the early 2020s. No other company is likely to offer shorter time-frames.

With around one-third of current UK power plants due to be decommissioned over the next decade or so and emissions reduction targets squeezing coal, there is predicted to be an increased reliance on natural gas. Natural gas will have to act as a bridge to a low- or no-carbon future.

Much of the progress the UK has made towards its Kyoto targets was, of course, due to the dash for gas in the 1990s, which saw gas-fired generation replacing coal and oil-fired power. Academics and environmental experts have identified further gas substitution for coal and oil in electricity generation across the world as one of a suite of actions that can help stabilise carbon dioxide emissions by 2055 because gas produces 22 per cent less carbon dioxide on combustion than oil and 40 per cent less than coal.

Gas companies are looking to go further, making the delivery of gas to market even cleaner by looking at each link in the gas-chain, from upstream exploration to delivery to customers, and identifying the optimal technologies that will minimise emissions at each stage in the process.

And we’re looking at opportunities for carbon capture and storage (CCS) schemes along the gas-chain. The economics for coal and gas CCS schemes are challenging at the moment but the potential contribution they can make towards stabilising global emissions is so significant that companies must keep looking for the ideas that might produce commercial breakthrough.

Despite the potential of natural gas to contribute to emissions reductions, there are indications that a new generation of coal-fired power plant could be on the cards, here in the UK and in Europe.

The recent surge in the price of coal and a higher cost of carbon in Phases 2 and 3 of the EU’s Emissions Trading Scheme may check that phenomenon but it is fair to say that this is a trend due in part to the cost of gas and to security of supply concerns and a desire not to put too many eggs in the gas-fired power basket.

I would agree absolutely that, ideally, the power-mix should contain a range of fuels, but generators do need to be aware that swapping inefficient coal-fired power with slightly more efficient coal-fired power is not going to bring about the kind of radical emissions reductions we need to move decisively towards our climate change targets.

Security of supply

In terms of energy challenges, security of energy supply is right up there with climate change. When energy prices were low and supply plentiful — the case for much of the 1990s — this was not an issue. With energy demand from the economies of China and India in particular growing fast, it has become a real issue. And, even if the impact of disruptions to Russia-Ukraine gas-supply and power imports to Italy in recent years was short-lived, consumers can be forgiven for feeling less secure about continuous, reliable supplies of gas and power.

But this is not just a challenge for politicians and policy makers. Natural gas companies can highlight two important points: first that there are huge volumes of gas available globally; and, second, that consumer countries need to underpin the security of gas supply by diversifying as much as possible their sources of gas supply.

In terms of volumes, there are already sufficient reserves identified to meet current global demand for over 60 years — and that’s a figure that is likely to double as more reserves are proved and more gas-prone areas are explored. It’s also true that Europe is within economic transportation distance of more than 70 per cent of total world gas reserves.

This is where the importance of liberalising the European market comes in. Liberalisation and security of supply are inextricably linked.

Energy consumers in Europe are now paying more for their gas than they need to because gas prices are indexed to oil. If we liberalise the European market, companies with multi-sourced gas-supply portfolios will be better able to sell their gas into Continental Europe, unlocking the stranglehold of the incumbent gas companies and introducing real gas-on-gas competition.

Effective gas-on-gas competition would deliver competitively priced gas to European consumers and the economies in Europe would be better able to compete in world markets.

The creation of a competitive, integrated gas market would be the single biggest contribution to gas supply security. It would incentivise suppliers to bring diverse sources to the European market and diminish the ability of countries like Russia to leverage their bilateral gas relationships in Europe.

A coherent European security of supply policy — along with market liberalisation — would also involve giving full support to new infrastructure projects that can deliver new sources of gas supply. New infrastructure should include new liquefied natural gas (LNG) import terminals that can access new and flexible sources of global gas supply as well as new pipeline projects such as a plausible third-corridor pipeline into the EU via South-East Europe.

Such new infrastructure projects will help to dilute the power of Russia’s gas supply into the EU at a time when it is refusing reciprocal access to Russian reserves and pipeline networks.

The UK market

So where does the UK fit within this picture? The UK will need to compete vigorously for supply but as a market it is well placed for several reasons:

1. It is Europe’s largest gas market and the fact that it is fully liberalised means that suppliers can come to that market confident in the knowledge that they can access customers and sell their gas;

2. The UK is close to gas-rich Norway, which is taking up much of the slack caused by the faster than expected decline in indigenous UK production;

3. The UK market has recently seen rapid development of import infrastructure including the Langeled and BBL import pipelines from Norway and Holland and the construction of two new LNG terminals in South Wales.

Perhaps more important is the leadership role the UK can and must play in Europe and the world: leadership in Europe with market liberalisation and energy supply source diversification and leadership globally in tackling climate change.

The combination of climate change policies and increased demand for gas supply in particular is likely to mean that the days of really cheap energy are over for the foreseeable future. But, as part of the down-payment for stabilising CO2 emissions and checking global warming, perhaps that’s not such a high price to pay.

Mark Carne is Executive Vice-President — Europe & Central Asia, BG Group.