Left in the dark

Jonathan Stern, one of the most respected commentators on energy policy in the UK — especially gas — met with Parliamentary Brief recently to discuss energy policy. He didn’t pull his punches.

Despite the 2003 and 2007 white papers on energy and the 2008 nuclear white paper he sees a great deal of confusion still surrounding energy policy in the UK — ‘particularly about what our priorities should be and how to address the issues that relate to them. Our energy future isn’t taken seriously enough by politicians’, he believes.

As a consequence he thinks we are likely to have a period of real difficulty with energy supply in the late 2010s as more nuclear stations and some coal-fired plants shut down.

‘There will be no nuclear before 2020, even if we really move on it, but the political /media stance and the market framework are not in synch. I cannot see a large-scale nuclear programme being built in the current framework: if the government/taxpayer underwrites the risks of such a programme then we tear up our current market framework returning to world of the 1970s, which has left taxpayers with nuclear liabilities of £73bn and counting.

‘Even Concorde pales into insignificance compared with the financial disaster of the nuclear industry. The new generation of reactors are supposed to be different, but then those of us who were around in the 1970s recall the promise of nuclear power being “too cheap to even meter”. For all the studies that have been made, no one knows the end game for the next generation of nuclear stations.

‘The timescale is huge in terms of political life spans: few current cabinet or shadow cabinet ministers will remain when the first new station is commissioned — and none when it will be decommissioned at least 30 years later, in another seven or eight governments’ time.

‘Commercial companies won’t accept all of the risks and the costs associated with nuclear development, which means that taxpayers will be required to pick up these liabilities just as in the past. Plus any serious nuclear accident anywhere in the world could cause the whole project to be dead in the water, without compensation for investments which have been made, before a single new station is completed.’

This means that despite John Hutton’s determination to move nuclear forward, it will be years before the first new nuclear power station starts up, leaving a gap in both generating capacity and policy credibility.

‘So,’ asks Jonathan Stern, ‘what will we use to generate electricity in the mid- to late-2010s? Is coal an answer? There will be no commercial scale carbon capture and storage plant operating before 2020 and that creates real uncertainties for coal, not least because of the still developing carbon regime. By 2012 the third phase of the EU ETS will begin; we have no idea what the price of carbon will be then or thereafter.’

And he points out, ‘as regards filling the generating gap by the mid- to late-2010s, no-one knows how long it will take to build a new coal-fired power plant in the UK — Britain’s last coal-fired plant, Drax, was completed in 1986; in Germany new stations have taken five years to build after the planning process had been completed, but that was without carbon capture and storage infrastructure.’

The obvious answer, he says, is a combination of renewables, which currently means mainly wind, and increased gas-fired power plants. Gas-fired generation is the only source of power which can follow the load variations caused by intermittency of renewable generation, because neither coal-fired nor nuclear stations can be operated sufficiently flexibly.

So what about gas? Gas fits well into the current market structure, and although there are similar, but less acute, carbon capture/storage and price issues as for coal stations, additional gas-fired power plants could be built by the late 2010s, in time to fill the generating capacity gap. Over-dependence on imported gas supplies is most often mentioned as the greatest concern.

The UK is already the largest and one of the most gas-dependent markets in the EU. But by 2010, sufficient import infrastructure will have been built to allow substantially increased imports from diverse sources in both piped and liquefied form. New pipelines from Norway will help offset much of the fall in UK North Sea production over the next ten years.

The interconnectors with Belgium and the Netherlands integrate the UK much more into the pan-European marketplace for gas — creating access to supplies from Russia and North Africa. In late 2008, two new terminals in Milford Haven, along with expansion of the existing Isle of Grain facility, will provide substantial additional LNG capacity, enabling the UK to tap into global sources of supply like Qatar and West Africa.

There is great suspicion of these foreign supplies, but, counter-intuitively, he argues that it is UK production which is our major security problem: it is falling faster than anticipated, and its availability on a day-to-day basis is highly uncertain because of unreliable infrastructure.

‘I have made the point before in Parliamentary Brief that infrastructure failure, not foreign policy problems, is the main risk to supply security. The UK’s gas fields, terminals and pipelines are all getting old. It is boring media copy but facility failure is the main risk which we face.

‘We have seen major UK infrastructure failures in each of the last three years. The Rough fire knocked out our largest offshore gas storage between February and July 2006. In Summer 2007, the CATS pipeline that brings southern North Sea gas to shore at Easington, East Yorkshire, was out of action for three months, and in February 2008 the Bacton fire, only interrupting supplies for a few days, caused a price spike. The Grangemouth strike is another example of how supplies can be interrupted. Increasingly diversified gas imports will not increase, and may reduce, our exposure to supply failure.’

Imports are the solution to security of supply, not the problem the media would have us believe. Growing insecurity of domestic supplies combined with growing imports is why gas storage is so important. North Sea fields acted as gas storage for the UK, but declining production means that it can no longer fulfil this role.

In a country as dependent on gas as the UK, government needs to consider how it will ensure that sufficient gas storage is created; this has both a market and a planning dimension. The 2008 white paper attempted to address the planning constraints, but ducked the market problem: how to ensure that storage will be sufficient to prevent shortages caused by supply failures and/or demand surges and resulting price spikes.

Strategic storage has been rejected because that would interfere with the working of ‘the market’. But even if all of the commercial storage currently contemplated is built, this would still leave the UK storage levels significantly below Germany, Italy and France in terms of percentage of annual demand.

‘Although the import infrastructure we have built will allow us to buy in LNG and pipeline gas, in a tight market such supplies could be very expensive. The major question mark over any major expansion of gas is from where will we source additional supplies after 2015, and especially after 2020. Although there are plenty of gas reserves, few countries have plans to expand their gas exports significantly.’

He sees three reasons for this: firstly their own domestic gas demand is rising rapidly due to economic growth and subsidised gas prices.

Secondly, they are earning two-three times as much revenue as they expected five years ago, and so have much reduced incentives to increase exports.

Thirdly, those which do intend to increase exports such as Libya and Turkmenistan, need international gas companies to invest but are imposing very tough terms; in addition domestic and international politics in these countries are problematic.

All this means uncertainty and takes time to resolve. So the major argument against increasing gas dependence is increased exposure to tight markets with high prices.

What can we do? ‘There needs to be a recognition that before 2020, the supply side can only deliver very limited solutions to our energy and carbon reduction problems. The “easy” gains are all to be found on the demand side. But measures such as smart metering and energy efficiency in buildings — which are moving painfully slowly — are insufficient.

‘What is required is draconian regulation on the demand side, something akin to “energy demand Stalinism” in every sector: household, transport, industry and power generation. Without rigorously enforced demand reduction measures we will be unable to deliver on our 2020 carbon reduction targets. But who will vote for politicians intent on enforcing such measures?’

It is already very late to bridge the generating capacity gap which will open up in the late 2010s, and probably too late to meet the carbon reduction targets that have been set for 2020.

While British politicans criticise oil exporters for failing to invest enough in capacity which would enable them to export more and bring down high international prices, ‘40,000 British fans make a 3,000 mile roundtrip to Moscow, using tens of thousands of gallons of aviation gasoline, to watch two hours of football which could have been staged at a UK venue, thereby saving a huge quantity of transport fuel’.

It is, he suggests, time to get our own house in order.