Energy crunch time for the UK

Last night I listened to Alistair Buchanan, chief executive of OFGEM, giving a talk using a presentation written in November last year called "Will GB's lights stay on and will the gas keep flowing: a look at the next decade". You can download the slides from OFGEM here. Alistair is standing down in June this year after 10 years; he declined an offer to extend his contract by two years and I can't help wondering if this is because he doesn't like his medium term forecasts of plummeting levels of spare capacity almost certainly leading to an increased dependency on gas and higher prices. The crunch arrives in 2015/2016.


There are 62 slides in his presentation and Alistair 'cantered' (his word) through them in 50 minutes - I will be much briefer than that. The first part is about electricity and the second about gas.

 

Electricity

Power station capacity margin forecast (OFGEM)

The chart shows a forecast for the capacity margin - how much spare capacity we have in hand to cope with peak electricity demand, in case of plant downtime for whatever reason. The red line base case drops from around 14% in 2012/2013 - which is barely comfortable, down to 5% in 2015/2016 which is excrutiatingly tight. The red line assumes zero net exports of electricity to Europe. (We buy and sell electricity according to demand through a cable link to France across the English Channel). The bottom blue line represents a worst case with full exports which takes us down to 0% capacity margin. Ouch. We'd better not do that then.

The forecast is for increasing margin from about 2017 due to new plant coming online. However, quite a lot of the new capacity is delayed.

• Three new nuclear power station projects are delayed

• Horizon  which is now owned by Hitachi after E.ON pulled out,
• Nugen which says it will reach an investment decision in 2015, for new plant not before 2023
• Hinkley B running behind schedule for commissioning in 2017

• CCS (carbon capture and storage) investment has not yet produced any significant options
• Offshore wind is ramping up slower than was hoped
• Drax has just cancelled its big biomass plant project

The drop in margin is partly due to planned decommissioning of old coal and oil plants - some of these have been postponed, for example Didcot A (1.6 GW) was due to close in March this year but will now go on to 2013. However, oil plants at Grain and Fawley (total 2.2 GW) are now to close in 2013, sooner than previously expected.

It appears that we need gas as a bridge until we can get more renewables and nuclear online.

Gas

The trouble with gas is that everyone wants it - and supplies from the North Sea are drying up. For the moment we get about half our gas from the EU and Norway but this will decrease with the shortfall coming from Russia, North Africa and global markets. The recent crisis in Algeria is unlikely to increase confidence in North Africa and Russia says it has plenty for us - but it was unable to meet demand in February last year when the winter was very cold. Supplies to Western Europe were reduced by up to 10% for a few days

Demand for gas is increasing across the continent since the recent Fukushima crisis has triggered plans to close more nuclear plants.

The promise of shale gas continues as a promise only, delayed by bureaucracy even if it does eventually get the go-ahead - and it is already banned in France and Germany. Poland has just passed a new law allowing development but exploratory wells have shown underwhelming potential and local demand will be high.

Shale gas in the US has caused a glut in the market and a drop in price - but even at current rock bottom prices, the additional cost of compressing it to liquefied gas (LNG) and transporting it to the UK (since there is no pipeline across the Atlantic) would bring the price level with what we are paying now. Needless to say if we start buying this the price will go up. In any case, on the global markets we are competing with China and all the other countries wanting more gas.

The uncertainly around shale gas seems to be leading to a lack of investment in new gas fields and pipelines across Russia and the 'stans'. The Shtokman gas project in the Russian arctic has been shelved. The Nabucco pipeline which was supposed to diversify our supplies is going on but at a reduced scale.

Conclusion

If we invest in gas we will be locked in to increased carbon emissions and rising gas prices for another 30 years or more. We could ramp up renewables a bit faster, or keep more coal plant going for a little longer - this would take strong signals from the government and support for investment - but the best thing we can do is to cut demand. Even small cuts make a big different on the margin. A reduction of 3% turns a 5% margin into a significantly more comfortable 8%. Even if you aren't worried about your energy bills now, saving energy today could save your energy supply tomorrow.