OFGEM CEO speaks on the 2015/16 UK energy crunch

You may have seen my earlier post covering yesterday's (old) news that quite a few of the UK's older power stations are about to shot down. Well, I've found a couple of important updates since then, so here's the latest. First, it's worth noting that although this news isn't really new, it's in the headlines because it's coming from the Alistair Buchanan, the CEO of OFGEM. He seems to be speaking quite freely as he leaves his post in June 2013, so has nothing to lose... For example, read his letter in the Telegraph, which starts:

On Wednesday January 16, due to unplanned outages and cold weather, National Grid had to find power to supply roughly a million homes to keep the lights on.
Fawley, an oil-fired plant in Hampshire, was one of the power stations that responded.

Next winter Fawley will not be there. Indeed, about 10pc of our current generation stock goes next month as coal and oil-fired power stations close earlier than expected to meet environmental targets.

and goes on to say:

If you can imagine a ride on a roller-coaster at a fairground, then this winter, we are at the top of the circuit and we head downhill – fast. Within three years, we will see the reserve margin of generation fall from about 14pc to less than 5pc. That is uncomfortably tight.
...
Wellington described Waterloo as a close-run thing. Let’s hope that, in the battle to keep the lights on, these measures ensure it isn’t too close. Victory at Waterloo came at a price and we also have to face the likelihood that avoiding power shortages will also carry a price.

More revealing though is a lecture that Buchanan gave to CIBSE back in Nov 2012, when he covered the same material in great detail. The slides are available here, and the video from the lecture is embedded below. His main talk is just over an hour, so if you don't have the time to spare for that, I've listed what I view to be the key points, along with my comments, below the video, and after that a full listing of the points he makes, with time references so you can jump top that point in the video.

My summary of his key points

• Spare electricity capacity in winter will fall to 5% or below in 2015/16.
• We made lots of promises and set targets before the financial crash, and now they are proving hard to deliver on. Energy companies are not in a position to invest much money.
• 11GW of coal plant closing by 2015 – compare to 60GW peak winter demand in UK. Coal plants have been running ahead of plan on LCPD, as coal prices have dropped and owners are trying to run through their allotted hours before carbon tax comes into force.
• Could we ignore the LCPD? Problems: Could be a judicial review, government reputation would be damaged, government could be sued by plant operators that DID undertake work to comply and avoid shutdown (thus spending money and reducing plant efficiency), closed plants have not been maintained or have been stripped for parts – high restart costs.
• Gas: old gas plants are being closed as they are uneconomic, or too expensive to clean up to Industrial Emissions Directive standards.
• Coal has been profitable, gas has been loss-making, hence the shift in fuel use. Future is uncertain on gas policy, so only one new CCGT currently might be built between now and 2017. Between 2008 and 2011, 33GW of gas plant was cancelled in Europe, and 20GW was delayed, due to financial crisis and political uncertainty.
• New plant coming up? Nuclear: delayed, 2021 at earliest. CCS: zero success rate, no large plants being built. Offshore: delivery slower than planned. Biomass: Siemens/Drax NEW plant on hold, only conversion going ahead. 20GW of coal remains, but needs to be cleaned up, and only 6GW has done this so far. Offshore wind has gone much slower than thought.
• The outcome is that gas is the only choice for the bridge to a renewable energy future. Rather than falling from 40% to 20-30% by 2020 (as predicted in 2009), it will rise to 60-70% of electricity generation
• New gas supplies are tight in the short term, and demand is rising
• Shale gas is expensive
• Gas storage is small in the UK, and expensive/difficult to build

To be honest, it seems to me that we should be expecting more price rises in gas and electricity, perhaps big enough to make the ones we've had so far seem quite small. Otherwise the lights will go out. And even with higher prices, we still run the risk of some level of power cuts happening within the next few years. The only thing we can really do fast enough is to take action on reducing demand for electricity, and also on gas for heating, and then improve efficiency for the demand that remains. Building renewable energy also needs to progress as fast as possible, but on its own it will not be enough. If we simply depend on importing gas, then we are in deep trouble.

Here's my full notes on what Buchanan said:

2m10s CO2 will only be down 18% by 2020, bills up by 22% at same point. £95bn needed to be invested in generation. These figures account for slow growth since 2009.

3m10s 2012 update from OFGEM has brought capacity shortage forward a couple of years, to 2015. It’s even possible that spare capacity could be zero by this point!

4m30s reasons for this: LCPD, Industrial Emissions Directive (2021-23 target to remove all gas and coal from grid), 20/20/20 targets, 50% CO2 cut by 2020. But these targets were all set before financial crash. The outcome is a need for 33GW of new capacity, but only 13GW will be online by 2016/17, so a further 20GW is needed in the following few years!!!

5m50s The pre-2007 visionary approach, ruling out dirty coal and unabated gas, is expensive and doesn’t work with usual investment approaches by banks, so post-financial crash is a problem.

7m20s UK energy suppliers have good share prices, but mainland European suppliers have done poorly recently. The energy suppliers have also underperformed the average during the recession, which is not what would normally be expected. They are loaded with debt. Causes are, for example, Germany rejecting nuclear, Spain switching fuel preferences, EDF being owned by struggling French govt. Market capitalisation is back to 2004 levels – so nobody is keen to invest in new stuff.

10m40s Reasons we are in more trouble than three years ago: Coal has been used much more in generation, gas use has reduced. Also, past study had assumed zero net exports of electricity, but we usually export to Ireland, and because of German nuclear policy they are importing more from France, so we may not be able to import from them. Not sure we can be guaranteed import from Holland.

13m20s 11GW of coal plant closing – compare to 60GW peak winter demand in UK. Coal plants have been running ahead of plan on LCPD, as coal prices have dropped and owners are trying to run through their allotted hours before carbon tax comes into force.

14m40s List of coal/oil plants due to shut in March 2013

15m10s Could we ignore the LCPD? Problems: Could be a judicial review, government reputation would be damaged, government could be sued by plant operators that DID undertake work to comply and avoid shutdown (thus spending money and reducing plant efficiency), closed plants have not been maintained or have been stripped for parts – high restart costs.

16m35s Gas: old gas plants are being closed as they are uneconomic, or too expensive to clean up to Industrial Emissions Directive standards. Some gas has been mothballed – but there are different levels of this, and ‘deep’ mothballing costs more to reverse.

17m50s Coal has been profitable, gas has been lossmaking, hence the shift in fuel use. Future is uncertain on gas policy, so only one new CCGT currently might be built between now and 2017. Between 2008 and 2011, 33GW of gas plant was cancelled in Europe, and 20GW was delayed, due to financial crisis and political uncertainty.

19m30s New plant coming up? Nuclear: delayed, 2021 at earliest. CCS: zero success rate, no large plants being built. Offshore: delivery slower than planned. Biomass: Siemens/Drax NEW plant on hold, only conversion going ahead. 20GW of coal remains, but needs to be cleaned up, and only 6GW has done this so far. Offshore wind has gone much slower than thought.

23m25s The outcome is that gas is the only choice for the bridge to a renewable energy future. Rather than falling from 40% to 20-30% by 2020 (as predicted in 2009), it will rise to 60-70% of electricity generation. So it is vital to understand the security of our gas supply, and the factors affecting energy supply and demand in the UK and Europe.

25m30s Our European neighbours are using, or planning to use, more gas. Germany is adding 15-38bcm (billion cubic metres) a year of gas to replace nuclear, Belgium will phase out nuclear by 2015 and use more gas, France too may add more gas. So demand is rising.

27m20s We are going to need a lot more gas than we thought we would three years ago. But delivery is lower and demand is higher than planned. Direction of gas flows is away from UK.

28m30s Russia: People thought Russia would supply all Europe’s needs, but many these projects on the map are now cancelled or delayed. The picture has changed drastically.

30m0s Chart shows Europe 2020 annual gas demand of 630bcm, with shortfall of 27bcm, even allowing for some shale supplies and a significant ramp up in LNG imports.

32m45s Shale: Paused in Lancashire, most resources are in south-east England, which is densely populated. Poland looked good, but developers have pulled out due to taxation regime, France has ruled it out, as have some other regions. None are much good in the timespan where the UK has problems. There are many challenges to developing shale, and regulations too. Slide showing Scottish Widows ethical pension fund advice on CO2 emissions from shale. There’s also public opposition, on earthquakes and water contamination.

38m20s Shale gas is expensive.

39m0s In the US, govt support, geography, ownership and regulation were all more favourable for shale gas than in the UK. Even with all this it took 10 years – so no chance of it happening in the UK during our near-term energy crunch.

41m0s Will the US export its shale gas as LNG to Europe? Price will determine this – exports are more likely to go to Asia. But the USA also want to get nearer to energy independence, so exports may be frowned upon. Gas-dependent industries are booming in the US, and creating jobs there. Even if the gas was imported to the UK it would be no cheaper, and likely 60% higher than current UK prices.

43m30s So can we buy LNG on the global market? There’s lots of gas, but at a price, and with delays. LNG from Australia is the only new option that could help, but the cost of the gas is much higher than past LNG, and there have been significant delays in bringing the gas to market. East Africa is very early stage, South America is in decline. Qatar has a moratorium on their North Field until 2015. Further gas in the future there are more potential supplies, but not in time for the UK energy crunch. And demand is growing fast too, especially China, which currently has capacity to import 12 million tonnes of LNG a year, and is building another 46 million tonnes capacity by 2020! On top of this there is new LNG demand for marine use and for cars, to reduce SOx and NOx emissions, as well as CO2. Many ferries and lorries are converting to LNG in the next couple of years.

48m0s RECAP: UK needs gas for generation 2012-2022 (40% rising to 60-70%). We can get it from Norway, but all the other sources are uncertain or lower than previously expected.

48m50s UK has a major position on LNG – we are currently the EU’s single biggest LNG importer, mostly from Qatar, through the Straits of Hormuz (a risky sea route from a security point of view) and the Suez Canal (also risky during the Arab Spring).

50m55s Gas storage – can this help? We store 4 billion cubic metres, but use 100 bcm in a year. For comparison, Europe stores 87 bcm, Germany 21 bcm, while using 90bcm. The UK is so low because we used to depend on North Sea supply which we could just turn up as required, while Germany depended on Russia. Also, almost all of our storage is in the Rough field – risk of single point failure. In Jan 2011, we had 44% of storage capacity full, after a cold winter, but we then had a very warm January, or else we would have run out of storage in February 2011. However, storage is difficult to deliver – it’s expensive and difficult to get planning for.

53m30s Will the market prevail? In 2006 gas left the UK following high prices in Europe, and then when it got cold here and we were short of gas, Europe invoked public supply obligations and prevents gas coming back to the UK. The market failed. OFGEM, together with regulators in Holland and Belgium, are reviewing this. 71% of the time gas flows properly through the interconnectors, but the rest of the time something else is going on. E.g. gas coming in from Holland and then going straight back out to Belgium.

55m15s Do we need a security of supply obligation? Other countries in Europe do this, it is allowed under EU law, as are storage obligations.

56m2s Good news is that the best advice available has been given to government, and that the Energy Bill and Gas Generation strategy will address the challenges we face. The question is whether something needs to be done to promote new power generation capacity, and to promote security of gas supply? You could say “no, leave it to the ongoing recession to destroy demand”, or say we will use active demand side response. But leaving it to demand destruction is not politically acceptable, as it means admitting the economy is doomed. We could say “let National Grid handle it” – but on 13 March 2006, gas prices went to 260p/therm (60p at time of lecture), electricity went to £414/MWh (£50 at time of lecture). This was a one off, but if was sustained, it would be disastrous. Or you could say “OFGEM is wrong” – but they have used numbers from National Grid, so if they don’t know, then who does?

59m50s What are the options if we say “yes”? A range of options are presented for electricity and gas.

62m24s Q&A starts