Gas is King – with nuclear thrown in

Long live the king! That was the message loud and clear last week from the UK Energy Secretary Amber Rudd as she rubber stamped the future of the UK’s energy security move from coal to gas by 2025. However, as was discussed at our energy seminar at the offices of city legal firm Hogan Lovells this month, which took place in sync with Amber Rudd’s speech, how that is delivered is not as clear or understood in the industry and amongst investors.

There is a capacity mechanism which was initially lauded as a government tool to ensure security of supply in the form of new power stations, which last year on this basis was a massive failure. It might have seemingly saved the consumer a few pounds off their energy bills in the short term at a time when coal, gas, and oil are at the cheapest they have been in years; but for the long term stability of UK energy supply which needs new, cleaner, more efficient power stations the savings will be pretty meaningless.

The energy sector and the way the UK generates its energy has undergone a pretty radical readjustment in recent years with the advent of renewable, intermittent technology. But the reliability of energy the UK consumer has come to expect is under threat. National Grid has already invoked a scheme which pays energy intensive users such as steel and ceramics to reduce their energy usage by paying them off to save the rest of the population.

This was at a time when the temperature was 15 degrees, the greater test will come when we hit winter.
Gas is quite rightly seen as a lower carbon transition, baseload fuel that can be used for decades whilst renewable technology and energy storage enters maturity. So whilst backing the role of gas the UK now needs to also back increasing gas storage as part of its security of supply strategy.

At present Germany has 120 days storage capacity, France around 100 days, and yet the UK has just 14 days – it was only during the late winter of 2013 that the UK came within hours of running out of gas capacity. The problem though is that as Peter Atherton remarks, managing director of Jefferies, there is too much ‘bad’ uncertainty ie regulatory changes undermining new infrastructure investment in both gas storage and gas generation.

The UK energy sector is crying out for ‘good’ uncertainty where developers and investors back projects within a solid, long term, coherent market framework set by Government. But take nuclear, the Government cites cost as the primary driver of energy policy and yet backs one power station to the tune of £25billion to provide 7% of UK energy needs, where a gas power station would equate to under a billion. The UK needs six nuclear power stations so how will it deliver them under their current thinking?

The UK sits at a juncture when energy is said to be at the height of privatisation and yet the public sector has more control over it than when energy was in the public domain. As Amber Rudd herself said, we are in a state where not one piece of energy generation is produced without Government intervention. So using her exact words there is more than the need to be honest and clear about how we will meet our European and international obligations – the detail of which were not set out in her re-setting of Government policy.

At our seminar, the audience were evenly split as to if they believed electricity market reform will be delivered and be delivered with enough security to meet the needs of the UK market. This doesn’t bode well with the pressing need that in a decade’s time 40% of our generation via coal will have been lost and its replacement isn’t even off the policy table as yet.
It all makes for an interesting decade to the casual observer but the seriousness of keeping the lights on cannot be underestimated.

Everything we rely on to run our homes, businesses and the economy relies on this Government getting it right over the next four years – it’s a heavy burden to carry but one it must bear and bear it well.