Energy Security, Gas And The Missing Money

Energy Security, Gas And The Missing Money


CategoryArticles Author Stephen Tromans QC Date

How is Britain’s future energy security looking at present? If it depended on new nuclear build, probably not as good as might have been thought a year ago. Last year’s withdrawal of RWE npower and E.ON from the Horizon project was a serious blow, in that while the project was sold as a going concern to Hitachi, the need for fresh generic design assessment will involve some years of delay. Centrica pulling out from EDF’s Hinkley Point C project was another reverse: as The Times put it on 5 February, “Cloud over Britain’s nuclear future as Centrica loses faith.” Added to these setbacks, the stand-off between EDF and HMG regarding the strike price for electricity from new build looks no nearer to being resolved. There is great uncertainty as to whether commercial considerations will prompt current nuclear plant operators to seek lifetime extensions to their stations, and if so, whether the regulators will allow this, and on what terms. More widely, we know that much coal fired capacity will be lost through closure decisions made under the Large Combustion Plant Directive, but what is less certain is how operators will react to the tighter standards imposed by the Industrial Emissions Directive, as these bite. Equally, the Government does not know how many opted-out coal fired stations may convert to biomass and rise, phoenix-like, as “new plant”.

It is therefore notable that specific emphasis is now being placed on gas. In December 2012 DECC published its Gas Generation Strategy, Cm 8407.[1] This acknowledges the currently important role which gas plays (generating some 40% of our electricity in 2011) and sings its praises as a flexible, reliable and (relatively) clean source of energy. Gas fired power stations are relatively quick and cheap to build, and according to DECC we will need a lot more of them – up to 26 GW of new gas plant by 2030. This is a substantial upward revision from DECC’s last analysis. However, responses to the “call for evidence” issued by DECC in May 2012 have suggested that the current profitability of gas plant is low, that future profitability is uncertain, and that this is a significant barrier to the investment needed. This rather fundamental obstacle is, according to DECC, compounded by uncertainty over the detail of proposed Electricity Market Reform, restrictions on credit and finance, and planning delays. So what to do?

The Government describes the problem as one of “missing money”. Investors are not piling in for two reasons, so DECC says: (1) the settlement arrangements for suppliers are not sufficiently responsive in rewarding the provision of the necessary capacity to avoid power cuts, and (2) potential investors worry that if wholesale prices rise too high, DECC or OFGEM will be tempted to impose a price cap. In a marvellously opaque passage from the Executive Summary to the Strategy, the Government says this:

“The objective of this strategy is to reduce the uncertainty around gas generation for investors. The Government recognises that support for other forms of generation could undermine certainty for gas investors. We are therefore seeking to provide certainty for investors in both low-carbon energy sources and gas. To this end, we are setting a sustainable and affordable cap on the Levy Control Framework out to 2020. We are also reiterating that our approach to decarbonisation trajectories will continue to stay in step with other EU countries throughout the 2020s and consistent with a least-cost approach to our legally-binding 2050 decarbonisation objective and the 4th Carbon Budget.”

The Capacity Market is intended to address the first problematic cause of the “missing money” by offering explicit payment for the provision of infrastructure to reduce the chances of blackouts or brownouts. The Levy Control Framework is essentially a cap, imposed by The Treasury on the sums which can be raised through surcharges on electricity bills to be used for investment on renewables and nuclear. In November last year, after wrangling between DECC and The Treasury, it was set at £7.6 billion in real terms for 2020 (as compared with about £2.3 billion in 2012).[2] So at least potential investors in gas projects have some idea as to what financial support will be provided to their competitor technologies.

The reference to decarbonisation trajectories is significant. Carbon Budgets are set in law under the Climate Change Act 2008 and it seems clear that the current (4th) Budget, covering 2023-2027, may result in a more ambitious/onerous domestic trajectory of reduction that our EU fellow States, the pace for which is dictated by the EUETS. If this is so, and it seems very likely, the Government intends to seek Parliamentary approval to revise the Budget upwards to align with the EU trajectory. Such a step would be hugely controversial with the green lobby, but put crudely, the more liberal the revised Budget, the more gas will be used.

As well as these steps, the Government proposes a package of other measures and incentives for those thinking of investment in new gas projects. These include the first auction under the new Capacity Market arrangements, which the Government is “minded” to hold in 2014; the new powers under the Energy Bill to enable intervention to improve wholesale market liquidity; proposals to improve the planning regime, both in terms of s. 36 consents and major infrastructure proposals under the Planning Act 2008;[3] consideration of the case for further measures to encourage gas storage; and on the supply side, establishment of an “Office for Unconventional Gas and Oil” – of which more anon.

My next posting will consider where the gas to fire all these new stations will come from, and in particular the politically-charged issue of unconventional (shale) gas.
[1] See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65654/7165-gas-generation-strategy.pdf
[2] See http://oilbarrel.com/media/pub/var/release_downloadable_file/41389.pdf
[3] More flexibility for section 36 applicants, less onerous consultation and front-loading requirements under the 2008 Act, and the oft-canvassed “one-stop shop” for planning and environmental consents are all on the agenda.


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