Ofgem chief executive Alistair Buchanan made a media splash last month when he warned that the UK’s electricity supply margins were becoming "uncomfortably tight", were "on a rollercoaster" and were heading "downhill fast".
It’s not often that broadsheet - let alone tabloid - newspapers pay any attention to the UK’s energy supply mix, so I was intrigued by the level of attention Buchanan’s comments drew – particularly as he said very little that Ofgem hadn’t already said.
The basis for Buchanan’s argument (which I agree with), was that capacity margins in UK electricity generation (the buffer between the maximum amount of electricity we are able to generate and the highest amount of electricity we could need at any given time) will be squeezed over the next few years as old power stations close faster than new ones are built.
See also:
Gas strategy reveals plan to abandon tackling climate change
Factcheck: How supply margins turn to blackouts
Scenarios: The Limits of planning ahead
Most of the press I read pointed to the slow progress being made by the Government on reforms to the power sector designed to help speed up investment in new low-carbon electricity generation. It suggested that urgent action is needed in order to avoid a domesday scenario in 2017, or even earlier as analysis by the regulator Ofgem suggests.
So far, so good.
But another theme to emerge from the coverage (and from a double-page spread in The Sunday Times in particular) was the suggestion that the UK has within its grasp two silver bullets to solve the problem: exploiting the UK’s shale gas reserves and building new nuclear power stations. This misses the point entirely.
Shale gas doesn’t build power stations
Let’s start with shale gas. Even if we assume that it can be extracted economically in the UK, this process will take time from a standing start. Not only that, but it will also have no direct impact on the UK’s capacity for generating electricity – it would simply displace other sources.
Shale gas has helped bring down power prices in the US but only because it was created as a by-product of shale oil and was extracted in such abundance that it produced a glut which could not be exported to command a much higher price. Only under these circumstances has it been possible for generators to use it to run their power stations more cheaply and produce electricity at lower cost.
If these one-off conditions were replicated in the UK this could have the effect of making gas-fired power stations a more attractive investment in the long run, but the price of fuel is only one part of the reason they are not being built here at the moment. And having a lot of fuel lying around doesn’t do much to address a capacity problem if you don’t have the power stations to utilise it.
No nuclear plant will make the slightest difference to the capacity crunch in this decade
Similarly, deciding to build new nuclear power stations now will do nothing to avoid a capacity crunch in 2017, let alone before then. These are huge projects with long lead times, mammoth up-front construction costs and a recent track record littered with cost-overruns and failed projects.
Despite being a mature, 60-year-old technology, it appears from the very fact that the Government is in talks about a price guarantee that it is still unable to stack up financially without public subsidy. At least there is an honest and public debate about the need to provide support for renewables until their costs have reduced and they are able to compete in the market on their own strengths. Why can this not be the case for nuclear?
Don’t get me wrong, nuclear has played and will continue to play an important role in providing the UK’s supply mix with low-carbon, baseload electricity. It is encouraging to hear reports that the Government is holding out for a lower price in its ongoing negotiations with EdF over its proposed project at Hinkley Point. But it must avoid signing up UK consumers to take on responsibility for the seemingly inevitable construction cost overruns and delays which mean that no new nuclear plant will make the slightest difference to the capacity crunch in this decade.
So what can be done now to keep the lights on?
The short answer is that we need to encourage considerable investment in both gas and renewables.
The more renewables are running in future, the less gas (or coal and oil) we will need to burn. That means maintaining investment in renewables should be a top priority, and the best way the Government can do that is to confirm that access to the Renewables Obligation (RO) support mechanism will be extended for sufficient time to keep investment going while it works through its complex Electricity Market Reform (EMR). Otherwise we could well see the already reducing level of investment in renewables fall off a cliff for a number of years until the EMR dust settles.
That said, what the Government’s recent Gas Generation Strategy showed was that, no matter what the supply mix looks like in future (and no matter what your views are on gas), we are going to need a significant amount of new gas-fired capacity to be built in the next few years. But this simply isn’t going to happen while so much uncertainty surrounds the future revenue of these power stations; the more renewables run, the less gas will run and the less certain investors in gas can be of their future income if this is entirely dependent on energy sales.
The Government must therefore move quickly to introduce its ‘capacity mechanism’ so that SSE and other investors can push ahead with truly ‘shovel-ready’, consented projects like our new gas-fired power station at Abernedd. The capacity mechanism will see generators paid a fixed amount for the availability of their power stations to generate electricity when needed, for example when output from renewables is low. That would give investors the certainty they need to make final investment decisions, in turn giving the UK the knowledge that it will have enough capacity available to meet demand.
So, while the recent media focus on the challenge facing the UK and the need for decisive action from government was welcome, it is naïve at best to argue that shale and/or nuclear can get us out of this predicament. What investors really need is a clear, single voice from the Government that does not pit one technology against another. Unambiguous confirmation of uninterrupted support for renewables and swift implementation of a capacity mechanism are what’s required to deliver the energy and capacity mix we need for a secure, low-carbon electricity supply at an affordable cost to the consumer.
‘If we don’t act now,’ The Sunday Times piece suggested, ‘the lights will go out’. If we gamble our energy future on new nuclear and shale gas, they almost certainly will.
Guest posts represent the views of the author and/or their organisation. They do not represent the views of Greenpeace.
