Where we are and where we are headed


The UK energy market is being rushed through an enforced update because it has been neglected for the last fifteen years or so.  Today we are embroiled in that legacy. John Hall, Chairman, Alfa Energy looks to the future:

When the Large Combustion Plant Directive was first proposed it made sense to phase out the large emissions emitting power stations and replace them with a greener and more efficient ones and that was the general view at the time so that the EU could comply with its environmental directives.

Now, ten years on as the stations are being phased out with 7.5 GW scheduled to go by 2015 but only 2.5 GW being replaced, we realise that we have not only a potential capacity shortfall but also a shortfall in the sustainable capacity coming from Renewables.  The original question that this strategy provoked was “If new renewable capacity is not sufficient, will the Government of the day reprieve those stations under the LCPD or let the lights go out?”

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We still do not have an answer but what we do know is that there were no plans to invest further in the actual plant designated for shut down under the LCPD and that it would be run down to the point beyond which it could go no further anyway.  So, reprieve for much of it, without substantial investment is an unlikely option.

National Grid is naturally confident over supplies for the forthcoming winter.  Demand for gas will be similar to last year and there is a range of different supply sources while for electricity with more planned scheduled for closure and not being replaced the situation will be tighter.  Nevertheless, assuming we get through this winter, the next will be more demanding as closures take affect.   We hear talk of large industrial customers cutting consumption in times of high demand but does this mean the return of interruptible gas contracts and the creation of such contracts for electricity?

Back in 2004 a statement from the Parliamentary Office of Science and Technology stated “The shift from domestic gas surplus to import dependency may leave the UK more vulnerable to supply interruptions and gas price fluctuations”.  Yet, in spite of the warning, the UK has continued to deplete its supply of gas by exporting it through the Bacton Interconnector to the Continent.  Now, nine years later, the UK can only supply around a quarter of its own gas needs while looking ahead to 2020, gas needed for generation will more than double to around 70% as it replaces coal and oil fired plant.

Concern over the cost of domestic energy is high on the agenda again following the latest round of price increases but this time politicians have attempted to gain from the situation.  Ed Miliband for the Labour Party has promised to “freeze” prices for twenty months while David Cameron, Prime minister, in response, has expressed frustration at the impact of “green taxes” from domestic utility bills.  Yet, with supplier profit margins running at 3 to 5%, consumers are quick to castigate them but when other organisations that thrive off public expenditure, like supermarkets and high street stores, make good profits they are applauded and customers switch to the best!

Senior Politicians don’t necessarily want to understand how the market operates but prefer to use the headline of the day for political advantage where they can.  Their agendas may differ although in the background there is actually much cross party consensus on what needs to be done although environmental issues are often where the disagreement arises.  We have a fluid wholesale market to which we add a range of pass through costs and taxes to reach a delivered price.  The idea of fixing the delivered price while the components remain flexible simply doesn’t make sense.

Suppliers have to buy ahead to secure supplies and because they all follow the same markets, under the same conditions, it is likely that the pattern from one will be replicated in others.  Ofgem has stated that had the suppliers not bought ahead for this coming winter and then bought at the end of September the cost for gas would have been 8% higher than it was last winter and for electricity it would have been 13% higher.  Unfortunately the price dealing between generation and supply divisions of the Big Six are not transparent and one does not know precisely what price levels have been agreed and this should be urgently investigated.

Renewables thrive on subsidies and while the feed-in-tariffs reward those who have supposedly invested in the new technology, realisation is filtering through to the general public that they are the ones to pay for the subsidies through the green taxes which have made up an increasing proportion of the overall energy bills.  The phrase “Government Money” has now been changed to “Public Money” or “Taxpayers Money” or just “Our Money” and how it is being used is under scrutiny as politicians now know and also fear as election dates loom ahead.

Green taxes have always been a threat to the end user cost but when people are asked if they care about the environment, most will say they do but when they are asked if they want to pay for it, the answer changes and most do not!  The Government will finally recognise the impact of environmental or green taxation and make concessions which we should see passed back immediately by the suppliers.  Nevertheless, whatever is taken out will not disappear but will be moved from source to another.  Furthermore, in his Autumn Statement the Chancellor has again confirmed that Fuel Duty will not be increased, saving consumers to date around 20ppl.  At the same time he has given a tax concession to encourage fracking.

Today we are planning to back Nuclear, which ten years ago was not the chosen option, and restructure the supply sector but time is against us and what is being agreed now to materialise in ten years or so should have been done fifteen years ago.   I remember Brian Wilson the Energy Minister from 2001 to 2003 stating that he would reduce nuclear capacity and virtually phase it out by 2020 but he didn’t stay long and left only to re-appear a short time later working within the nuclear industry!  Likewise, David Cameron was not a supporter of Nuclear early on but pressure from the Conservative Party made him aware of its need and it is now firmly on the agenda.

Having spent years discussing the nuclear option the decision has been made for the plant to be built at Hinkley with EDF.  However, until recently, the two German suppliers, RWE and EON, were serious contenders to invest in the UK but the decision by Germany to dispense with nuclear generation, their potential investment has switched from the UK to Germany where the two suppliers are charged with generating from renewable sources.  Ironically as Germany phases out nuclear the big switch has been to coal with severe environmental implications.

The UK supposedly needs investment of around £200bn over the next eight years or so and with the French support additional funding will come primarily from the private sector and probably the East , namely Japan, China and India.  Meanwhile, having got this far, the EU isn’t sure whether the deal between the UK Government and EDF is legal or not and has announced an investigation in to the planned development which will have implications for this and the next one.

Looking ahead the restructuring of the industry under the Energy Bill should clarify how markets are supplied and simplify the contract and price structures but with perceived energy shortages we are also mindful of Climate Change and the need to cut pollution without imposing additional taxation on our population and industry in times of austerity.

Delays in lack of activity can readily be blamed on the supply sector, namely the Big Six , who took over the industry back in 1990 but, in reality, Government indecision and dithering over the years has been the true reason.  So, today we are in rapid catch up mode at a time when UK stocks of gas have been dramatically depleted and generation plant run down to a dangerously low level without sufficient planning to replace either.  The UK is in for a period of severe restraint, making up for the lack of policy decision making during the last fifteen years or so.  The decisions that will need to be taken will not be vote winners and this will be to the detriment of the Government of the day well in to the future.



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