Sam Hall: The solution to a gas crisis is not to deepen our dependence on gas

10 Jan

Sam Hall is the Director of the Conservative Environment Network.

With Ofgem’s price cap review weeks away, political attention is turning to an inevitable hike in energy bills and the rising cost of living.

Conservative MPs were right last weekend to highlight that affordability is a critical energy policy goal and that steep bill rises should be curbed. But this can and must be pursued in tandem with our net zero goal, which insures us against much greater economic costs and national security impacts in the future due to dangerous levels of climate change.

There is little disagreement among experts on the root cause of the current price spike: rocketing wholesale gas prices, which increased by more than 400 per cent across Europe last year.

It’s important not to conflate security of supply and cost. The UK will keep the lights and the heating on this winter. The issue is that we are having to pay over the odds for gas because it’s in high demand, particularly in Asia, and supply to the European market is being strategically constrained by Vladimir Putin.

Some commentators have argued that the UK is in a poor position to manage this global price rise due to climate change policies which prevent us exploiting domestic fossil fuel reserves.

But the fact is that climate policies have not constrained gas production from the North Sea, as gas production has been roughly flat for a decade according to the latest official statistics. The main constraint on North Sea production is the relatively high cost of production compared to other gas basins.

In fact in 2015, seven years after the Climate Change Act, the government passed legislation to give the oil and gas regulator new duties and powers to maximise the economic recovery of oil and gas from the UK Continental Shelf. Arguably, this should be amended now to include a Net Zero duty, reflecting the faster projected falls in fossil fuel demand and increased risk of stranded assets, but the maximising economic recovery duty remains in law and Ministers have been clear that North Sea gas will be needed during the transition.

Climate policies are not to blame for blocking fracking, either. Despite the Government removing multiple regulatory barriers to fracking in the 2010s and expending huge political capital in the process, shale gas companies were unable to frack without exceeding legal limits on earthquakes and alienating local communities.

It was the regulator’s report on seismicity which led to the government’s decision to impose a moratorium, not any climate policies. I’m sure the fact that only 19 per cent of the public support fracking made the decision easier still.

But even if we’d offered more tax breaks to North Sea producers and somehow overcome the various economic, environmental, and political barriers to fracking, it is highly unlikely that the UK could have produced sufficient gas to make a significant dent on the 400 per cent increase in natural gas wholesale prices currently being experienced in the European market to which we are connected via multiple pipelines and whose prices we therefore follow.

The fact is that if we’d had more renewables on the grid, and had put in place a long-term set of financial incentives for homeowners to insulate their homes, we’d have lower demand for gas for heating and power now and therefore be less exposed to the current price rises.

Yes, more variable wind power on the grid would have reduced aggregate demand for gas over the course of the past year, enabled gas power stations to be used more as back-up on calm days rather than as baseload all year round, and reduced our exposure to European gas prices.

And yes, clean technologies already exist, from hydrogen and battery storage, to interconnectors and demand response, to keep the lights on when the wind doesn’t blow.

But rather than relitigate past debates, we must deal with the current acute situation and look to our future energy policy.

First of all, the Treasury should consider providing some short-term relief – with options including targeted support to vulnerable households via Universal Credit or existing schemes such as the Warm Homes Discount, or wider measures such as funding some of the legacy environmental and social levies on bills out of general taxation on a temporary basis.

Funding some of the levies from the Exchequer would be expensive, but would also support Net Zero by making lower-carbon electricity cheaper relative to higher-carbon gas, which the government has already committed to doing in the Heat and Buildings Strategy.

Long-term funding could come from a carbon tax on gas, once prices stabilise. In the short-term, this would offer a de facto tax cut to the many businesses and middle-income households who will struggle with rising energy bills, as well as the fuel poor. While none of these proposals would be sufficient to halt the rise entirely, this is a key opportunity for the Chancellor to burnish his tax-cutting credentials and alleviate some of the cost of living pressures this spring.

In the medium-to-long-term, though, the focus must be on reducing our dependence on gas, by insulating more buildings, improving industrial energy efficiency, and investing in new home-grown energy generation that delivers reliable, clean, and affordable electricity, as well as creating jobs and export opportunities in sectors that are forecast to grow rapidly.

As we do so, we must be extremely cautious about adding further costs to energy bills through future policy choices. As ministers commission a new fleet of nuclear power stations, for example, the industry must demonstrate it can achieve significantly lower costs than Hinkley Point C. Bioenergy should do more to prove its positive climate impact and reduce costs before it gets new subsidies. And when establishing support schemes for nascent technologies, such as low-carbon hydrogen, the Treasury should opt for taxpayer-funded mechanisms rather than bill levies.

Ultimately, we need to break away decisively from this cycle of fossil fuel price shocks, which have been weaponised for decades by unsavoury regimes to advance nefarious geopolitical objectives. Russia provides a third of Europe’s gas, and this is unlikely to change any time soon due to Nord Stream 2.

With Russian gas exports to Europe around six times total UK gas production in 2019 (the last ‘normal’ pre-Covid year), there is no plausible scenario for increased domestic production which would insulate us from Putin’s grip on the European gas market.

The solution to a global gas crisis is not to deepen our dependence on gas. For the sake of our bills as well as our security interests, we need to double down on homegrown green energy instead.

Clive Moffatt: The Net Zero target may not be possible, and gas should bridge the generation gap

29 Sep

Clive Moffatt has over 30 years of experience as an energy market analyst. He founded and chaired the UK Gas Security Group (UKGSG) from 2017-19.

As the start of the energy decarbonisation programme in 2013, various participants in the gas to power chain warned the Government that the UK was especially vulnerable to supply and price fluctuations in the global gas market – because of our growing dependency on imported gas for heat and power.

In the harsh winter (2018) and now, these predictions have proven correct.

This problem will not go away and consumers, industry and infrastructure investors need to be reassured by government that the need to underpin energy security and affordability will not be ignored in the pursuit of Net Zero.

The following announcements from No 10 would go some way towards restoring consumer and market confidence:

Commit to energy security and affordabilty

Neither Parliament nor the electorate voted for Net Zero and the Government needs send a clear message that for very good reasons – such as technological constraints, security of supply, industrial competitiveness and affordability – reaching the Net Zero target by 2050 may not be possible.

There is very little credibility to be gained at COP26 by the Prime Minister seeking to lead the world on reducing emissions when his own energy policy is in a shambles.

Abolish retail energy price caps

There is no economic sense in capping retail energy prices when you have no influence over wholesale market prices. All that happens is that weaker suppliers go bust and Ofgem ends up having to raise the cap.

Caps may benefit larger better resourced suppliers by making it quicker and easier for them to grow market share but there is a little benefit to the consumer. Better to let the market work and instruct Ofgem to tighten the financial tests it uses to judge the credibility of existing and potential suppliers.

Encourage investment in UK gas storage.

The UK will be almost totally dependent on imported gas from 2025 and with storage capacity at less than two per cent of annual gas demand, policies are urgently required to encourage new investment.

This could be achieved via an obligation on suppliers and shippers to keep a proportion of their annual gas demand in annual storage or via a capacity market auction to award capacity payments to winning bids to underpin new investment in seasonal and flexible storage capacity.

This should include an allowance for the planned growth in hydrogen production to fuel heat and transport and the need for related hydrogen gas storage.

This new investment will mitigate wholesale gas and electricity price volatility and help pave the way for a more secure and affordable transition to Net Zero.

In addition, more needs to be done to increase short-term liquidity in the gas market via a system of Demand Side Reduction (DSR) (as with electricity) which rewards industrial users (on an auction least – cost basis) for voluntarily curtailing their demand at times of system stress.

Use gas to bridge the generation gap

With the demise of coal and retirement of existing nuclear capacity the UK is very short of both regular baseload and reliable flexible power generation to compensate for the planned expansion in intermittent renewable energy.

Natural gas is the only cost effective and reliable solution.

In the medium term some 10GW of new baseload generation is required and this should be provided by unabated gas via a new capacity market auction.

Carbon capture and storage (CCS) to remove the CO2 is still an expensive prototype – requiring more gas, raising electricity costs – and so initially all new large- scale gas plant should be CCS compatible but not compulsory – additional capex and opex incentives and preferential despatch could be available later when CCS proven.

In addition, a separate auction should be run to procure smaller scale (eg 300mw units) via a separate auction for flexible generation with unabated small -scale gas being allowed to compete with batteries and Demand-Side Reduction (DSR) on the basis of strict criteria relating to network locality, reliability and costs with penalties for non-delivery.

Establish an Independent Energy Authority

Finally, more consistency and long-term coherence are needed in how energy policy is designed and implemented. The current fragmentation and politicisation of energy would be removed with the creation of an independent Strategic Energy Authority (SEA), with an independent chair and expert management board.

This would reduce the policy burden on BEIS, remove the need for the Climate Change Committee, allow Ofgem to focus exclusively on retail market competition and remove potential conflicts within National Grid as grid investor/owner and system operator.

Such an authority could:

  • set long term investment targets for generation transmission and distribution based on the need to balance emissions reduction against security and affordability;
  • create a consistent and cost-effective policy framework (eg long-term gradual price trajectory for carbon and capacity auctions) to ensure fair competition between different forms of energy supply;
  • oversee the system operation of the electricity and gas market and facilitate greater liquidity in the short term balancing markets eg gas storage and DSR in gas; and
  • liaise directly with Treasury to define and publish long- term budgets for taxes and levies impacting on consumers and industry.

In the words of our Prime Minister, this would be a “grown-up” rational approach to energy. His key message from now on should be that the pursuit of Net Zero is not incompatible with the urgent need to deliver to consumers and industry secure supplies of affordable energy.

Chris Skidmore: Nuclear power. More small reactors in the future? Fine. But we need more big ones soon if the lights are to stay on.

27 Sep

Chris Skidmore was Science Minister between 2018-2020, and Energy Minister in 2019 when he signed Net Zero into law. 

Over the past week, energy supplier companies seem to have been falling like dominoes: People’s Energy, Bulb, Green Supplier; my own energy company, Avro, went bust as I was drafting this piece. It’s not clear how far the contagion will spread, but what is clear is that we need an urgent rethink of how we shift from an overdependence on gas towards more secure and constant energy provision for the future: one in which the UK won’t be held ransom for by other nations.

The problem has long in coming – and the stresses of the pandemic only compounded a sector under pressure. Energy prices in the UK are currently among the highest in Europe due in part to a wider supply crunch in gas, with wholesale prices currently at some 250 per cent since January. Ofgem has confirmed that customers should expect energy price increases by at least £135 this winter, putting families in tough financial positions right after the pandemic.

These price increases are likely to decimate small to medium energy suppliers, who will not be able to handle the increasing prices and may collapse – in turn putting pressure on the larger suppliers to fulfil the contracts, straining our entire energy supply network. There are legitimate worries that, of the 70 energy suppliers the UK started the year with, only a mere ten will survive.

The status quo is clearly unsustainable: the UK energy market can no longer afford to be so heavily dependent on the pricing of gas, unreliable weather patterns for wind and solar – and we must not return to coal.

This provides us with both the brilliant opportunity and financial incentive (or perhaps imperative) to invest and grow the UK’s nuclear fleet. We no longer have the luxury of kicking this can down the road, we need investment into new nuclear power facilities as soon as possible.

Already, we have maxed out the lifetime extensions of our current fleet: it is time to build and expand afresh. And we don’t have much time to waste. Currently, nuclear power is responsible for 20 per cent of our energy needs but, by 2025, over half our nuclear power stations will be forced into retirement, leaving a massive gap of in our energy supply capabilities.

This will undoubtably cause the current price run to look like a drop in the proverbial ocean, as wind and solar power will not be enough to cover for this shortfall.

It would not be out of the realm of possibility for government to be faced with the choice between rolling blackouts – increasing our dependence on gas, and forcing Ministers to stomach exponential price increases, or else to return to increased coal power usage.

No option here is even remotely palatable and, thankfully, we still have time to do the correct and environmentally responsible action of investing in the nuclear industry. Yet despite the fact that nuclear power is safe, sustainable and economically beneficial in the long run, the British nuclear industry ,and its potential for providing a clean, sustainable source of net zero carbon energy, remains curiously absent from the policy negotiating table.

It is not too late to have a clear U.K. nuclear plan: indeed, to do so should be a vital mechanism on the transition away from carbon intensive power sources, a transition that cannot rely on wind and solar given their unpredictability. Investing now in the development and construction of new UK nuclear plants is the sensible and rational choice, as nuclear power can run all day and night, whether the wind is blowing or still, and will not be dependent on foreign supply chains.

At the same time, nuclear plants require scarcely any land supply: wind farms require 360 times the land area to produce the same energy as one nuclear facility; solar farms, 75 times the land mass. For an island like the UK, whose constraints on space are more likely to be determined by laboursome and delayed planning wrangling over wind and solar farms, nuclear should be a no-brainer.

Sovereignty is also key here: energy security will be increasingly top of the agenda in energy policy discussions, as our dependence on gas pipelines and interconnectors become newsworthy. New nuclear can provide this if we are willing to set out a clear pathway for an expansion in nuclear provision, including in nuclear innovation that can deliver the low cost, reliable power sources of the future.

Excitingly, Rolls-Royce has also announced plans to develop small modular reactors. Innovative technologies such as these, along with scientific breakthroughs in the research capabilities of nuclear fusion, will allow the government and the industry to secure the UK’s energy supply. Already, the Government has suggested that they will row in behind these proposals, with 20 small modular nuclear reactors in the pipeline.

Fine – but we cannot simply wait for the technologies of the future, important though these are. We need more of the existing large fission reactors now. Without them, we face potential power shortages throughout the next decade, just as our energy supply is expected to double between 2020 and 2040.

This comes at the same time that our previous past failure to invest in more nuclear power replacements is about to be laid bare. Last month, EDF Energy announced that it would close the Dungeness B nuclear plant in Kent seven years earlier than anticipated, amidst fears that the company will be forced to shut down two additional plants in the near future.

Dungeness B had been originally placed offline in 2018 for maintenance, to be restarted to run until 2028 in time for the Hinkley Point C to be finished and capable of providing the necessary energy for the nation to reach Net Zero. The early closure of Dungeness B comes after EDF announced that it would have to shut down Hinkley Point B and Hunterston B by next year instead of 2023.

Additionally, the nuclear power stations in Torness and Heysham 2 could be faced with safety issues which could force their closure well before the originally planned date of 2030.

Our delays to Hinckley C in 2016 nearly turned out to be a dark moment for the UK nuclear industry. With approval finally given, EDF have demonstrated the value chain that nuclear brings to local communities, with well over 50 per cent of the 30,000 jobs created going to the local community.

New nuclear could be the industry which helps to ‘level up’ disadvantaged communities, creating jobs for the future, not just for one generation, but for generations to come well into the next century. The key thing about nuclear industry skills is that they are also highly transferrable: teams learn how to build plants and their skills can then be taken to the next project, reducing its cost in turn.

It isn’t surprising that the government may now turn towards nuclear. What is surprising is that the nuclear industry remains without a seat around the table at COP26. They deserve to be an integral part of the negotiation on how not just the UK, but the rest of the globe can achieve net zero with the aid of nuclear energy.

We cannot afford to ignore the potential that nuclear brings – without it, we risk creating an uncertain future which potentially jeopardises the progress we have made towards a low carbon future.