In the dark on the reality of blackouts

Strike prices unveiled, a shale boom predicted, regulator warnings and tabloid hysteria – Kelvin Ross examines 24 hours in the evolving UK energy market

ELECTRICITY TO BE RATIONED. That was the headline on the front page of UK middle-market tabloid newspaper the Daily Mail earlier this month.

“Britain could face a return to Seventies-style power rationing to prevent blackouts” the paper told its readers.

The story appeared the morning after a busy 24 hours for the UK energy industry, a day dubbed ‘Super Thursday’. The government’s Department of Energy and Climate Change (DECC) revealed some long-awaited details of its Electricity Market reform package by publishing draft strike prices for various forms of renewable energy, the British Geological Survey published a report on the potential reserves of shale gas in Britain, and energy regulator Ofgem issued a warning over electricity supply.

It was this last report that prompted the Daily Mail’s screamer headline and it is the latest of many occasions in recent months when energy has grabbed the front page, sometimes with measured reporting, sometimes not.

So what was in these reports and DECC announcements and what did the power industry make of them? Is it all doom and (literally, as the Mail would have us believe) gloom, or are there reasons to be upbeat about the British power sector.

What Ofgem actually said was this: that electricity supplies are set to tighten faster than previously expected in the middle of this decade. It stated that “the risk to electricity supplies is projected to increase from the current near zero levels”, although it added – and here’s a rather vital caveat – that it “does not consider disruption to supplies is imminent or likely, providing the industry manages the problem effectively”.

Ofgem chief executive Andrew Wright said the report “highlights the need for reform to encourage investment in generation”.

He said Britain’s energy industry “is facing an unprecedented challenge to secure supplies” and added that it would be “prudent to consider giving National Grid additional tools now to procure electricity”.

Ofgem believes these tools would give network operator National Grid “the option to buy extra demand-side response and reserve generation to balance the electricity network”.

Dr Monica Giulietti, Associate Professor of Global Energy at Warwick Business School, has studied UK energy prices for more than a decade and says Ofgem’s warning is the latest of several alerts.

“There have been warnings the gas reserves are getting tight in the UK as its storage capacity is a lot smaller than the rest of Europe,” she says. “Plus there is also an issue with the decline in gas production from the North Sea. A change in demand will see the energy companies rely on the spot market and import gas, which is subject to variations in price. With such low reserves the UK might have to import more.”

The Ofgem report came a day before the government made key announcements on its Electricity Market Reform. It revealed the strike prices for renewable energy that it proposes to pay under its contracts for difference scheme and also outlined details of its planned capacity market.

Contracts for difference form a key plant of the government’s Electricity Market Reform. Varying in amount for each form of power generation, they guarantee to pay generators a fixed sum – or strike price – for the electricity they generate.

The government revealed figures covering each year from 2014 to 2019. For projects with a potential deployment capacity of more than 1 GW, the government plans to pay £155/MWh for offshore wind in 2014, falling to £135/MWh in 2019; Onshore wind will get £100 from 2014, dropping to £95 in 2019, while large solar PV will receive £125 in 2014 and get £110 in 2019. Hydro and biomass conversion will get the same amount for the 2014-2019 period: £95 and £105 respectively.

On the capacity market, the government confirmed that – subject to EU state aid approval – the capacity market will be launched next year, with participants such as existing generators and investors in new plant bidding in auctions to provide the total amount of electricity that the UK is predicted to need from 2018-2019.

Successful bidders will receive a steady payment in the year they agree to make capacity available. In exchange, they will be obliged to deliver electricity in periods of system stress or face financial penalties.

Energy Secretary Ed Davey must have felt he was directly answering Ofgem’s concerns when he said: “Developers and investors have been crying out for more details sooner, and that is what we are giving them today”.

The announcements were welcomed – albeit with some key caveats – by many in the energy industry. Andrew Horstead, head of commodities research at energy and carbon management specialists Utilyx, said: “This is the first real assurance that we’ve seen from the government to make a real and lasting commitment to improving the UK’s energy infrastructure. The measures outlined should finally provide investors with the clarity they need to commit funds for energy projects.”

But he added that “this will take time to get through the legislative process” and said he believed it was “highly unlikely that we will see the real benefits of these plans until the latter stages of the decade at the earliest, which has serious implications for the country’s short term energy needs.”

Maria McCaffery, chief executive of trade group RenewableUK, said the publication of the draft strike prices was “a welcome step forward in setting out how the long term market is going to work.”

However, she added that “more details do need to be set out. The most important ingredient remains investor confidence and that will take time to land. The secret is consistent long term support and investors seeing that government is behind renewables and low carbon generation for the long term.”

Paul Massara, UK chief executive of RWE – one of Britain’s ‘Big Six’ power utilities – said “a significant level of detail is not yet finalised. This, along with the overall complexity of the proposals and the need to gain EU state aid approval, means uncertainty remains.”

And Katja Hall, chief policy director at the Confederation of British Industry, said DECC’s announcements were “a big step forward and should unlock the private investment we need to keep the lights on and costs down”.

Shale gas

In what proved to be a bumper day for UK energy announcements, the government also published details of a report from the British Geological Survey on the potential volume of shale gas in the north of England.

Shale gas

The BGS estimated there is likely to be some 40 trillion cubic metres (1300 trillion cubic feet) of shale gas in the ground in this area – a figure far exceeding all previous estimates. However, it should be noted that the figure relates to technically recoverable volumes and not to commercially recoverable gas.

Emma Wild, head of the upstream advisory practice at consultancy KPMG, was far from bowled over by the BGS report and the government’s shale gas package.

She said what had not been addressed was “the high cost of operating in the UK, the availability of alternative sources of gas supply for UK power and how these factors contribute to shale gas commerciality”.

“Therefore the likelihood of large scale developments remains uncertain.”

However, Dan Byles, chairman of the All-Party Parliamentary Group on Unconventional Oil & Gas, was much more upbeat. He said the figures in the BGS report “confirm the UK’s potential to become a major global player” in the shale gas market.

“Even if only ten per cent of what BGS believes is there was extracted, this would support the UK’s gas needs for four decades – and the report only covers one part of the country. Now we need to know how much of this valuable resource we can extract and what it will mean for UK consumers and industry.”

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