2006 UK Energy Review
Picture courtesy of http://www.ecotricity.co.uk/

This month Paul Cassar summarises the UK Government's long awaited energy market review's main findings in terms of carbon trading, distributed energy and fossil fuels. Next month he will look the controversial issues of new nuclear build and carbon capture.

“A clean, secure and sufficient supply of energy is simple essential for the future of our country. We need energy to heat and light our homes, to power our businesses and to transport people and goods. Without it, we could not function as an economy or modern society. Even minor disruptions in supply, after all, can cause major problems for communities and businesses. Ensuring we have a sustainable, secure and affordable energy supply is one of the principal duties of government.”
Tony Blair MP

The two challenges facing the UK at the moment are energy security and climate change. How to make sure there is enough energy to meet demand without increasing carbon emissions?

Carbon

The UK currently accounts for 2% of global carbon emissions (see chart 1 below) which is set to rise by 50% by 2030. This in itself creates a challenge if carbon emissions are to be reduced, by using low-carbon sources to provide energy and the products that are made. The EU ETS (European Emissions Trading Scheme) has provided a step towards reducing carbon emissions, by encouraging businesses to think about how to use energy more efficiently and reduce carbon emissions in production.

Chart 1: Global Emissions of Carbon Dioxide, 2005

The EU ETS basically puts a limit on the amount of carbon emissions a company or country may emit. In an attempt to force the company or country to invest in better technology and reduce the emissions they produce. If the limit is exceeded then carbon credits need to be purchased, but the money paid for carbon credits cannot be used to clean up the carbon from the atmosphere, as there is no technology that enables us to do that, so in itself is not a solution, but rather provides an incentive to produce less carbon.

Climate change is a global problem and requires participation by all countries if any successful attempt is to be made to correct the damage that our energy hungry society has caused. The UK is keen to see the EU ETS become a global market and to help countries like China and India along with other developing countries to find low carbon producing sustainable energy for their growing economies.

Distributed Energy

Most of the UK’s electricity is generated in large power stations and transported at high voltage by wire to low-voltage distribution networks and then to users. Heat for homes and other buildings is generated from gas that is transported through a national gas grid. By generating energy near to where it is needed not only do you reduce loss, but also carbon emissions and the need for large power stations.

Producing electricity in large power stations has kept the generating costs down, despite having to transport it. Likewise buying gas in bulk has kept the price lower than if it was bought in smaller amounts. But by combining new and existing technologies new possibilities are emerging that could make a huge difference to both carbon emissions as well security of supply.

Small scale renewable power generation can also be employed at a local level. This clearly has the benefit of involving the local community to think about how they use their power effectively. For example if every UK household installed just three energy efficient light bulbs, the amount of electricity saved would be enough to supply all of the UK’s street lights. 

As Renewable and CHP power generation contribute less than 10% of the UK electricity generation and only 1-2% contributes heat to households, the distributed energy model has a long way to go before it becomes a significant contributor to the UK energy market, although the UK government plan to offer incentives to encourage growth in this area. Part of the problem lies in lack of awareness, by householders and local councils, coupled with complicated planning permission for microgeneration in the home. Also at the moment renewable technology is expensive compared to the more traditional ways of generating electricity, but as time goes by as with all new technologies the price will drop and renewable energy produced at local level will become fashionable and affordable.

The UK government is now making proposals where responsibility for carbon emissions are to be picked up at regional, local and community levels, which will mean all new build incorporating renewable generation such as photovoltaics and microwind wherever possible. Proposals are also being put in place to make planning permission for existing buildings to install renewable energy easier to obtain.

“Second, and even more important in the long term, is the impact that our sources and use of energy are having on our planet. The evidence is now compelling that the activities of humankind – and greenhouse gas emissions in particular – are changing the world’s climate. Temperatures are rising and so are sea-levels. Extreme weather is becoming more common. There is no scientific consensus yet on how much time we have to avoid dangerous irreversible climate change. But the overwhelming majority of experts believe climate change is already underway and, without collective action, will have a hugely damaging effect on our country, planet and way of life.

The prime source of greenhouse gas emissions is the production and use of energy. If we are serious about tackling climate change, the centerpiece of our programme – in the UK and across the world – must be in ensuring we power our economy and way of life in a cleaner, greener and more efficient way.”  

Tony Blair MP

Microgeneration is defined in section 82 of the Energy Act as the smallscale production of heat and/or electricity from a low carbon source. The technologies covered by this definition are:

• Heat producing technologies:

– Solar water heating installations account for 79,000 out of the total of 82,000 installations

– Heat pumps (ground source, air source, water source). Ground source heat pumps are starting to gain prominence as on ‘off gasgrid’ heating solution, but the requirement for ground works makes them more attractive in new build or as part of a substantial refurbishment

– Biomass stoves and boilers provide space and/or water heating from a variety of fuels such as wood pellets, woodchips, logs and non-wood fuels.

• Electricity producing technologies:

– Solar photovoltaics can take the form of a bolt-on panel or roof-tiles and are perhaps the most architecturally attractive technology, yet remain one of the most expensive solutions in most cases

– Micro-wind. Small-scale building-mounted turbines are a relatively new innovation and are one of the cheapest technologies

– Micro-hydro installations are limited by the availability of suitable locations

• Combined heat and power technologies at the small-scale mainly use natural gas as a fuel but provide electricity as well as heat. The two systems closest to market use reciprocating engines or Stirling engines, with fuel cells being an alternative source of power.
The Energy Challenge July 2006

It is estimated that the UK uses gas to produce about three quarters of its heat, with electricity, CHP and renewables making up the rest. There is a need to develop low carbon heat technologies over the coming years and incentives are being put in place to encourage this. As the market grows, as with low carbon power production, so the costs will reduce and more people will use them. Although the Renewable Transport Fuels Obligation comes into force in 2008 and the Renewables Obligation is in force for electricity, there is no plan to implement an equivalent for heat as yet, despite various calls for it. The UK Government is of the opinion that it would be difficult to track accurately and just provide an additional administrative burden.

The government is expecting distributed energy to eventually supersede the current centralised system, which has, and still does, serve the UK well. They foresee that this will happen over a period of decades, because of new build, particularly for CHP, as new technologies improve and become cheaper to install. At present there are strong financial incentives to be part of a private wire network as opposed to the grid. Where you do not have to pay costs of the Climate Change Levy, the Renewables Obligation, transmission extension or distributions upgrades, even though some feed into the grid and rely on it for back up. Obviously as this type of distributed electricity grows then the remainder of the grid users will have higher costs to pay, to cover this.

Oil, Gas and Coal

Fossil fuels provide about 90% of the UK’s energy needs and are expected to be the dominant fuel for many decades. Like many countries the UK needs to import this fuel as its own production is now in decline. It is expected that imports will be as high as 40% by 2010 and 80-90% by 2020.

For this to be a sustainable source of supply to the UK, then confidence is needed in the markets, supply chains and quality of product.

THE ROLE OF OIL, GAS AND COAL IN THE UK ENERGY MIX

Developments in low carbon technologies and improvements in energy efficiency will act to reduce demand for and thus decrease our reliance on imported fossil fuels. Nevertheless, fossil fuels will constitute the majority of our energy mix for the foreseeable future, particularly oil and gas. Global energy resources are still plentiful, and markets are well-developed to deal with increased trade.

Nearly our entire transport system relies on petroleum products, in the form of petrol or diesel for road transport and kerosene for aviation. Our homes and places of work are mainly heated by gas, and in recent years gas has also increased its share in the electricity generation mix. Even with the growing importance of gas in the generation mix, coal-fired generation continues to meet around a third of electricity demand on average and during the winter of 2005/2006, in response to high gas prices, it met about half of demand. This illustrates the important contribution made by coal-fired generation to the UK’s energy security and the flexibility of its energy system.
The Energy Challenge 2006

The UK has good relations with its key coal suppliers, including South Africa, Russia, Australia and Columbia, which is where nearly three quarters of UK imports came from in 2005.

Global oil and gas reserves can be found mainly in Russia, Central Asia, the Middle East and North Africa. OPEC holds 75% of proven reserves and its market share is expected to rise from 40% in 2005 to 50% by 2030.

Chart 2. World Proven reserves of Natural Gas. Source: Cedigaz, 2004

Gas imports are expected to grow to 80-90% by 2020 and Norway, Algeria and Qatar are expected to be the main supplier of gas to the UK in the medium term. As time progresses then other areas are expected to become UK suppliers also. For this to happen, the UK would look to the supplier countries that have built reliable relationships with other consuming countries.

It makes sound economic sense for the UK to use its own resources for as long as it possibly can do so. Around three quarters of its total energy needs still comes from the UK continental shelf (UKCS) which, after 40 years, is in decline, having peaked in 1999. Production is expected to rise strongly in 2007 and the high price of oil has encouraged a record number of offshore license applications over the last year. If successful, there may be a slower decline and a further 7 billion boe of extra production could be realised by 2030.

The UK manages to produce around a third of its coal needs, 20 Mt per annum, despite a decline in production of 30 Mt pa over the last ten years. The biggest uses of which are generators. There are currently 13 deep and 31 surface mines in operation and a further two deep mines were mothballed in 2005. Coal is still an important fuel in the UK, during the last winter (2005/2006) it met around half of the electricity demand when gas prices were high. By attempting to tackle its high emissions with cleaner technology and carbon capture and storage (CCS), which if successful, will firmly keep coal in the UK energy mix.

Unlike gas, coal and oil is an established global market which adjusts easily to changes in supply and demand and are easy to transport and store. At the end of 2005 the UK had coal stocks of around 15 Million tonnes which is equivalent to a quarter of annual demand. Emergency oil stocks are provided through the IEA and EU. But in gas the biggest changes are needed as the UK moves from self-sufficiency to almost total import dependant by 2020. A stronger global market for Liquefied Natural Gas (LNG) may develop in the future, as suggested by table 1 below.

Table 1 Planned gas imports infrastructure. Source: JESS, 2006

With regards to gas storage, table 2 below shows what has been planned and proposed for the next few years. The extract from the Energy Challenge sums up the UK governments’ immediate gas storage plans.

Table 2. Planned gas storage projects. Source: JESS 2006

The UK is becoming increasingly gas import-dependent, and our ability, during periods of high demand (e.g. winter), to rely on additional, flexible supply from gas fields in the UK North Sea is reducing as production declines. It is clear that gas storage – and other forms of flexibility, such as the ability for electricity generators to switch from gas to alternative fuels – is going to play a key role in managing fluctuations in the amount of gas supply available and the level of demand, both from season to season and from day to day. We have therefore commissioned detailed analysis38 of the risks to UK gas security of supply in the next 10 – 15 years and an examination of the costs and benefits of developing ‘strategic gas storage’. As with any modelling exercise, it was not possible to capture all of the complexities of the gas market. However, the findings of the modeling (summarised below) are broadly consistent with views expressed by industry participants as part of the Energy Review consultation.

The risks to UK gas security of supply over the next two decades were analysed to calculate the level of risk of an involuntary supply interruption. The work showed the probability of an interruption between 2008 – 2014 to be minimal; the planned large expansion in gas supply infrastructure over this period provides substantial flexibility in sourcing supplies. After 2014 it estimated a 1-2% chance of a significant supply interruption. Despite such a low probability that gas supplies will be interrupted, the costs to the economy of such an interruption could be very high. The loss of gas supplies to energy intensive industry has both direct and indirect effects on suppliers to and customers of the affected businesses.

In this context, after around 2015, the model indicates that it is possible that the level of spare gas supply capacity could again become tight for UK consumers. While the probability of this leading to involuntary interruptions of gas supplies would likely remain very small, the costs of any shortfall to British industry and economy as a whole could be substantial. If companies fail to invest to protect themselves (and any customers they have committed to delivering gas to) against such low probability events (e.g. through additional gas storage or fuel back-up), there might be a case for Government intervention, such as obligatory ‘strategic storage’. 
The Energy Challenge 2006

The UK government is planning a consultation for the autumn with industry and consumers to discuss the current security of supply arrangements and whether new measures are needed as the UK moves into a higher independence on gas imports.

 Electricity Generation

The current electricity generation in the UK comes from; 37% gas fired power stations, 34% coal, 20% nuclear, 5% renewable sources and the remainder from other sources, as chart 3 shows.

Chart 3. UK Electricity Generation Mix (2005). Source: DTI 2006

The next two decades will see many changes as the UK’s coal power stations close by 2015, as a result of the EU environmental legislation, and more than 10GW of the UK’s nuclear power stations come to the end of their life by 2023. So by 2025 the UK is going to need substantial new investment to bring around 25GW of new electricity generation on line, which equates to about 30% of today’s existing capacity.

With the current market framework, set as it is, many of the coal and nuclear power stations would be replaced by gas fired power stations. This would take the UK’s dependence on imported gas up to about 55% by 2020 for electricity generation, which could be asking for trouble. Also, from an environmental point of view, there is the risk of locking every new fossil fuel power station into 20 – 40 years of more carbon emissions, one of the very things that needs to be reduced.

Investment also needs to be timely. Currently planning permissions require updating to make that procedure less complicated and new power stations need to come on-line before the old ones expire if tightness in supply is to be avoided. The information set out in the Energy Review 2006 document is intended to help remove uncertainties about government policies with regard to new nuclear build and the on going support of renewable power generation. With this in mind, companies can come forward with new investments in a timelier manner.

One thing is for certain, that over the next 10 – 15 years there are going to be many risks in ensuring the UK’s security of supply, but there are many exciting opportunities for companies and individuals alike. Whether it’s building a state of the art new nuclear power station or installing renewable energy to your home, all these things will contribute to a cleaner, more energy efficient society.

Next month we intend to look at the UK governments proposals for new nuclear build, more renewable energy and carbon capture and storage. If you can’t wait till then, or wish to read it for yourself then you may download the Energy Review 2006 here.