Issue number: 93  

February 2013

 

It is rapidly becoming a well-known fact that the UK faces a potential energy gap in the future. This is mainly due to the closure of old power stations, the decline of indigenous reserves of North Sea oil and gas as well as the need to combat climate change. In this article we’ll seek to assess the Government’s gas generation strategy recently released by Chancellor Osborne in his Autumn Statement. Will the strategy ensure that the UK has a reliable and secure supply, at affordable prices whilst maintaining progress towards a low-carbon future?  Gas, like coal and oil, is an extremely reliable and flexible source of energy, but is the financial and environmental cost too high?

Security of Supply

In the coming years there are set to be a number of contributors to a tightening of capacity. For instance, coal-fired generation which currently represents around 28GW (over 30% of total capacity), is planned to decrease significantly. In 2015, 8GW is set to come offline, with around 4GW of oil generation, and further closures relating to environmental requirements are likely. Furthermore, 4 GW of existing nuclear generation capacity will have closed by the end of 2020. This means that to maintain current capacity levels, at least 16GW needs to be replaced [1]. The chart below (fig. 1) illustrates a likely drop in the 2020s based on various modeling examples.

Figure  SEQ Figure \* ARABIC 1 -  Tightening Future Capacity Margins (Source: DECC, OFGEM)

However, the report states that an expected 21 GW of gas plants will be retired [2] , and therefore, the 26GW planned to be built will replace this capacity, albeit with newer, more efficient CCGTs. This will increase the total CCGT capacity by 5GW to around 37GW in 2030 and will help to provide a secure and reliable backdrop to the increasing use of renewables, as fig. 2 demonstrates. However, in one of the three scenarios proposed there is a possibility that 37GW of new CCGTs could be built which would lead to gas playing a more prominent role in generation.

Figure  SEQ Figure \* ARABIC 2 – Estimated Total Capacity 2012 – 2030 (Source: DECC Analysis 2012)

In spite of all the uncertainty surrounding the development of the electricity sector towards 2030, DECC argues that under all the various scenarios such as de-carbonisation trajectories and variations in demand and cost, investment in new CCGTs will continue to be needed. This is in order to maintain adequate capacity margins, meet demand and provide supply side flexibility where the generation mix becomes increasingly intermittent and inflexible 

Gas provides a very suitable replacement for some of the loss of oil and coal capacity as it can maintain a high level of reliability and flexibility ready to meet peak demand. This is necessary for a diverse and reliable electricity mix, and is extremely useful in minimising the restrictive effect of weather conditions on intermittent energy sources.  Whilst nuclear power is extremely reliable it is not overly flexible and thus not as well suited to meeting varying levels of demand as gas. 

Additionally it is predicted that the CCGT fleet is likely to average a load factor of 25% in 2020, 38% by 2025 and then down to 27% in 2030 [3]. As generation from nuclear and plants equipped with CCS (carbon capture and storage) is projected to increase, CCGTs will only be representing 22% of electricity generated. This is a steady base but arguably the CCGTs will be more important for the capacity they provide and therefore their potential generation in times of need. It is worth noting that should the UK lower its emissions targets the report suggests that new CCGT capacity could be up to 37GW increasing total capacity to 49GW and leading to CCGTs accounting for 45% of total generation in 2030 with the graph below detailing the possible scenarios.


Figure 3 - Range of generation estimates for CCGTs in 2030 from different decarbonisation trajectories (Source: DECC)

Affordable Prices

It is argued above that gas can play an integral part in ensuring the UK ‘keeps the lights on’. However, given that reserves in the North Sea are declining, the UK will have increasingly to rely on imports. This will make it more exposed to the fluctuations of the market, whilst losing the benefits of its resources - meaning more worries over the price of gas. Of course, if a shale gas boom takes off, this situation could change.

In truth one cannot predict whether this would happen in the UK or what the consequences might be. It has been suggested that the production of shale gas in the UK is unlikely to see prices tumble as they have in the US due to a completely different set of circumstances. A set of high-profile figures in the industry, including Sam Laidlaw, the chief executive of Centrica, warn that it will not prove a ‘game changer’ for the industry [4]. Nonetheless, whilst the consumer may not receive direct benefits, shale gas production could still provide security of supply as well as a number of economic benefits.

As stated above, the current proposal, based on an emissions target of 100g of CO2 per kWh, does not place excessive reliance on gas as an electricity generator - although given its current role as a primary energy source its decline will be gradual. With various nuclear, coal and oil plants scheduled to come offline, gas is the most likely to pick up any slack and may well see some peaks. Therefore in the event of significant price increases, the UK could be in a position of being unable to diversify from gas and so would be forced to pay.

Realistically, with gas supply at present fairly plentiful and the US looking like it is going to turn from a large net importer to a net exporter, gas prices are unlikely to soar in the near future. Despite this, prices are likely to continue rising [5] in accordance with the global trend. Any unconventional gas production will ensure this rise stays fairly moderate. It is almost impossible to predict gas prices in the future, and what possible events, like those at Fukushima, may occur to increase gas demand. Whilst it seems unlikely gas prices will become dangerously high, the UK must still be wary of high gas price scenarios. In the long-term, whilst the UK needs a stable source of energy to ensure it is able to keep the lights on whatever the weather, there is a danger that over reliance on gas will lead to exposure to the volatility of international markets.


Decarbonisation

With the UK legally bound to an 80% reduction of carbon by 2050 the manner in which it produces electricity cannot conflict with this commitment. The report claims that the importance of gas and the key role it plays within the electricity mix is consistent with the need to de-carbonise the economy, with much of the new gas replacing ageing coal capacity [6]. As mentioned above, it is true that where gas is replacing coal it is lowering CO2 emissions. However, a fleet of CCGTs is not necessarily consistent with some of the de-carbonisation targets being touted. For instance, the report suggests that gas capacity may not be significantly lower but where a carbon reduction target is set at 50g of CO2 per kWh, total CCGT capacity would only allow 31GW to be generated compared to the 37GW possible with a target of 100g of CO2 per kWh. This suggests that in the case of compliance with the lower carbon target, CCGT generation will only account for 10% of the total with renewables and nuclear generating more electricity.

At present the UK government has yet to set a de-carbonisation target, although there is a growing clamour for one to be set in the government’s energy bill. At the moment it is not known whether a target aside from the 2050 reduction will be set and exactly how strict it would be but if one is set it will dictate just how extensive the use of CCGTs will be.

The lowest target (50g/kWh) does not rule out CCGTs. In fact, whilst their generation would slump to around 10% of total generation as previously mentioned, they would still prove key in terms of capacity. Furthermore, such a target might encourage further investment in CCS plants which could continue to utilise gas (and coal) at high levels without most of the emissions. On the flipside, a high target (or no target) will allow for even more CCGTs to be built and could perhaps see higher load factors and percentage of total generation.


Conclusion

The so-called ‘dash for gas’ of 21st century Britain has been argued by many as a sign that Osborne is betting the farm on both conventional and unconventional gas supplies, and that this is a risky move in terms of price at the expense of the environment. One cannot argue with the fact that fossil fuels, alongside nuclear power, currently provide the most reliable and secure form of electricity generation, with the former particularly well suited to dealing with variations in demand, and neither subject to the whims of the weather. Lastly, gas can form part of the de-carbonisation process as the UK moves from coal and oil towards a cleaner future. But exactly how big a role it plays will in part be decided by the de-carbonisation targets set by this government or the next and how strict they are, not to mention the development of CCS plants, which could also utilise coal without high CO2 levels. Therefore whilst CCGTs may not be the long term solution to the de-carbonisation problem the reports that Osborne’s policy is a misguided gamble are perhaps somewhat overstated. Gas is and will continue to be an extremely important part of the electricity mix and will provide a reliable supply allowing the UK the chance to steadily increase its generation of electricity through renewables as it begins to replace its older coal and oil plants.

 


[1]
Department of Energy & Climate Change, Gas Generation Strategy (Cm 8407, 2012) 15.

[2]
Ibid 17.

[3]
Ibid.

[4]
http://www.businessgreen.com/bg/news/2238772/centrica-boss-shale-gas-no-game-changer-for-the-uk

[5]
p.47 of gas generation strategy, referencing the IEA New Policies scenario the price of European imports of gas increases from $11/mmbtu in 2010 to $14.4/mmbtu in 2035.

[6]
DECC, 10.

 

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