The Energy Review:
Over the period between winter 2002/03 and the forthcoming winter, the UK wholesale cost of gas will have risen by 266%; it is up 71% in the past 12 months alone as can been seen on the chart. UK electricity generators continue to make superior profits on the back of higher wholesale energy prices, while the energy supply business suffers. Increases in commodity input costs over the past three years have fuelled rising electricity wholesale prices as energy suppliers seek to pass these costs on and stay marginally profitable. The UK has historically relied on indigenous coal and nuclear- fired power stations constructed in the 1960s and 1970s. In the 1990s, there was a wave of investment in gas-fired capacity, stimulated by the availability of plentiful and cheap UK Continental Shelf Gas the “Dash for Gas”. Today around 70% of the UK's capacity is thermal-based, requiring carbon certificates to cover their CO2 emissions. CO2 emissions were the big influence on power prices across Europe in 2005. The UK's Kyoto commitment was an 8% reduction in emissions from 1990 levels by 2012, but clearly the Government's targets are now more ambitious. The UK accounts for 2% of global CO2 emissions. Perversely, following the introduction of carbon taxes, carbon emissions increased in 2005 in the UK, though due to factors outside the Government's control – the high gas price made it more profitable to generate electricity from coal rather than gas and coal-fired generation emits more CO2. Without clarity on future Government energy policy, companies may not feel confident to invest. Investment is critically needed in UK generation as a precipitous drop in available capacity by 2016 is predicted. According to National Grid (the system operator) the reserve margin could fall below 10% in 2016. If you remove renewable generation from the equation (wind & hydro) which is not reliable, the reserve margin falls below 10% by 2010. The reserve margin is the difference between the total capacity in the UK and peak demand, anything less than 10% can lead to rolling blackouts due to lack of supply. From the Government's perspective, the risk is the market will not deliver on time and in enough quantity to mitigate plant closures. The UK needs 25 gigawatts of new power plant by 2020 to replace old nuclear and coal plants. Overlaying this is the need to reduce emissions in absolute terms. Hence, the Energy Review needs to create incentives to develop C02-friendly technologies, including carbon capture and storage, renewables and the possibility of new nuclear plants. The Government is starting to consider “new” nuclear. Nuclear power avoids the oil and gas supply crunch and brings no greenhouse gas burden. However there are clearly other issues which need to be considered, not least the question of long-term storage of nuclear waste. The Energy Review needs to frame policies to secure supply issues, environmental commitments, growth in demand and affordability. The experience of this winter alone with the tight gas market causing prices to spike, as can been seen on the chart, suggests the challenge is significant. High and volatile energy prices are bearing down on the industry and causing some unexpected problems and this winter could see gas prices soar again as markets worry about supply. 21.8.06