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What does the UK’s future energy mix look like?

An Oil Platform in North Sea

An oil platform off the Norwegian coast in the North Sea. The UK government and energy sector face intractable problems of how to generate more electricity more cheaply and with less carbon. Photograph: StatoilHydro / Oyvind Hagen / HO/EPA


Powered by article titled “What does the UK’s future energy mix look like?” was written by Fiona Harvey, for on Wednesday 11th September 2013 16.46 UTC

Soaring domestic bills and millions living in fuel poverty. Protestors chaining themselves to the gates of the first new indigenous source of fossil fuel since the North Sea oil discoveries. Warnings of power blackouts within three to five years from the government’s top energy official and energy company bosses. An ageing fleet of nuclear power stations and a damaging stand-off over the site of the only new reactor yet in planning. A dearth of investment in crucial infrastructure.

The UK’s energy sector has not faced such an extraordinary combination of dire problems since the crises of the 1970s – and even then help was on the horizon in the form of North Sea oil and gas. Policy interventions by government will be vital to solving the multiple looming difficulties and encouraging the massive investment needed from the private sector. But time is running out. The UK’s remaining coal-fired power stations are having to reduce their hours of operation – under European Union regulations on pollution – so replacing that capacity is a matter of urgency.

A challenging future landscape

Baroness Verma, UK energy minister, acknowledged that the UK was facing “a number of unprecedented challenges” – not least that electricity use is set to rise as we use more power for heating and transport – but said that government plans laid out in this year’s energy bill would set the framework for increasing energy generation. She forecast that the measures would bring about investment of £110bn by the end of this decade.

She said: “Electricity Market Reform [EMR] provides support for low carbon technologies in the short to medium term, in order to work towards a long-term vision. This vision is of a competitive market in which all technologies participate on a level playing field, without financial support.”

Under EMR, energy suppliers will be able to enter into long-term contracts and will be supported by “capacity payments”, by which generators will guarantee to have enough power at hand to provide for peaks in demand, and “contracts for difference” by which low carbon energy generation will receive a premium over high carbon fuels.

Key details of how some of these mechanisms will work were set out over the summer, including the “strike price” on contracts for difference for various forms of renewable power, but some details remain unresolved. These include exactly how the capacity market will work in practice, and the strike price for nuclear power at EDF’s proposed new reactor at Hinkley Point. The latter has been the subject of a tense stand-off between the Treasury and the French state-owned utility, with the government taking the view that EDF’s current demands for price assurances are too costly to the consumer.

Kickstarting UK investment

Key to the government’s thinking on energy policy is the need to moderate fuel prices for consumers. Baroness Verma told a meeting of the all-party parliamentary environment group: “The coalition is determined to help consumers with the rising cost of living. Our current Electricity Market Reform proposals are set to deliver the affordable energy bills, cleaner energy and reliable supplies that we need.”

So far, however, the energy industry remains to be convinced, and investors have been slow to come forward. Plans to convert the Tilbury power station to biomass were shelved over the summer, offshore wind construction has not kept pace with forecasts, and there is currently only one new gas-fired power station under construction in the UK. Industry insiders are sceptical that the government can provide sufficient reassurances in the short term to kickstart the massive sums needed over the next few years. Another issue is the heavy reliance of the UK energy sector on overseas utilities: with Germany undergoing its Energiewende and France and Spain in financial difficulties, these companies are likely to concentrate their efforts on their home markets with less investment and management time available for the UK, analysts fear.

This uncertainty is affecting the wider economy, too. Manufacturers are concerned about the future of power supplies, and about the cost. Jeremy Nicholson of the Energy Intensive Users Group pointed to plans by the National Grid to offer incentives to companies to cut their power use at peak times and run their systems instead at night or other times of lower demand. This could affect manufacturing capacity, he said. Meanwhile, British and European manufacturers are suffering from the advantages that US companies have tapped through the bonanza in shale gas and oil. Gas prices have plummeted, more electricity across the US is now coming from gas rather than coal, and manufacturers are reaping the rewards in undercutting their overseas rivals.


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