Thursday 3 July 2008

The UK’s energy future

UK Energy has become the currency of nations. How it’s sourced, bought, traded and used is now at the heart of national political and public debate.

Today, the UK faces an energy crunch from all directions. Securing supplies is at a critical phase - this year we will import around 40pc of our gas supplies, and by 2015 it will be 75pc.

Britain now faces the fastest growth in gas imports of anywhere in the world and the cost of those imports is being driven by the oil price - as on international markets the gas price is set by the oil price - and by the worldwide demand for liquefied natural gas (LNG).

These factors are creating a global gas market in which the UK is currently being outbid by Japan, Korea and China.

We’re also being squeezed by the dysfunctional European energy market, in which the UK acts as a gas bank of last resort: when European gas prices are higher than ours, gas flows to the Continent - however, when our price is higher, there is no certainty gas will flow back. Price volatility drives up costs.

UK users have yet to feel the full impact of these new price pressures. As our evidence to the Commons Business and Enterprise Select Committee last week made clear, energy suppliers are now paying a wholesale cost of more than £1 a therm for gas this coming winter - nearly double last winter’s price - yet it is currently being sold on at 60p a therm to customers.

That position is unsustainable if we are to generate the money needed to invest in secure supplies for Britain’s future.

Electricity production faces similar challenges. Spare capacity that meets spikes in demand is declining and a quarter of UK power stations will be retired by 2015 as older coal and nuclear plants reach the end of their life. And demand continues to rise.

So how can the UK best tackle this looming squeeze on energy? First, on the demand side, energy efficiency has a huge role to play. If we were able to achieve the levels of energy efficiency of Germany, for example, which has 200 times the amount of installed domestic solar capacity, this could potentially reduce our domestic consumption and customers’ bills significantly.

Second, on the supply side, the Government has taken two big steps forward in the past week in grasping the nettle of self-sufficiency with its Commons victory for the Planning Bill, and the publication of its renewable energy strategy.

I fully acknowledge that some elements of the Planning Bill are controversial, but as it moves to the Lords for its first reading there I believe it’s vital to keep in sight what is in the national interest - maintaining a degree of the energy security that Britain has enjoyed for centuries.

Streamlining planning is vital if we are to develop the offshore wind farms, power stations, gas storage facilities and transmission grids this country needs. The UK’s limited gas storage capacity means we are always exposed to price spikes on mid-winter, high-demand days.

Yet there are storage projects held up in the planning process that could double this capacity.

None of us wants a planning regime that steamrollers local democracy and takes ministers out of the decision-making process.

That is why the proposed National Policy Statements are a key tool in strengthening democratic accountability. They will be thoroughly scrutinised by Parliament, ministers will maintain responsibility for setting the Government’s policy via these statements, and they will then go to public consultation.

Centrica plans to invest £1bn a year to secure future energy, including an interest in participating in new nuclear builds alongside our major investment in offshore wind farms. But we cannot afford a process that took BAA seven years, 37 different planning applications under seven different pieces of legislation and multiple decision points before Terminal 5 became a reality.

On those time scales, it would be 2015 before we could start building any new gas facilities or generation capacity, well after a number of existing plants would have to be retired.

The Government’s renewables strategy heralds an exciting leap forward towards a low-carbon future, with householders empowered to play a significant role alongside large-scale generators. It will open up opportunities for British Gas and other suppliers to install solar panels, heat pumps and other renewable and energy-saving technologies in millions of UK homes, while at the same time increasing the amount of offshore and onshore wind generation 10-fold.

I believe this is both achievable and essential if we are to deliver a low-carbon world, but the investment needed is on an unprecedented scale - £100bn on the Government’s own estimate, which equates to around £1,600 for every man, woman and child in the UK over the next decade.

On top of this comes investment in new nuclear power, replacement gas generation, clean coal generation and, of course, standby generation for when the wind isn’t blowing. We also need to see further investment in energy-saving measures, particularly at the domestic level, to help to reduce continued growth in energy usage.

And we need more targeted support from the Government and suppliers for those households unable to cope with the higher-priced energy environment of the future.

This is almost certainly the largest investment programme in any sector of our economy. Without it, not only will Britain fail to meet its commitments on tackling climate change, but also our customers and our economy will continue to be at the mercy of volatile international commodity markets.

Source - The Telegraph

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