Keeping Britain’s lights on – CEO of Ofgem
Alistair Buchanan – Chief Executive of Ofgem
On Wednesday 16 January 2013, due to unplanned outages and cold weather, National Grid had to find power to supply roughly a million homes to keep the lights on.
Fawley, an oil-fired plant in Hampshire, was one of the power stations that responded. Next winter Fawley will not be there. Indeed, about 10% of our current generation stock goes next month as coal and oil-fired power stations close earlier than expected to meet environmental targets.
Four years ago, Ofgem’s Project Discovery report outlined how the combination of the global financial crisis, along with tough environmental targets, and the forced closure of ageing coal and oil power stations would combine to provide a unique challenge for securing electricity supply from 2015 to 2020.
Our report to the Government, published in October last year, was a sequel to Discovery, which confirmed this prognosis but with even more alarming warnings. This was because cheap global coal was driving gas stations to close or mothball.
If you can imagine a ride on a roller-coaster at a fairground, then this winter, we are at the top of the circuit and we head downhill – fast. Within three years, we will see the reserve margin of generation fall from about 14% to less than 5%. That is uncomfortably tight.
National Grid has managed one-off shortages in the past in a professional way. It will face a tougher challenge over the next few years because of the possibility of a prolonged lack of spare power station capacity.
So where will our new sources of power come from? Wind has also been hit by the financial crisis and it will take time to reach a critical mass; nuclear will not be with us until well after 2020; and carbon capture and storage technology is still in its infancy. So that leaves gas.
Ofgem estimates that, by 2020, 60% to 70% of our generation may have to come from gas to fill the gap. That’s up from about 30% today. The Government asked Ofgem to look at gas security of supply last year and we concluded that in all but the most extreme circumstances, supplies for domestic consumers should be secure. However, power stations and large industrial users may be affected in a squeeze. The big worry about gas for all consumers is what price will we have to pay to get it? Because just when we need more gas, world demand for gas is set to rise while our own supplies are predicted to fall by another 25% by 2020.
In fact, the global availability of gas in the middle of the decade is set to tighten due to several factors. For example, we no longer expect gas from Russia’s large Shtokman field, which has been recently cancelled, just as demand is increasing in Europe, partly as a reaction to the closures of nuclear plants. Demand will also grow rapidly in Asia, with China’s gas consumption alone growing at 20% each year.
This growing demand is forecast by experts to lead to a tightening of liquefied natural gas (LNG) capacity for a relatively short period – but that period just happens to be when we need gas for our power stations at record levels.
Britain, therefore, will have to compete for its gas on a worldwide market. Today, Asian LNG prices, which drive long-term contract prices, are about 60% higher than UK gas prices. But what about shale gas – will that not save the day? It is true that the US has transformed its energy market thanks to shale, but in our time-frame, when Britain will rely on gas for its power stations, this is not going to happen on any significant scale either here or elsewhere in Europe. Even if the US allows exports (and assuming they come to Europe), it will still cost about the same as we are paying for our winter gas now. No one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure that it comes here.
That is why the Government’s reforms to the electricity market and its gas strategy are so important; not only to encourage diverse and sustainable sources of generation, but also to recognise the importance of gas in the near to medium term. Further out, say by 2030 or 2050, we may well be able to rely on renewables, clean coal and nuclear, but the Government wants to ensure that we can get to this vision in an orderly way. That also means tapping energy demand reduction.
Wellington described Waterloo as a close-run thing. Let’s hope that, in the battle to keep the lights on, these measures ensure it isn’t too close. Victory at Waterloo came at a price and we also have to face the likelihood that avoiding power shortages will also carry a price.Source: www.telegraph.co.uk/finance