The Power Debate: A UK generation game? by Watson Burton

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The Power Debate: A UK Generation Game? December 2013

Contents

Foreword

Page 3

The market in context

Page 4

The debate

Page 12

Conclusion

Page 15

The Power Debate: A UK Generation Game? December 2013

Foreword National Grid recently issued a warning that the risk of blackouts this winter will be higher than it has been for almost a decade: reserve supplies of electricity will apparently be wafer thin, following a significant drop in the amount of coal-based power plants operating across the UK. So where will the UK’s future power supplies come from? Currently just 14% of the total energy supply in the UK comes from renewables, oil and other sources with the remainder coming from coal, gas and nuclear. Our breakfast debate held at The Sage Gateshead on 19 November 2013 was kindly supported by the CBI, Northern Offshore Federation and NECC and addressed key issues facing the energy sector with help from a panel of experts from Contract Natural Gas, Miller Argent, NAREC, Banks Group and Siemens. Together with our audience they tackled questions including: What is the potential impact of the UK closing existing power generation capacity before new, substantial and viable alternatives are in place? Will changes to the UK energy mix result in price and capacity volatility? Where will we purchase electricity and gas from if we are unable to generate it within the UK, and how are those supplies sourced? With Secretary of State for Energy and Climate Change, Edward Davey, stating that he does not envisage a role for coal in the UK’s Energy Policy – what does the future hold for the world’s most traditional source of power? How will we manage security of supply if a significant proportion of our current generation capabilities are removed? Are we saving the planet, or destroying UK plc? This short report summarises the information shared and the discussions on the day. We hope you find this both useful and informative. Should you have any queries regarding the debate or the contents of this report, please do not hesitate to contact me, I would be delighted to hear from you.

Richard Palmer Watson Burton LLP richard.palmer@watsonburton.com 0845 901 0944

The Power Debate: A UK Generation Game? December 2013

The market in context

Over the last 30 years scientists have developed a much greater understanding of the impact of greenhouse gas emissions on the planet. Governments around the world are struggling to get to grips with the potential damage this will cause and efforts are being made to de-carbonise the global energy sector. The UK has a binding energy target to reduce its emissions to 80% of the levels recorded in 1990 by 2050. In light of this the UK government has set out three broad priorities for its energy strategy; •

Security of supply

•

Reduction in emissions

•

Affordable to the UK population

But how are those priorities and targets being delivered? In order to tackle this, and some of the other questions posed at the outset of the debate, we first needed a clearer picture of the current market, and the forms of generation that currently make up our energy mix in the UK.

‘ 4

Coal Coal has played a dominant role in the supply of electricity to the UK, and has been joined in that role by gas over the last 15 years. In 2012 coal generated 135.9 TWh of energy in the UK making it the largest single energy source, and highly cost efficient, not least due to the large amounts of existing infrastructure. However these traditional sources are finite and produce large amounts of harmful CO2 emissions. The challenge for the UK government is to reduce emissions in a sector where fossil fuels remain dominant, and emerging renewable technologies simply do not have the capacity to meet the shortfall at this stage. The following charts illustrate the continuing (and indeed rising) dominance of coal on our current energy supply mix. Coal accounted for 38% of electricity generation mix in 2012 up from 29% in 2011, as a result of the stability of price as against gas. Interestingly, since 2001 there has been a rapid expansion in coal imports making the UK a net importer of coal. In fact we now import more than twice the amount we mine in the UK.

‘

The current energy crisis is the result of a number of interwoven, highly complex issues including an increase in demand, a reduction in capacity of ‘traditional’ energy sources, price volatility and the pressures surrounding carbon reduction and storage.

The Power Debate: A UK Generation Game? December 2013

Although coal is a reliable, tried and tested and cost efficient means of generating energy, the impact of recent EU directives and the punitive Carbon Price Support is likely to result in the majority of coal generation capacity being shut down over the next five years. Martin Needham of CNG, said: “The Government has made the wrong decisions. No other country is facing the problems we are facing. In Poland where most of its electricity comes from coal, they just said ‘no’. We need to utilise coal. I’m aware of the environmental issues but we have to ask ourselves. ‘Are we prepared to pay more for our electricity over the next five years?’ “Wind is unreliable. Offshore wind is the most expensive electricity source there is. We need to have a balanced mix which includes coal and gas.”

Electricity supplied by fuel type, 2011 and 2012 2011

2012 2%

3% 2%

Coal

29%

38%

Oil and other fuels Gas

18%

Nuclear

18%

Hydro Wind and solar

Other renewables Net imports 1% 41%

28%

The Power Debate: A UK Generation Game? December 2013

Key issues

Burning coal produces lots of carbon Coal is a finite resource and will run out albeit in several hundred years A number of coal power stations are due to go offline as they will no longer meet EU emissions regulations We import more than twice the amount of coal that we mine It is a “cheap” source of fuel It is a well developed / understood technology – it works! It is the safest source of fuel to be stored It is in abundant supply throughout the world Cheaper price of coal relative to gas has encouraged its increased use in electricity generation. This itself may add to the capacity pinch point being more real as allocation of coal burn has been utilised ahead of forecasts.

The future Our panel unanimously agreed that we cannot simply switch off fossil fuel energy sources (including coal, oil and gas) until stable and volume capacity is available from renewable sources. Barnaby Pilgrim commented “that current coal policy means that coal is effectively being written out of the equation”. He believes that the capacity margin would feel the squeeze should coal go offline before new, reliable generation sources are available. James Poyner conceded that unabated coal burn would have to be reduced, but still saw a strong future for the fuel in conjunction with Carbon Capture and Storage (CCS) and other technologies. Barnaby Pilgrim and James Poyner also pointed out the wider economic benefits of the fossil fuel industry, particularly as one of the UK’s largest employers, so care will need to be taken to avoid any negative impacts on the sector when planning our energy future. Coal will need to play a reduced role but is essential to keep as a bridging fuel, making use of Carbon Capture and Storage technologies to ensure that plants can comply with EU emissions regulations. He also believed that flexibility on emissions regulations, carbon floor price and extra investment in CCS was crucial to help coal as a bridging fuel.

The Power Debate: A UK Generation Game? December 2013

Oil and gas Together Oil and Gas account for 29% of the UK’s energy supplies on 2012, down from 42% on 2011 and according to The Department for Energy and Climate Change, the North Sea provides nearly half of our energy needs as a country. The decline in the volume of supply is thought to be largely as a result of the decline in UK continental shelf production and dwindling reserves. In 1980 the UK extracted some 121.7m tonnes (oe) of oil and gas, which reduced to just 87.7m tonnes in 2012. There are a number of key factors affecting production rates including maintenance issues at Large Buzzard, St Fergus, production constraints in Elgin and the price increases against coal. The UK oil and gas sector supports some 400,000 jobs, with supply chain sakes of £27bn in 2011. It has also been the focus of significant investment with £14bn of capital investment forecast to be spent in the sector in 2013, up from £11.5bn in 2012.

The Power Debate: A UK Generation Game? December 2013

Nuclear EDF Energy owns and operates 15 of the 16 current generating reactors in the UK, with the Nuclear Decommissioning Authority owning, and Magnox Ltd operating, the 16th. These reactors together account for around 10 GW of installed generating capacity. The government has recently enlisted support from China to develop the new Hinkley Point plan, which is due to come online in 2023, supporting plans for an extra 16GW nuclear capacity by 2030. Public response to this announcement has been mixed, not least given the heavily subsidised and cosseted nature of the development. It is thought that the £16bn cost of the two reactors would be enough to build a gas fired power station with eight times the output of Hinkley Point. Our panel thought that there was a need for a serious and honest discussion of nuclear’s place in the UK energy mix, and that there were a lot of myths that needed to be dissolved if it were to secure public confidence and play a larger role in our future mix.

Key issues Poor public perception High subsidies Cost of development and construction Potential for danger on a large scale (Chernobyl, Fukushima) Toxic waste Target for terrorism Clean-up cost when plants come off line. The future The panel thought it most likely that Hinkley C would come online. Its place in the overall mix is largely dependent upon public /political mood and whether safety concerns can be negated The government sees the potential for Nuclear to meet around 40-50% of the energy mix with up to 75GW coming from Nuclear. However this is likely to be tempered by technological development, financing, and public opinion, although a recent survey of IOD members suggested 84% would be in favour of Nuclear. Research and development of new types of plants will also play a significant role in future generation:

•

The next decade: the arrival of Small Modular Reactors (SMRs)

•

2028 onwards: thorium-based reactors

•

2033 onwards: nuclear fusion reactors

The Power Debate: A UK Generation Game? December 2013

Renewables Over the last 30 years the UK energy mix has become more diverse. Energy provision from renewable sources is one of the biggest changes. Solar and wind have grown from zero contribution in 1980 to providing about 6% of the total electricity mix. Hydro power has remained largely stable since its introduction in the 1950’s.

The rise in the use of renewables is a feature that looks likely to continue given emissions targets and sustainability issues of finite fossil fuels. In recent years their growth in the mix has been pronounced. “Overall generation from renewables increased by 19% between 2011 and 2012. Generation from solar photovoltaics was almost 4 times higher than in 2011. Wind generation also saw large increases – offshore wind up 46 per cent, and onshore wind up 17 per cent; hydro generation fell by 7 per cent.” According to the UK Energy in Brief report from DECC (2013) The government has also signalled their support with the announcement of the following investment in renewable projects across England.

Contribution of renewables sources to electricity generated (TWh)

Electricity generation from renewable sources since 1990 45 40 35 30 25 20 15 10 5 0

1990

Offshore wind

1995

Onshore wind

2000

Solar PV

Other Bioenergy

2005

Landfill Gas

2010

2012

Total Hydro

Note: Hydro bar includes shoreline wave/tidal (0.004TWh in 2012)

The Power Debate: A UK Generation Game? December 2013

Region

Investment

Jobs announced

Key Issues

North West

£542m

1,257

North East

£1,300m

2,190

Inconsistency in supply from some renewable sources (e.g. wind)

West Midlands £17m

140

High cost of production

Yorkshire £3,382m 3,919

Developing technologies not yet reached full commercialisation

South West

Need for back up to be in place

£1,249m

3,308

East Midlands £435m

1,275

London £80m 125

The future

South East

£280m

361

East

£8,981m

8,320

Total

£16,266m

20,895

Rapid rise predicted in energy coming from renewable sources as more traditional sources come offline, or are reduced Stabilisation of technological developments and associated costs Ongoing investment from both public and private sectors in infrastructure and technologies

Renewable energy sources, 2012

Solar PV & active solar heating 2.7% Small scale hydro and shoreline wave/tidal 0.6% Heat pumps and deep geothermal 0.6% Other 3.9%

Landfill gas 18.3% Sewage gas 3.3% Domestic wood 4.9% Industrial wood 3.2%

Wind 18.0%

Bioenergy 73.7%

Co-firing 4.3% Waste combustion 10.6% Animal biomass 2.7%

Hydro (Large scale 4.3%

Anaerobic digestion 2.0% Plant biomass 14.1% Transport biofuels 10.3%

Total renewables used = 9,336 thousand tonnes of oil equivalent (ktoe)

The Power Debate: A UK Generation Game? December 2013

Solar Solar PV accounts for about 3% of renewable electricity generation, with the majority being used in domestic applications. There have been a number of recent large schemes which have helped to illustrate its potential contribution to the UK energy Mix.

•

In March 2013 the Bentley Motor factory in Crewe installed the UK’s largest rooftop solar PV array. It creates a 5MW installation that can supply 40% of Bentley’s power requirement at peak times In April 2013 the world’s largest solar bridge was created across the Thames. It creates 1.1MW at a cost of 7.3M, but will supply 50% of Blackfriars station’s energy needs

Versatile and scalable: can be developed in a wide range of locations including domestic and commercial buildings Can be developed and installed very quickly Sun is free The Future In the Roadmap 2012 (DECC) Solar PV was included as one of the key renewable energy technologies that can help to create a balanced UK energy mix Key to the anticipated increase in use will be the reduction in costs and consistency in schemes such as FITS

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Analysis indicates that there is a potential deployment range of 7-20 GW, with 20 GW being our current estimate of the technical maximum level of solar deployment by 2020 UK Renewable Energy Roadmap (Update 2013)

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•

Key Issues

The Power Debate: A UK Generation Game? December 2013

The debate The debate section of the event sparked interesting and often differing views from the panel and indeed the audience. We have included the main discussion themes in this report.

One of the starting points of the debate was the highly publicised warning from The National Grid that there is an imminent danger of blackouts in the UK. Andrew Mill, Chief Executive at the National Renewable Energy Centre (NAREC) thought that this is unlikely to happen. He stated that the government had been in talks with the EU to arrange a subsidy for gas plants to act as a backup. He also thought that the following could happen to avoid the lights going out: •

Mothballed gas plants could be brought back online

•

There is reduced demand generally and there could be government intervention if needed

•

Growth in renewables would meet some of the shortfall

It was asked whether we are doing enough with regards to demand side response (DSR).

Demand Side Response (DSR) has the ability to help balance the network, increase capacity, reduce generation costs and reduce the cost of network assets.

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Will the lights go out?

DSR has the ability to help balance the network, increase capacity, reduce generation costs and reduce the cost of network assets. Colin Henry thought that the case needed to be made for DSR, but that it had the ability to save lots of money for users of the system. Martin Needham added that there is a need to improve awareness of the range of tariffs and peak times for usage, as these could help businesses and consumers save significant amounts of money as well as reducing demand on the network at peak usage times. The Government’s Pathways 2050 states: “A growing level of variable renewable generation increases the challenge of balancing the electricity grid. Potential growth of peak loads, combined with the expansion of inflexible or variable low carbon generation sources, such as wind power, would present challenges for the management of electricity networks. Demandside flexibility could help by providing consumers with new incentives to shift demand to better match electricity generation. But either significant storage, interconnection and other balancing technologies are likely to be required, or we would need to rely on extra back-up capacity.”

The Power Debate: A UK Generation Game? December 2013

Colin Henry outlined some of the current thinking with regards to smart cities. “As cities are responsible for such a large proportion of energy use and the creation of emissions our focus needs to be there. It is about thinking beyond the idea that just making the fabric of the buildings is enough to address energy efficiency. Instead we can think of buildings communicating with the grid to modify supply and demand.” He thought that local solutions in this area would also become key, for example demand response and flexibility to manage volatility. He believed that Electricity Market Reform (EMR) would lead to more flexible networks, and flexible generation and more flexible demand. The need to balance the 3 elements of the “energy trilemma” (energy security, sustainability and affordability) was discussed. Whilst there may be differing priorities at different times, they still need to be kept in balance. James Poyner felt that the government has given too much emphasis to sustainability at the expense of affordability and security. He stated that coal gives us immediate, short to medium term security and as such it should not be written out of the energy equation. Andrew Mill agreed that sustainability had become something of a preoccupation and that the balance needed to be redressed in future energy policy.

Energy price freeze There were mixed views on this current political hot potato. Some thought that a shake-up of the industry was a good thing, bearing in mind the dominance of the “Big Six”, whereas the vast majority felt that in an industry where investment is needed, energy companies would only do this if it guaranteed a return and so the suggestion of a price freeze was “naïve” and “a gimmick”. James Poyner stated that he thought the freeze was a disastrous idea. He stated that in his view it would not help with the energy mix and the future of supply, stating that politicians rarely look beyond five years. Andrew Mill thought government policy is the problem, and he criticised a lack of long term thinking. Mill stated that we are relying on the six big utilities companies to invest in the UK energy infrastructure, then trying to hold them on price. He warned that they may leave the UK, as they are big enough to survive in other markets. Mill commented that we need collaboration with government

and the suppliers, not confrontation. Barnaby Pilgrim welcomed the debate stating that debate is good, but that certainty is key. He believes there is a need competition and the Electricity market Reform routes to market need further improvement. Colin Henry believed that a “shake up” was a good thing. He suggested that the energy companies have had things very comfortable for a while and that something dramatic was needed in order to prompt change in the market.

Carbon emissions Watson Burton Construction Partner, Andrew Poyner, raised perhaps one of the most controversial issues in the energy debate: Is there any point in the UK reducing its carbon emissions when the likes of Brazil, Russia, India and China are not reducing theirs in the same way? There was acceptance amongst the panel and the audience, of the need for the UK to make changes in order to reduce its carbon emissions. With clear emissions targets to meet by 2050 there is already an impetus to de-carbonise the UK energy sector. Most speakers acknowledged that China and other large countries whose cities were set to grow rapidly, present a challenge that requires careful planning and thought. There was a view that the North East has the potential to lead technological developments that could help to address this global issue.

Flexibility in the mix There was consensus amongst the panel and the audience that there should not be an over-reliance on any one particular type of fuel, but rather a portfolio of energy sources. It was agreed that any over-reliance on a single energy source would be detrimental to the UK given that it leaves UK susceptible to power outage if that source goes offline. It also makes it more difficult to balance peaks and troughs in supply and demand, especially with renewables. Doing so would leave the UK susceptible to over pricing and market fluctuations that cannot be offset by using another source.

The Power Debate: A UK Generation Game? December 2013

It was also mooted that there is the potential to leave the UK vulnerable to energy security threats if imported sources are “cut off”, for example political relationships with Russia and Middle East could become difficult if there was over reliance on fuels sourced from these regions. The UK government’s Pathways 2050 scenarios also seem to favour a mix, so that there is no need to deploy significant resources in just one area to meet the 2050 emissions targets. Indeed the need to de-carbonise and deploy more renewable technology will complicate the task of balancing the grid. “Fossil fuels continue to play a role. The pathways show an ongoing need for fossil fuels in our energy mix, although the precise long term role of oil, coal and gas will depend on a range of issues, such a development of CCS.” 2050 Pathways Analysis July 2010 (HM Government) The role of renewables has increased as the UK attempts to de-carbonise the energy sector and with targets through to for 2050 this process will continue to increase. Andrew Mill pointed out that there was still significant work to be done on technologies, which would drive down cost and increase reliability and capacity. One member of the audience questioned the role for Biomass. The panel agreed that Biomass has a place in the energy mix, however they believe it still has a bad reputation following its original life as “incineration”. Andrew Mill stated that the technology needs some work, but questioned how green it actually is given that in some examples the timber used for biomass is shipped across the globe. The panel did agree, however, that increased use of Carbon Capture and Storage (CCS) is vital to support the continued growth of biomass generation in the UK. In some pathways the use of bioenergy with carbon capture and storage (BECCS) is important. This is where bioenergy is burnt to produce electricity and the carbon dioxide released is captured and stored, which can lead to a net reduction in carbon dioxide in the atmosphere. This has a potentially large greenhouse gas benefit, but is dependent on the ability to use CCS with biomass – which has not yet been proven at scale.

Long-term planning There was consensus from the room that the looming energy crisis has been forecast for a number of years and that not enough has been done to address the issues that presents. Andrew Mill and James Poyner both highlighted the lack of long-term thinking from successive governments with regards to energy policy. Martin Needham added “No other country in the EU has the problem we are facing at this moment of time.” It was agreed that planning needs to be more long term, more global, but also more local and holistic. There was a discussion around the North East Local Enterprise Partnership (LEP). It was agreed that there is a need to balance local and national needs from planning, economic and environmental perspectives, and as such there is a need for the relevant regional bodies (including local authorities and the LEP) to engage in the energy debate. There is an opportunity to use the North East region’s brand and resources (including its leading role in the oil and gas sector) to take advantages of the opportunities that exist in relation to technological solutions that will impact the sector for years to come. One key issue affecting the further development of power generation facilities is the local planning regimes across the country. The panel agreed that we need a planning specific energy strategy. There is always a debate about national versus local issues and the country would benefit significantly from a national strategy aligned to energy policy, which would work to minimise impact and maximise benefits. Colin Henry stated that historically planning has been seen as being part of the problem, however there is now the chance for local authorities to be seen to be part of the solution. They can enable developments and be more proactive in their approach to future energy related facilities.

The Power Debate: A UK Generation Game? December 2013

Conclusion This lively and informative debate has highlighted some of the key issues not only for the sector as a whole, but also relating specifically to our home region: the North East. It is clear that we have a unique position within the UK energy market. We are a hub of technological development, investment and have a wealth of natural resources on our doorstep. It was the panel’s view that with long-term strategic planning, the opportunity for the region to thrive in the energy sector is substantial. The debate, and this subsequent report, highlighted four key areas of consideration for future energy strategy and policy: Global nature of the challenge There is a clear need for global holistic planning with regards to energy sources, linking closely to other global themes of climate change, poverty and risk management. Reaching existing UK targets The existing and binding climate change targets in the UK mean that something will have to be done if we are to achieve our aim of reducing our environmental impact to 80% of 1990 levels by 2050. Good progress has been made, but actions arising from point four below, will significantly impact our ability to meet these targets. Maintaining a diverse energy mix There is a continued role for coal, oil and gas as bridging fuels whilst renewable technologies continue through their development phase. This represents a key opportunity for the North East region’s workforce and economy. There are is also opportunity for improvements in the way we consume our energy, through consideration of smart grids and other technologies which will also serve to reduce cost to the consumer – whether on an individual or corporate basis. Improved, collaborative energy policy The UK would benefit from a longer term, strategic approach to its energy policy, that is developed and implemented in a collaborative manner. There is an opportunity to bring energy suppliers, technology developers, consumers and the politicians together to create a solution for the UK’s energy needs, and balancing the energy trilemma, regardless of which political party happens to be leading the country at any given time.

We hope you have found this paper interesting and above all, helpful in planning how your business might take advantage of the opportunities presented by the rapidly evolving energy sector. If you would like to discuss any of the themes from this document in more detail, please contact us. We would be delighted to hear from you. 0845 901 2100 watsonburton.com @WatsonBurton

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