Energy and Climate Change Committee 

The UK’s Energy Supply: security or independence? 

 

Ref  Organisation  Page

UKES 01  Department of Energy and Climate Change  3 

UKES 02  Calor Gas Ltd  16 

UKES 03  UK Coal Producers   30 

UKES 04  Dr. Vlasios Voudouris  34 

UKES 05  Gerry Wolff   43 

UKES 06  B9 Coal  54 

UKES 07  Carbon Capture & Storage Association  63 

UKES 08  Stag Energy  69 

UKES 09  ReSus Technology Ltd  80 

UKES 10  Jonathan Cowie  84 

UKES 11  The Crown Estate  93 

UKES 12  Food & Drink Federation  98 

UKES 13  ofgem  101 

UKES 14  British Geological Survey  108 

UKES 15  The European Azerbaijan Society  120 

UKES 16  E.ON  126 

UKES 17  UK COAL Mining Limited   133 

UKES 18  BP plc  139 

UKES 19  Royal Society of Chemistry  143 

UKES 20  RWE npower  149 

UKES 21  John Mitchell   156 

UKES 22  The Gas Forum  167 

UKES 23  Statoil (UK) Limited   173 

UKES 24  EEF  176 

UKES 25  EDF  179 

UKES 26  InterGen (UK) Ltd  187 

UKES 27  ExxonMobil   195 

UKES 28  Association of Electricity Producers  200 

UKES 29  Energy Services and Technology Association  207 

UKES 30  UK Petroleum Industry Association Ltd  212 

UKES 31  Professor Alan Riley  223 

UKES 32  Scottish and Southern Energy  239 

UKES 33  Institution of Engineering and Technology   245 

UKES 34  UK Hydrogen and Fuel Cell Association   250 

UKES 35  Electricity North West Limited  255 

UKES 36  National Grid  258 

UKES 37  Neil Crumpton  269 

UKES 38  Drax Power Ltd  279 

UKES 39  Energy Networks Association  288 

UKES 40  RMI Petrol  294 

UKES 41  Gazprom Marketing & Trading Limited  326 

UKES 42  Scottish Renewables  330 

UKES 43  Sussex Energy Group  336 

UKES 44  The Geological Society  345 

UKES 45  Juwi Renewable Energies Limited   348 

UKES 46  The Russia Foundation  351 

UKES 47  Oil & Gas UK  357 

UKES 48  Centrica  366 

UKES 49  Shell  375 

UKES 50  Nuclear Industry Association  390 

 

Memorandum submitted by the Department of Energy and Climate Change

(UKES 01) Introduction 1. The challenge for energy security over the medium and longer-term is significant. As

indigenous resources decline, the UK is increasingly dependent on fossil fuel imports, leaving us more exposed to risks from rising global demand, limitations on production, supply constraints and price volatility.

2. Over the coming decade, UK production of oil and gas will continue to be in decline and our

dependency on global LNG markets will increase. On oil in particular, we have seen recent increased levels and volatility of oil prices and there is clearly a risk that this will continue. Meanwhile, global pressures from increased demand, investment uncertainties and supply constraints pose major risks in the longer term.

3. At the same time, many power stations will close as they come to the end of their lives or

are forced to close due to environmental legislation. By 2018, 16 power stations representing approximately 19GW generating capacity will close – that is around 25% of British electricity generating capacity. Further, the shift to low carbon generating technology, such as wind, which is intermittent, brings challenges.

4. Therefore, we must take action to reduce our long term dependence on imported fossil fuels

and reduce the risk of locking ourselves into a high carbon future where we are reliant, in global competition with others, on uncertain and potentially volatile supplies.

5. We are therefore acting in four key areas:

i) Maximising economic recovery of indigenous reserves

• We have policies in place to maximise economic recovery of our indigenous hydrocarbon reserves. Some 20 billion barrels (perhaps more) remain, around 3.5 billion of them in the deepwater areas West of Shetland. In our latest (26th) offshore licensing round, we have offered 144 new oil and gas licences covering 268 blocks.

ii) Reducing our demand for energy

• Reducing demand is often the most economically efficient way of reducing emissions; whether from appliances, lighting, houses or businesses. The Green Deal will provide household and business energy efficiency improvements at no up-front cost, with consumers repaying through the savings they make on their energy bills and the roll-out of smart meters will enable consumers to optimise their electricity and gas demand."

iii) Ensuring we have a strong, resilient market and infrastructure, through:

• Electricity market reform to ensure that the right long-term signals are in place to enable cost-effective investment in all forms of low-carbon generation while maintaining security of supply and the best possible deal for consumers;

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• Gas market reform – improving our resilience to low probability / high impact events;

• Creating a Green Investment Bank to fund the scaling up and deployment of green technology and clean energy projects;

• Building import infrastructure to ensure resilient access to global energy markets,

particularly for gas, oil and electricity;

• Developing a smart grid; and

• Institutional Reform, including reform of OFGEM.

iv) Influencing other countries

• Where we are reliant on imports we need to manage that dependency through constructive bilateral relationships and international institutions, further diversifying our imports to reduce our reliance on individual markets, and supporting long-term contracts;

• Internationally promote low carbon growth, encourage necessary transitional investment in oil and gas production, promote more reliable supply of energy and enhance price stability; and

• Pursue the liberalisation of EU and global energy markets. Immediate challenges 6. These are central challenges in the long-term. However the Government is also focused on

delivering the day-to-day resilience of our energy infrastructure. We live in an uncertain world, and the Government stands ready to meet immediate challenges – such as major climatic events, civil disturbance or terrorism. This is illustrated by recent developments in Japan and in the MENA region (the Middle East and North Africa).

7. The Secretary of State has asked the Chief Nuclear Inspector to submit an interim report by

mid-May on lessons from the emerging nuclear crisis in Japan, with a final report within 6 months. The Secretary of State has also confirmed that the Government will consider the Nuclear National Policy Statements (part of the planning consents regime) in light of these developments, before proceeding with the ratification process. Safety is the Government’s top priority.

8. Recent social unrest in the MENA region has put upward pressure on oil prices, due to

market perceptions of an increased risk to supply, but with only limited disruption to global supplies, and no physical impact in the UK. If physical supplies were significantly affected, the UK is a member of the IEA’s emergency response mechanism, whereby substantial strategic oil stocks can be released to make up a shortfall in the market; and we also have a National Emergency Plan for Fuel to help manage any domestic impacts.

9. Gas production was not affected during the uprisings in Tunisia or Egypt, and (as this

Memorandum is prepared) has not been affected in any Gulf countries. Libyan gas exports have been suspended, but meanwhile Russia has increased exports to Italy, the country most affected, to make up the shortfall. The Japanese nuclear crisis could also impact global gas

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markets, through increased demand for imports of LNG (Liquefied Natural Gas) to offset reduced availability of nuclear generating capacity.

10. These developments underline the importance of a diverse mix of energy types and fuels,

and of diverse sourcing of the fuels in an open, liquid and competitive market. This is further discussed below, in the response to Q.7.

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Responses to specific questions:

Q1 How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

11. Resilience to future changes in fossil fuel and uranium prices is taken to mean the extent to which such changes are likely to feed through into higher energy prices (for electricity, heating, transport) and /or risk supply disruption.1

Uranium Prices

12. If global demand significantly affected the price of uranium, it would only have a limited

effect on the cost of electricity generation as uranium represents a much smaller part of the cost of electricity in nuclear power stations than the fuel for other forms of electricity generation. This was illustrated in 2007 when the spot price for uranium moved from the very low levels it had been for almost two decades to record highs and then subsequently fell back. Since raw uranium only makes up a small proportion (around 1.5%) of total nuclear generation costs, the movement had little effect on overall nuclear costs.

13. In addition, we are confident of our ability to source uranium, now and in the future. Deposits of uranium are widely dispersed across a number of countries. Potential sources include countries that we do not currently rely on for fossil fuels and there are considerable resources available in OECD countries which can help spread the supply risk that could be associated with a particular fuel or region of the world. For example, over 40% of the Uranium supplied to EU utilities in 2009 was supplied from Australia and Canada alone.2

14. The OECD’s Nuclear Energy Agency (NEA) and the International Atomic Energy Agency (IAEA) have stated that, regardless of the role that nuclear energy ultimately plays in meeting rising electricity demand, the uranium resource base is more than adequate to meet projected requirements. The Euratom Supply Agency has expressed confidence that there are sufficient identified uranium resources to meet the current demand for about 100 years.3

Fossil Fuel Prices

15. Fossil fuel price increases could come about for a variety of reasons, for example, sudden

increases in demand (e.g. due to cold weather increasing heating demand), supply interruptions or, in the long-term as a result of lack of investment.

16. The risk of interruptions to physical supplies will depend on what the driver is for the

changes in prices. Changes in prices per se do not imply a risk to physical security, as has been shown in the recent oil price rises caused by unrest in North Africa and Middle East. In response to a shock, commercial operators and the IEA might be expected to act to mitigate the impact of the shock. Markets can respond to prices in the long-run in a number of ways,

1 Within Northern Ireland, energy policy is devolved. Depending on the context, this Memorandum refers to the UK or to GB. 2 Euratom Supply Agency – Annual Report 2009, published 2010 http://ec.europa.eu/euratom/ar/last.pdf 3 Justification of Practices Involving Ionising Radiation Regulations 2004, October 2010. http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/Energy%20mix/Nuclear/newnuclear/667-decision-ap1000-nuclear-reactor.pdf (page 41)

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for example by attempting to alter the efficiency with which they use the fuel (e.g. using more fuel efficient vehicles if oil prices rose), switching to the most competitive energy source, and investing in new supply sources.

Short-term price shocks

17. Oil: To mitigate oil price shocks, oil-producing countries can expand production to increase the amount of oil available to the market, putting downward pressure on the price. For example, Saudi Arabia has recently made a number of announcements of its plans to increase production capacity following unrest in North Africa and the Middle East. In addition, IEA members and EU member states have access to precautionary oil stocks equivalent to 145 days of net imports for IEA, 121 days consumption for EU. On unanimous agreement, these stocks can be made available to the market to offset the supply short fall.

18. Gas: Gas markets at present have a significant amount of production and transportation capacity relative to demand, and reductions in supplies from one source can be made up by increasing production flows from elsewhere, using stocks, and demand-side response. UK currently has sufficient import capacity alone to meet 150% of annual demand, though more will be needed in the future to replace declining domestic production and to provide resilience to unexpected outages and the increased demand from prolonged cold spells. As European and global markets become increasingly integrated then the market’s ability to respond to shocks will improve, benefiting the UK. Implementation of the EU Gas Security of Supply Regulation, which came into force in December 2010 will also improve the resilience of member states, and the EU as a whole, to gas supply disruptions. The Government is also proposing further improvements with measures in the current Energy Bill to reduce the likelihood of a Gas Supply Emergency, and its duration and/or severity, should one occur.

19. Coal: A reduction in supplies from a particular source will tend to raise prices, incentivising increased supply from other sources of coal (production and stocks) and demand-side response. Since 2002, electricity generation has accounted for over 80 percent of UK coal consumption4. At the end of December 2010, stocks held at UK electricity generators were about 13.4 million tonnes (provisional estimate),5 or approximately enough for all 23GW of transmission-connected coal generation capacity6 to generate continuously at full capacity for about 63 days.7 In terms of demand-side response, generators may switch to gas generation (depending on gas and carbon prices).

Sustained Price Increases

4 DECC monthly statistics, February 2011. 5 DECC monthly statistics, February 2011. On average, from 1995 to December 2010, stocks at electricity generators over the course of a year peak in October (14.5 million tonnes on average), and are at their lowest in March (10.8 million tonnes), and stocks have never fallen below 6.2 million tonnes in any month since January 1995. 6 DUKES 2010, Table 5.7. 7 Based on an average generation per tonne of coal of 2.6GWh. In practice, it is unlikely that coal generation will run continuously at full capacity, and that generators will not have added to stocks at all since October.

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20. Should fossil fuel prices significantly and sustainably rise then, all other things being equal, there is expected to be significant impacts on electricity wholesale prices.8 Changes in wholesale prices would be expected to lead to increases in retail prices (at least in the long-run).

21. We could also expect average retail bills for gas and electricity to rise too in this case, although the extent of bill rises would be offset to some degree in a number of ways. A range of Government policies aimed at reducing energy consumption and moving to more sustainable sources of energy would be expected to help shield consumers from increases in fossil fuel prices by reducing the demand for fossil fuel. Additionally, there is scope for consumers to reduce their energy consumption and, by creating greater incentives for investment in renewable energy sources, the subsidy requirement for these sources to achieve our renewables targets will reduce.

Q2 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

Electricity Networks (transmission and distribution) 22. Failure to put electricity network infrastructure in place will, immediately or over time,

reduce the reliability of energy systems, with potentially damaging consequences for the local, regional and national communities and economies.

23. Lack of sufficiently robust electricity networks can cause or contribute to large scale

blackouts. Such infrastructure projects often have long lead times and/or cater for longer-term needs, based on careful forward planning by energy companies; failure to put them in place may reduce future reliability.

24. Whilst the existing network needs to be maintained and upgraded to safeguard ongoing supply and accommodate new generation, it will also need to respond to the expected increases in demand due to the development of new housing and business premises as well as technological shifts such as the greater electrification of transport and heating. Electricity networks need to evolve on an ongoing basis to ensure a reliable supply of energy is maintained.

25. Ofgem estimates that around £32 billion needs to be spent on pipes and wires in the next 10 years to secure supplies for consumers and to move to a low carbon economy. This is a doubling of the rate of investment from the previous 20 years. In order to attract efficient investment, Ofgem’s new performance based RIIO model for price controls rewards companies that innovate and run their networks to better meet the needs of consumers and network users. It does this by setting longer eight-year price controls, offering incentives focused on delivering results, and expanding the £500 million Low Carbon Network Fund to further encourage the development of smarter grids.

26. Beyond 2020, distribution networks are likely to need to expand and be reinforced to deal with growing demand, especially from electric vehicles and heat. The development of smart

8 Electricity prices will be determined by the cost of the marginal sources of supply. This is often gas, or coal, power stations.

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grids will also be important in working alongside traditional reinforcement to help manage network limitations and reduce the pressure on new infrastructure requirements.

Electricity Storage and Other Technologies

27. Storage, including pumped-storage plants such as Dinorwig and Festiniog, plays a small but

vital role in meeting short-term surges in demand. In the future, storage has potential to play an even larger role in the management of the system carried out by the system operator, and in managing day to day fluctuations in generation and demand, particularly around intermittent output from renewables. A variety of technologies are in development to fill this role, though at present are not commercially viable.

28. The system operator currently procures the services it needs on a technology neutral, least cost basis, where storage must compete against other technologies which can provide the same services. The system operator will continue this approach as its requirements for reserve and other ancillary services grow up to 2020.

29. A similar process is present more broadly in the market, where storage must compete against investment in other technologies (such as conventional generation plant) that can provide energy. The case for investment in storage is likely to increase with greater volatility, which would come about with sharpening of cash out and increased levels of wind generation.

30. As part of the Electricity Market Reform consultation a Capacity Mechanism has been proposed which would be designed to ensure there is sufficient investment to guarantee resource adequacy. The starting principle of any such intervention is that it be technology neutral. So whilst storage may form part of this package, it will need to be considered alongside other technologies which would provide resource such as demand response, conventional generation, and interconnection.

Gas networks

31. A lack of investment in the gas network would put constraints on the system operator’s

ability to accept gas into the network, or transport gas within the network, and risk interrupting customers. For example, planning approval granted in December 2010 for a Pressure Reduction Installation at Tirley, Gloucestershire, will enable a 25% (around 5 bcm/pa) increase in capacity on the Felindre to Tirley pipeline (which transports gas from the Milford Haven LNG terminals), when the facility is operational.

32. The GB gas transmission network achieved 100% reliability in 2009/10. Despite record demand during winter 2009/10, it was necessary to interrupt only one interruptible customer9 supplied directly from the National Transmission System (NTS) on a single

9 An interruptible contract may be signed by gas consumers where the relevant transporter and/or supplier has the ability to ask a consumer to reduce its off-takes. These contracts allow the transporter and/or supplier to disconnect the consumer (in or out of an emergency) in order to manage demand on the system. Consumers may sign these contracts in return for reduced rates on their gas supply.

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occasion, and no firm customers.10 National Grid’s Transmission network reliability was 99.9999% for Distribution Networks.

33. In the future, investment may be required to accommodate changes in the level and profile of demand for gas: for example, to take account of energy efficiency measures, of electrification of heating, of the role of gas-powered generators providing flexible back-up to wind generation, and of the potential for bio-methane grid injection.

34. Information relating to forward planning for the gas transmission networks is set out in detail in National Grid’s Ten Year Statement.11 As for electricity, Ofgem’s new eight-year price control review process offers incentives focused on delivering results, innovation and efficiency.

Gas Storage

35. Storage is one means of managing seasonal fluctuations in gas demand– as are flexibilities to

modulate imports (via LNG and pipeline) and production from the UK Continental Shelf. Storage is also one option for dealing with short-term demand fluctuations or supply disruptions, which the UK may be further exposed to as it becomes increasingly import-dependent. Storage will also become increasingly important as the contribution from wind to power generation increases, when gas-fired generators are expected to provide firm back-up for wind intermittency.

36. At present there are nine commercial gas storage facilities in GB. Four new facilities are under construction, and another 16 proposed storage facilities, nine with planning consents in place.12 Independent modelling,13 commissioned by DECC, has shown that, in the short to medium term, the GB market is resilient to a wide-range of potential shocks. Additionally, the growth of a large and flexible LNG market, together with surplus import capacity, allows the GB market to access “virtual” gas storage through commercial arbitrage opportunities. The continued liberalisation of EU markets will allow this opportunity to expand. However, the report did identify certain scenarios, with a low but non-negligible probability, that could lead to supply disruption and/or high wholesale prices. In the current Energy Bill, the Government has therefore proposed new powers for Ofgem to make changes that would improve our resilience to such events, and which would help underpin commercial demand for additional supply infrastructure, including gas storage facilities.

Q3 What impact could increased levels of electrification of the transport and heat sectors have on energy security?

37. At a national scale the levels of electrification anticipated by 2020 will not have a significant impact on demand. Up to 2020, and for some years beyond, the main impact of electrification of heat and transport on security of supply is likely to be at the local level. Electric vehicles and heat pumps place a significant new demand on the network which,

10 A firm customers is one with a non-interruptible gas supply contract. These customers cannot be requested to reduce their demand or have their demand curtailed except for following the announcement of stage 3 or greater of an emergency. 11 National Grid Ten Year Statement: http://www.nationalgrid.com/uk/Gas/TYS/ 12 National Grid Ten Year Statement: http://www.nationalgrid.com/uk/Gas/TYS/ 13 GB Gas Security of Supply and Options for Improvement: A report to Department of Energy and Climate Change (Pöyry Energy Consulting, March 2010).

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where clusters of installations occur, may exceed the capacity of the distribution system on a localised basis. Where clustering of installations does occur, reinforcement to the network, or management of demand, for example to stagger charging of vehicles on a particular street, will be necessary.

38. In March 2011 DECC published its revised 2050 Pathways Analysis.14 Dependent on the choices of the user for how energy will be supplied in 2050, the Calculator shows that high electrification of demand can trigger significant challenges for electricity back-up, demand shifting and/or interconnection requirements with the European mainland, as well as a potential doubling of electricity demand.

39. The Electricity Market Reform consultation has made proposals for ensuring the market framework enables sufficient generation capacity to be developed, while remaining consistent with our long-term climate change targets and ensuring the best value possible for electricity consumers. Government is also working with Ofgem to ensure that we have the right investment framework in the distribution networks in the longer term to cope with future challenges such as electrification, and to enable network capacity to increase at the appropriate rate. It will also be important to develop smarter grids to help manage network constraints in the period of transition to greater electrification, especially where reinforcement is not feasible in the timescales allowed. Roll out of smart meters will be an important first step in enabling optimised charging, for example through the development of time-of-use tariffs. It will be important to ensure that local network operators can input into the use of demand management as a resource.

Q4 To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

40. Actions to improve the energy efficiency of our homes and businesses make an important, cost-effective contribution to each of our energy policy objectives, including energy security. Through minimising overall demand for energy, energy efficiency will also minimise the total volume of fuel imports required, and lessen the need for new generating plant.

41. It is estimated that in 2020, post 2007 Energy White Paper policies to improve energy

efficiency will have led to an overall reduction in domestic15 final user energy demand of roughly 9% from “business as usual”. This roughly equates to 12.7 million tonnes of oil equivalent (mtoe). Of this, electricity demand in 2020 will be reduced by some 55.7 TWh (4.8 mtoe, 14%), mostly through improvements in the energy efficiency of appliances and lighting. This will be of key importance for delivering our 2020 renewable energy targets.

42. It is important to note that many of the key energy efficiency measures we undertake today, such as loft and wall insulation, should last for many decades, thus contributing to our energy security objectives to 2050 and beyond.

14 www.decc.gov.uk/2050 15 Excluding international aviation.

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Q5 What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

43. Some efforts to reduce emissions will enhance security: specifically, efficiency improvements, demand reduction and increased deployment of micro-generation. Equally, diversifying our energy sources and switching to naturally abundant renewable sources also reduces risk, and particularly our reliance on imported fossil fuels.

44. However some renewable sources are intermittent, which, for electricity generation, means

we may still need back-up capacity (or additional demand-side response) to augment pumped storage. The Electricity Market Reform Project has consulted on whether a capacity payment mechanism is necessary to provide sufficient incentive for the market to ensure such generation is in place when we need it, while still meeting our emissions reduction targets.

Q6 What would be the implications for energy security of a second dash-for-gas?

45. A second dash-for-gas is interpreted as meaning a large increase in gas-fired power stations above currently projected levels. This scenario would impact on both gas and electricity markets.

Electricity Market

46. For the electricity market, so long as generators could access sufficient gas at reasonable

prices, electricity security could be maintained since gas-fired power stations are able to increase output flexibly to meet any sudden peaks in demand. Indeed, gas-fired power stations are expected to play a significant role in the transition to a low-carbon economy, in particular, by providing back-up to intermittent renewable generation. However, one key effect would be to place an increased proportion of our generation capacity at the mercy of global gas markets; in particular the price and availability of gas supplies. As domestic production declines this represents a growing risk to electricity security to the extent that it is dependent on gas. Furthermore, in the longer-term, to be consistent with our climate change objectives, a growing proportion of any gas-fired generators would need to be replaced by lower-carbon forms of generation. The Electricity Market Reform consultation has set out a number of proposals aimed at ensuring the GB electricity market provides sufficient generation capacity to maintain electricity security, while being consistent with our climate change targets.

Gas Market

47. The impact on gas supply security as a result of increased gas demand will depend on a

number of factors, such as whether GB transportation and supply capacity will be sufficient to meet the increase in demand, what arrangements the market has made to deliver the gas to GB, and whether any particular issues arise around system balancing.

Transportation capacity

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48. It is important to note that an increase in gas-powered electricity generation would not come as a surprise to the gas market; particularly to shippers, whose role it is to source gas for their customers’ demand, and gas transporters, whose role it is to transport that gas to sources of demand. This is because:

a. there are several stages to bringing forward a new CCGT, such as project development,

planning permission and construction, which together would take a number of years; and

b. if the gas is to be transported through a network, then both network capacity and a

connection to the network will be required. National Grid is required to make best use of existing capacity and to consider whether some unsold capacity can be substituted to other exit points. If additional gas transmission capacity is required, National Grid is obliged to make exit capacity available within 38 months from receiving signals from the exit capacity mechanism. National Grid is also required to prepare an annual statement for each of the succeeding ten years that will forecast the use and likely developments of the pipeline system. Together, these form a robust set of arrangements to allow for the delivery of sufficient transportation capacity.

Supply capacity and market balancing

49. In order to receive gas, the power station would need to make arrangements with a supplier

in order to offtake the gas, which in turn would need to arrange with a shipper for that that gas to be available, including that entry capacity (such as import and storage capacity) is available. Again the lead times for delivering gas-fired power stations to the market would give the market some time to prepare for any additions to gas demand.

50. However, if gas demand were to increase rapidly, due to a rapid growth in power generation demand, and, for whatever reason, there had been an insufficient market response to provide sufficient gas supply capacity, then it is possible that the security of supply position may be impacted.

51. In 2010 DECC published three reports from Pöyry Energy Consulting which formed a thorough assessment of GB’s security of gas supply; amongst other things these included sensitivity analysis, in which gas demand was assumed to increase significantly (for a number of reasons) in the medium-term. The analysis showed that large GB demand increases would not of themselves cause security of supply problems,16 and that the market would remain resilient to a range of shocks. However, the reports identified some scenarios, with a low but non-negligible probability, that could lead to high prices and / or supply disruptions.

52. There are already strong incentives for shippers to match their input and offtake of gas into the gas network (and thereby ensure enough supply capacity is available), and these incentives are being sharpened further still through changes proposed in the current Energy Bill. The Bill proposes to give Ofgem a new power to sharpen financial incentives on gas market participants to meet their contractual supply obligations during a Gas Supply Emergency. In turn, these should also sharpen incentives to avoid a Gas Supply Emergency occurring by, for example, underpinning commercial demand for additional supply

16 That is, supply would still be sufficient to meet demand even during a severe winter.

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infrastructure (including gas storage facilities), as well as encouraging demand side measures such as more interruptible contracts. System balancing

53. Ofgem previously assessed the balancing implications for the gas network of large gas demand from the electricity sector. At that time Ofgem judged that the balancing arrangements were adequate. Ofgem keeps these matters under close review, especially in the light of the potential impact that additional wind generation may have on the volatility of gas demand.

Q7 How exposed is the UK’s energy security of supply to international events?

54. We assess the greatest risk to energy security to be volatile oil prices. However, this is not an issue for the UK alone - oil is an internationally traded commodity, with prices derived from the global market. Prices have been rising recently, in part due to increased global demand as economies recover from the recession. The recent social unrest in the Middle East and North Africa has further increased prices due to market perceptions of an increased risk to supply, but there has been only limited disruption to global supplies, and no physical impact in the UK. Wider social unrest would almost certainly increase market prices, but it would not necessarily impact physical supplies significantly. If physical supplies were significantly affected, the UK is a member of the IEA’s emergency response mechanism whereby substantial strategic oil stocks can be released to make up a shortfall in the market and we also have a National Emergency Plan for Fuel to help manage any domestic impacts. Through the International Energy Forum we also work closely with oil producers, some of which can increase supplies to make up for shortfalls elsewhere.

55. Indigenous production currently meets around two thirds of UK primary energy demand. As UK fossil fuel production has declined, our former self-sufficiency has been replaced by increasing reliance on (net) imports, though to varying degrees depending on the fuel (coal, oil, gas). Imports of each come from a wide range of countries. By 2020, on central projections overall net annual energy import dependency is set to rise to over 40 per cent, with a rise from just under 20 per cent to nearly 50 per cent for oil and just under 40 per cent to just over 50 per cent for gas. However, increased imports do not necessarily equate to reduced energy security, as the UK’s experience of reliable supply from a diverse range of countries, sources and supply routes over many years generally shows. Furthermore energy prices – for oil and coal and increasingly also for gas – are set at a global level, even for domestic production.

56. The global gas situation is at present relatively benign (in large part due to global recession and the exploitation of new “unconventional gas” reserves in the United States), but could face challenges in the short term (e.g. if the Japanese market reacts to the closure of part of its nuclear generation fleet by importing additional gas from the LNG market that would otherwise have come to the GB market), and in the medium term should there be global underinvestment and /or supply constraints.

57. Supplies to the UK can also be affected by more local or regional issues, e.g. pipeline failures relating to supply from Norway, or disruptions to supplies from Russia to mainland Europe. However we have a diverse range of import sources, including UK Continental Shelf, pipeline from Norway and EU, LNG from a wide variety of sources and countries

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(including Algeria, Australia, Egypt, Qatar, Trinidad & Tobago), and withdrawal from storage. This has helped to ensure that gas disruptions on mainland Europe in recent years have not affected UK physical supplies, although there has been some price impact. Recent and forthcoming implementation of European legislation (e.g. Gas Security of Supply Regulation and the “Third Package” of energy market liberalisation) are making the UK and Europe even more resilient.

58. The Government has implemented a range of policies to address the risks. Domestically the UK is reducing the need for oil and gas imports – notably by maximising UK production and promoting low carbon alternatives such as electric vehicles, biofuels, CCS and fuel efficiency. Meanwhile, measures in the current Energy Bill are designed to improve the GB gas market’s resilience to high impact / low probability events, by improving the interface with international markets during a gas supply emergency.

59. Internationally, the Government is working to:

- encourage investment in oil and gas production; - promote more reliable supply of energy, through more efficient markets, stronger

bilateral links and robust energy response arrangements; - enhance price stability, through increasing transparency, shared analysis of energy and

financial markets, and enhanced producer-consumer dialogue; and - reduce demand, by supporting low carbon growth internationally.

Q8 Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

60. The Coalition Government has made Energy Security a priority, and is making vital reforms to our energy markets to ensure the UK has security of energy supply consistent with our climate change targets. We do not believe that any further interventions are necessary, but we keep our energy security outlook under constant review.

Q9 Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

61. Emergencies, whether caused by natural hazards, accidents or terrorism, also have the potential to disrupt energy supplies. Although outside the scope of the present Inquiry, there is cross-government work underway, including by DECC, to improve how we prepare for such events.

March 2011

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Memorandum submitted by Calor Gas Ltd (UKES 02)  

Executive Summary  1. Most attention historically in relation to security of supply has been given to interruptions  of  supply  from  third  parties.  Infrastructure  delivery  and affordability are just as important in securing our supplies. 

2. In  relation  to  both  LPG  and  natural  gas,  there  is  no  reason  to  fear interruptions of supply from third parties. 

3. The  threats,  however,  to  infrastructure  delivery  are  very  real.    Far  from renewables  being  “crowded  out  by  gas”  they  are  simply  underperforming despite heavy subsidies from the taxpayer. The 2010 renewables target cannot be reached. 

4. The  commonly  accepted  figure  needed  for  investment  in  energy  of  £200bn was calculated before the pure electricity play mooted in the Revised National Policy  Statements  on  Energy  (NPS)  envisaged  the  need  for  doubling  or tripling electricity generation. This has not been costed. 

5. The  major  reliance  put  by  NPS  on  wind  power  makes  electricity unnecessarily expensive because it needs back‐up by standby unabated fossil fuel  capacity  equivalent  to  some  80%  of  the  installed  wind  capacity,  and because the projected costs/MWh of offshore wind are roughly double those of onshore wind. Taxpayer subsidy to wind is on a trend rising to £5bn a year and for offshore wind definitely does not represent value for money. 

6. Nearly a fifth of all households in England, over a quarter of those in Wales, nearly  a  third  in Scotland  and  over  a  third  in Northern  Ireland  are  in  fuel poverty. The figures have been going significantly in the wrong direction for years  despite  large  sums  of Government money  being  invested  in  energy efficiency  in  vulnerable  households. OFGEM  expects  a  60%  rise  in  energy prices and a 50% rise in fuel poverty to cover 6 million households. An energy policy  that  threatens  to consign a  large proportion of  the population  to  fuel poverty is in effect stripping that group of consumers of security of supply. 

7. The  pure  electric  play  favoured  by NPS  is  far more  costly  than  one which envisages  a  continued  contribution  from  gas  –  the  all  electric  “solution”  to decarbonisation over  the period 2010  to 2050 would cost £700bn more  than a “Green Gas” solution – that is equivalent to £20,000 per household or £10,000 per person. Green Gas would continue to enjoy the benefits of sunk costs in the gas main. 

8. Domestic heat does not all have to come from expensive electricity, wastefully centrally generated by unabated gas:  it  can be generated   by gas within  the home  using  high  efficiency  (80‐90%)  fuel  cell  boilers  –  potentially  by biomethane in urban areas, and biopropane in rural areas.  

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9. Distributed generation would help avoid  the necessity for having expensive unabated  fossil  fuel  generated  at  distance  to  generate  20%  of  our  peak electricity needs for but 31 days in a year. 

10. Distributed generation could be part of a low cost, low carbon solution. It will lower household fuel bills by some 25%, and could be an effective antidote to fuel poverty  and  avoid  the  insecurity of  supply  implicit  in  energy  supplies driven to unaffordable levels 

What is Security of Supply?  Security of supply  is not simply about ensuring the sourcing of the fuels necessary to keep  the  economy  going  and  keep  our  homes  lit,  warm  and  functional.  If  the infrastructure necessary  to deliver  the quantum of generation we will need  in  future decades  is  lacking,  or  if  power  becomes  so  expensive  to  pay  for  that  industry  is exported abroad and our homes go unlit or unheated then that is a crisis of security of supply  just as severe as  interference with  imports of  fuels or power  from abroad. To ensure security of supply we must give due consideration then to:  

• Potential interruptions of supply from third parties • Infrastructure delivery • Affordability 

 We believe insufficient attention has been devoted to the two last factors.  Is Gas Under Threat from Third Parties? 

Calor Gas  is  currently a one product  company distributing Liquefied Petroleum Gas (LPG) mainly to rural areas off the gas main. Our views in this submission are confined to  gas.  The UK  is  self‐sufficient  in  LPG  –  indeed we  export  45%  of  the UK’s  LPG production.  Europe  is  almost  self‐sufficient  in  LPG.  Europeʹs  security  of  supply  is further safeguarded by: 

• a wide range of sources, both inside and outside Europe; • a flexible  supply chain via water, rail and road with numerous routes and entry 

points into Europe. 

In  relation  to natural gas,  the  recent  report  from Pöyry, “Gas: At  the  centre of a  low carbon  future”  (September  2010)  concluded:  “Recent  studies  by,  and  supported  by DECC,  concluded  that  there  are no major  security of gas  supply  concerns  as Britain increases  its  gas  imports…We  also  survived  the  coldest winter  in  over  30  years  in 2009/10 with plenty of gas available and no impact on the wholesale price”. Pöyry went on  to  refer  to  a DECC  study undertaken  in 2009/10  to  investigate  the  impact on  the UK’s gas supply to a range of supply shocks and two others to examine the global gas 

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market and the European gas market (including Russia): “By combining the analyses in all three reports we were able to take a view on the robustness of gas supply not only to events in the UK, but also the evolution of gas supply far across the globe. This work broadly concluded that the UK’s gas supply security is robust to a range of underlying demand  scenarios,  including  in  the  event  of  low  probability,  high  impact  events causing disruption to gas supplies. Specific events modelled included: 

• prolonged outages to key pipeline routes (from Norway and Russia); and, • long disruptions to major LNG sources and LNG regasification capacity (Qatar 

and Milford Haven). Outages were modelled  under  severe weather  and  using  a  very  high UK  demand profile (up to around 120bcm per annum), corresponding to National Grid’s top of the range of  its central demand projections. While the events did cause  increased UK gas prices, only in the coincident occurrence of the most extreme circumstances was there any gas interruption”.  Is There a Threat to Infrastructure Delivery?  Pöyry thinks so: “With large scale renewable build, new nuclear power stations and a major expansion  in electric grid  infrastructure (both offshore, mains transmission and within  homes)  required,  there  is  an  enormous  challenge  in  putting  together  the resources, capabilities and skills required…Based upon various substantive analysis we have undertaken we  believe  there  is  a  greater  risk  of  the  ‘lights  going  out’  through insufficient  power  generation  and  increased  peak  forecasts  than  any  concerns  over security and price from rising fuel imports”.  Will 30% of electricity generation come from renewables by 2020 as is envisaged by the Revised National Policy Statements on Energy  (NPS)? At  the end of 2009, 3% of our energy came  from  renewable  resources  (WA, 8.12.10).  Is  it  really  imaginable  that we can increase that by a factor of ten within 9 years?  We believe that the wind energy targets – the ascribed primary source for renewables by  the NPS  –  are  “heroic”.  The  2008  Fells Associates Report,  “A  Pragmatic  Energy Policy  for  the  UK”  said  that  the  UK  Renewables  Strategy  would,  “Require  a monumental shift in investment and build rate for renewables”. It still does. The total installed  capacity  of  windfarms  in  the  UK  according  to  the  British Wind  Energy Association  (BWEA)  as  of  February  2011  is  5,203MW  –  17%  towards  the  target  of 31,000MW  (RAB). The  targets  look  relatively harder  for offshore wind  turbines.  In a Lords Written Answer  on  19th  January  2011,  Lord Marland  envisaged  a  scenario  of 4,000  offshore  turbines  by  2020.  The Carbon  Trust  points  out  that  the  build  rate  of offshore wind turbines build rate  has been one every 11 days since 2003: 436 offshore wind  turbines have been  installed  to date. To reach  the 2020  target,  therefore, would require the current installation rate to accelerate tenfold.   

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As  for  the  potential  contribution  from  biomass  the  Government  acknowledged “constraints  to  the  provision  of  such  infrastructure”  (“The  UK  Renewable  Energy Strategy  2008)  including  “public  hostility  to  combustion  plant,  particularly  those burning waste”  (ibid.) Prof. David MacKay, Special Adviser  in DECC unrepentantly called for “industrialising really large tranches of the countryside”( 11.09.2009 – Times Online)  to  supply  biomass.  The  renewable  strategy  depends  on  doubling  the  land devoted  to  energy  cropping  in  every  year  from  2010  to  2017.  The  expectations  of biomass  look  as  heroic  as  for  wind:  “To  date  there  has  been  a  failure  to  achieve significant planting of woody energy crops in the UK” (“Combating Climate Change, Forestry Commission”, 25th November, 2009, para.14.2).  Pöyry is rather dismissive of heat pumps: “Mass deployment of heat pumps is central to  the  electrification  of  the  supply  of  heat.  In  July  DECC  published  scenarios  for renewable  heat  supply  to  2020. Around  2,500  air  source  heat  pumps  are  currently installed  and  sales  are  close  to  3,000  units  pa.  For  ground  source  heat  pumps  the respective figures are 8,000 installed and 4,000 pa sales. Yet in its central scenario there are 300,000 air source and 330,000 ground source heat pumps by 2020. For  these, still relatively low, figures to be reached, annual sales over the next ten years will need to be  ten  times  current  rates. This  is not  just  a  challenging  sales  target  –  it demands  a massive  expansion  in  the  supply  chain  to  manufacture,  install  and  maintain  the systems. How credible  is such a sales plan  in  the  face of a doubting public? Already there is information to doubt their value.”  Ground  source  heat  pumps  are  disruptive  to  fit  and  are  a  very  expensive way  of addressing  the problem, particularly  in  rural  areas which would  also  require  a very significant investment in electricity infrastructure where much of the electricity supply is  single phase,  limiting  the power available  for  electric powered heating  systems  to approximately 3.5kW. Heat pumps have only limited output on single phase electricity and are of limited value in older properties.  The most recent study of currently installed heat pump performance, was published by the Energy Saving Trust on the 8th September 2010 – “Getting Warmer: a field trial of heat pumps”. The study reveals that the actual performance of heat pumps installed in the UK  is surprisingly poor. The  study  showed  that only 1 of  the 22 properties with Ground Source Heat Pumps achieved  the  implicit minimum EU Directive Coefficient of Performance,  and only  9 of  the  47  sites with  air  source heat pumps  achieved  the standard.  Since  the  2009  European  Directive  on  Renewable  Energy  excludes  low performing heat pumps  from  contributing  to  the  renewable  energy  targets, where  it states  that  ‘Only  heat  pumps with  an  output  that  significantly  exceeds  the  primary  energy needed to drive it should be taken into account’ the great majority of heat pumps studied by the EST cannot be considered as “renewable” or contributing to the renewables target. Furthermore,  if  they  are not  renewable  then  it would be wrong  to  apply  subsidy  to their installation. 

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 Reality may possibly be beginning to break out. Charles Hendry MP, Minister of State at DECC on 8th December 2010 admitted in a written answer: “As a result of the failure to  make  sufficient  progress  in  past  years,  the  UK  will  miss  the  2010  renewable electricity target this year… meeting our 2020 target is challenging but achievable.”   The ECC Select Committee saw a “risk that new conventional generation would crowd out  renewables”  (para.  79,  Third  Report,  26th  January  2011);  the  risk  is  rather  that renewables, as heavily subsidised as they are, will fail to rise to the challenge.  Does Affordability Threaten Domestic Supply?  Pöyry thinks that the sums involved for those building the necessary infrastructure are, “Stretching (in the order of £200bn by 2020 and 400bn by 2050) and there are questions over the ability of the market players to raise the necessary debt or equity funding.”  The most  commonly  ‐  if  rather  loosely  ‐ used  figure  is £200bn. We believe  that  that figure is consistent with OFGEM’s Project Discovery projections and with the original Draft National Policy Statements for Energy and were based on what we would regard as an optimistic view that grid peak demand would remain flat at 60GW to 2020. But, in  the  Revised  NPS  the  full  implications  of  a  pure  electricity  play  including  the electrification  of  transport  and  heat  are  glimpsed  for  the  first  time:  “Generation capacity  will  need  at  least  to  double  to  meet  this  demand  and,  if  a  significant proportion of our electricity is supplied from intermittent sources, such as wind, solar, or  tidal,  then  the  total  installed  capacity might need  to  triple”  (para.1.66). This  is an astonishing  admission, with no doubt  a  similarly  astonishing,  and not  yet  revealed, cost. We believe  that  the commonly quoted costs of  investment needed of £200bn  to deliver necessary capacity relate to the original target, not to the doubling, or tripling of existing capacity. If energy companies do find the resources to invest in doubling to tripling  the generation  capacity ultimately  they will be hoping  that  the  consumer of their  electricity will  pay  for  the  increased  cost  of  their  electricity. We  should  have transparency as to what that will mean for the consumer.  Our projected future dependence on wind power  is making our power unnecessarily expensive. The UK Renewables Strategy 2008 says this about wind:   “3.9.4 Analysis of wind patterns  suggests  that, at high penetration  levels  in  the UK, wind generation offers a capacity credit of about 10‐20%. This is an indicator as to how much of the capacity can be statistically relied on to be available to meet peak demand and compares to about 86% for conventional generation. This means that controllable capacity  (for  example  fossil  fuel  and  other  thermal  or  hydro  power)  still  has  to  be available  for  back‐up  at  times  of  high  demand  and  low wind  output,  if  security  of supply is to be maintained. New conventional capacity will, therefore, still be needed 

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to replace the conventional and nuclear plant which is expected to close over the next decade or so, even if large amounts of renewable capacity are deployed…   3.9.6 In the British market electricity generating capacity does not earn money simply for being available;  it earns money only when  it actually generates. This  is consistent with striking the optimal balance between costs and benefits of spare capacity on  the system.  It  also means  that wholesale  electricity prices  are  likely  to  rise  to very high levels at times when high demand and low wind speeds coincide. This is necessary in order  to  cover  the  costs  of plant which does not  get  to  generate  very  often,  and  so ensure that generators are incentivised to provide back‐up capacity.  3.9.7 It is nevertheless possible that uncertainty over returns on investment, because of the  difficulty  of  knowing  how  often  plant  will  get  the  opportunity  to  run,  will discourage or delay investment in new conventional capacity – or speed up the closure of existing capacity – and hence increase the risk of occasional capacity shortfalls.”  The  Revised  Draft  National  Policy  Statement  on  Energy  accepts  this  argument: “However, some renewable sources (such as wind, solar and tidal) are intermittent and not  all  renewable  sources  can  easily  be  adjusted  to meet  demand.  An  increase  in renewables will  therefore require additional back‐up capacity and mean  that we will need more total electricity capacity than we have now” (Para.3.3.11).  

Put more  plainly,  every  10  new  units worth  of wind  power  installation  has  to  be backed up by what are likely to be 8 new units worth of fossil fuel generation, because fossil  fuel can and will have  to power up suddenly  to meet  the deficiencies of wind. Wind does not provide an  escape  route  from  fossil  fuel but  embeds  the need  for  it. Nuclear runs at baseload and cannot power up to cover the absence of wind.  The true picture is even bleaker than that. If fossil fuel plant has to be constructed and stand by waiting for wind to default then its power will have to be more expensive in order  for  the plant  to  “wash  its  face”. So,  the  effect of having a  large  investment  in wind is to drive up the price of power generally. Charles Hendry has admitted that no‐one has worked out the costs: “The Department has not provided estimates of the cost of constructing fossil fuel power stations to compensate for intermittency in the period out to 2030” (WA 9th February 2011, col. 356W). The subsidy to wind is not cheap either – by 2020 the subsidy will have risen to £5bn in that one year alone (Written Answer, House of Lords, 19th January 2010).   Fells (op. cit.) points out that, “The National Audit Office identified wind power as one of the most expensive ways of reducing carbon emission, with recent reports claiming that abating one tonne of carbon costs between £280 and £510. This compares with £10 to  £20  per  tonne  in  the  European  Emission  trading  scheme  (National Audit Office, “Department Of Trade and  Industry: Renewable Energy”,  report by  the Comptroller 

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and Auditor General,Hc  210;  Session  2004‐2005,  11  February  2005 & D Helm, Wall Street Journal, 18 March 2008)”.  The Daily Telegraph  reported on  11th  January  2010  that out of  a UK  capacity of  5% wind was delivering 0.2% during  the  January cold  spell. The wind was not blowing when most  needed. Andrew Horstead,  a  risk  analyst  for  energy  consultant Utilyx, commented: “This weekʹs surge in demand for energy in response to the cold weather raises serious concerns about  the UKʹs  increased  reliance on wind power…Failure  to address  these  concerns  could mean  further  rationing  of  energy  in  future  years  and could even lead to black‐outs, so it is vital that the UK Government takes action now to avoid the lights going off,ʺ  (ibid.) The poor performance of wind in January 2010 was echoed in the cold snap of December 2010: The Times of 3rd January 2011 reported that since  the  beginning  of December  turbines  had  been  operating  at  only  20%  of  their capacity – on 2nd January wind was contributing but 0.5% of the country’s power. 

The Renewable Energy Foundation has put the following research data on its website: “It is now well known that low wind conditions can prevail at times of peak load over very  large  areas.  For  example,  at  17.30  on  the  7th  of December  2010, when  the  4th highest  United  Kingdom  load  of  60,050 MW  was  recorded,  the  UK  wind  fleet  of approximately 5,200 MW was producing about 300 MW  (i.e.  it had a Load Factor of 5.8%). One of  the  largest wind  farms  in  the United Kingdom,  the 322 MW Whitelee Wind Farm was producing approximately 5 MW (i.e. Load Factor 1.6%). 

Load  factor  in other European  countries at  exactly  this  time was also  low. The  Irish wind  fleet was  recording  a  load  factor  of  approximately  18%  (261 MW/1,425 MW), Germany 3% (830MW/25,777 MW), and Denmark 4% (142 MW / 3,500 MW). 

Such figures confirm theoretical arguments that regardless of the size of the wind fleet the United  Kingdom will  never  be  able  to  reduce  its  conventional  generation  fleet below peak load plus a margin of approximately 10%. 

They  also  suggest  that while widespread  interconnection  via  the widely  discussed European Supergrid, may assist in managing variability, its contribution will not on its own  be  sufficient  to  solve  the  problems,  since  wind  output  is  approximately synchronised across very large geographical areas. 

Conventional generators acting  in the support role and guaranteeing that  load  is met will be faced with operating in a market that is physically and economically volatile. 

The  now  emerging  fact  that wind  power  can  be  highly  variable  year  on  year  adds further  layers of complication  to  this problem. Conventional generators will not only have uncertain  income over  shorter  timescales, but will  face  significant year on year variations. 

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The all but inevitable result of such uncertainties is higher prices to consumer.” 

 

Rising costs – rising bills 

We  have  referred  to HMG’s  target  of  4,000  offshore wind  turbines  by  2020  above. However, a  recent  report  for DECC by Mott MacDonald, “UK Electricity Generation Costs Update”  (June  2010)  estimated  the  levelised  cost  of  offshore  generation  to  be £157‐186/MWh,  roughly  twice  that  for onshore wind  (£94/MWh). Offshore wind was by  far  the most  expensive  technology  that MacDonald  compared between gas,  coal, nuclear and wind. Why are we subsidising such poor value for money in a technology? 

On 16th December 2009, an OFGEM presentation showed 4 million households in fuel poverty and  forecast  fuel poverty  to  rise  to cover 6 million. OFGEM has predicted a rise  of  up  to  60%  domestic  fuel  bills  (Evidence  to  Energy  and  Climate  Change Committee 2.12.09). The Renewable Energy Strategy admitted: “Poorer households are likely to spend a higher proportion of their income on energy and so increases in bills will impact more on them”.    A report, “The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries” (7th July 2010) published by the Energy‐Intensive Users Group (EIUG) and the TUC  forecast increases in total energy bills for industry, taking electricity, gas and emissions reduction schemes together,  as high as 141% by 2020. In a Written Answer (18th November, 2010, col. 930W) Charles Hendry MP, Minister of State for Energy and Climate Change estimated  that  renewables policies would add £246,000  (25%)  to  the average medium sized annual non‐domestic user’s electricity bill in 2020. The danger is that we will export our heavier industries to countries with lower fuel costs.  Rising fuel poverty  Tom Lyon, an energy expert at uSwitch, claims that the necessary investment, “Comes with a hefty price tag and mounting concern over who should be footing the bill…The overall  cost  of  the  investment  programme…equates  to  £769  per  household.  If consumers do end up footing the bill we could see the average annual household bill reach over £2,000, a huge 68% rise” (Daily Mail, 4th October 2010). An energy analyst at the M&C Energy Group, David Hunter,  said  in  the  same article: “Customers  should expect a 60% hike in bills over the next decade or so”.  In  the current economic context,  these very high rises  in  fuel costs are unlikely  to be underwritten by social transfers. This must raise questions of the potential  impact on fuel poverty and social cohesion.  

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In 2003, 1.2 million households in England were in fuel poverty. “The Annual Report on Fuel Poverty Statistics 2010” states that, “In 2008, the number of households in fuel poverty in the UK was estimated to be around 4.5 million, a rise of around 0.5 million from 2007. This represents about 18% of all households.”  It estimates  fuel poverty as affecting 15.6% of English households in 2008. This is despite the Warm Front Scheme and annually improving measures of homes becoming more energy efficient.  November 2010 fuel poverty figures for Wales are a somewhat dated snapshot. In 2008, 332,000 of households in Wales were estimated to be fuel poor and that this figure had risen  by  198,000  since  2004. This  is despite  the  application  of  such measures  as  the Home Energy Efficiency Scheme. The rise represents an increase of 15%: in 2008 26% of Welsh households were estimated  to be  in  fuel poverty. BRE models  fuel poverty  in Wales  rising  to  cover  368,000  households  in  2009.  The  targets  set  out  in  “A  Fuel Poverty Commitment for Wales” (2003) remain rather heroically in place and are that, as  far as  reasonably practicable,  fuel poverty will be  eradicated: amongst vulnerable households  by  2010;  in  social  housing  by  2012;  and  by  2018,  fuel  poverty  in Wales would be abolished.   In Scotland,  the position  is worse. According  to  the Progress Report on  the Scottish Fuel  Strategy  2002 by  the  Scottish Executive published  on  25th November  2010,  fuel poverty  affected  293,000  Scottish  households  in  2002 when  it was  set  as  policy  to reduce the number of households  in fuel poverty by 30%. But,  it has risen  inexorably year  by  year  till  it  reached  770,000  households  in  2009  ‐  and  increase  of  152,000 households  in one year. 32.7% of Scottish households are now  in  fuel poverty. These figures  have  risen  despite  schemes  to  improve  the  energy  efficiency  and  insulation within homes – 140,000 homes in Scotland have been made more energy efficient since 2008. The  Scottish Government  states  that up  to  46,000 more households  (i.e.  2%  of households) will  be  pushed  into  fuel  poverty  every  time  energy  prices  rise  by  5% (OFGEM’s  prediction  of  a  60%  domestic  fuel  price  rise  would  mean  55%  of  all households in Scotland would be thrust into fuel poverty). The Scottish Government is committed to the abolition of fuel poverty by 2016 “as far as is reasonably practical”.   Northern Ireland comes out worst. The Northern Ireland Fuel Poverty Strategy aims to eliminate  fuel  poverty  in  vulnerable  households  by  2010,  and  in  non‐vulnerable households  by  2016.  Fuel  poverty  affected  34.2%  of  the  population  in  2006  (now  a dated figure given significant rises in fuel prices since). Despite the application of the Warm Homes Scheme which has made 71,000 homes more energy efficient since 2001 the same inexorable rises in fuel poverty are evident as in the rest of the UK.  So, nearly a fifth of all households in England, over a quarter of those in Wales, nearly a third in Scotland and over a third in Northern Ireland are in fuel poverty. The figures have been going significantly in the wrong direction for years. It is not credible that the 

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fuel poverty targets can be met in the statutory timeframe in any of the nations of the UK. Government seems in denial of the seriousness of the position. 

On 10th February 2011 Philip Davies MP had the following question answered: To ask the Secretary of State for Energy and Climate Change what estimate he has made of the change  in  the  number  of  people who will  be  classified  as  fuel  poor  as  a  result  of increase  in energy prices arising  from  the Renewables Obligation  in each of  the next five years.  

Gregory  Barker:  There  have  been  no  recent  estimates made  as  to  the  effect  on  the increase  in  the  level  of  energy  generated  from  renewable  sources will  have  on  the number of people in fuel poverty (Hansard col. 438W). 

Some might comment that a policy that threatened to consign a large proportion of the population to fuel poverty is in effect stripping that group of consumers of security of supply, and that it would be a wise precaution to work out the effect of the renewable energy policy on future levels of fuel poverty. As Pöyry warns, “Many of the pathways rely heavily on  improved  energy  efficiency  so  that  consumers  can pay a higher unit rate  for  energy  in  order  to  fund  all  this major  investment  referred  to  above. Unless changes  in  consumer  behaviour  deliver  their  side  of  the  equation  we  will  see  a substantial rise in the numbers of consumers in fuel poverty.” 

What would be the implications for energy security of a second dash‐for‐gas? 

The Committee  has  already  attempted  an  answer  to  its  own  loaded  question:  “We recognise that gas will continue to play a role in the UK energy mix. Gas plant provides low‐cost,  flexible generation  that can be brought online quickly and  reliably. Limited generation by unabated gas may be  important  at  times of peak demand  in order  to balance  an  increasing  amount  of  intermittent  generation  from  renewable  sources. A dash  for  gas,  however, would  have  considerable  implications  for  the  UKʹs  climate change  mitigation  targets,  especially  in  the  event  that  CCS  does  not  become commercially  or  technologically  viable,”  (Paragraph  80,  Third  Report,  26th  January 2011). 

Historically,  gas  has  a  very  creditable  green  record.  Pöyry  points  to  the  benefits accruing  from  the  first  “dash  for‐gas”:  “The  UK  is  on  target  to  achieve  its  Kyoto commitments mainly because of the major expansion of gas‐fired power generation in the 1990s.  Its widespread use of gas  in heating homes and businesses also gives  it a lower  carbon  footprint  than many other  countries.” The  report proceeds  to question why policymakers underplay the potential role for gas in the future: “Our view is that a deliberate policy to reduce gas’ share of the energy mix represents a flawed pathway for  society  to  progress  towards  decarbonisation.  Policymakers  should  present  an unbiased  set  of  technologies  to market  investors  including  gas  CCS,  CHP,  district 

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heating  and  biomethane.  By  doing  so,  markets  will  be  able  to  choose  the  mix  of technologies  and  energy  sources  that  best  ameliorate  the  risks  and  uncertainties  of meeting  the  long  term  carbon  targets  in  the  most  secure  and  affordable  way  for consumers.”  An Energy Networks Association’s  report concurred    (“Gas Future Scenario Project”, 9th November 2010) pointing out that an all electric “solution” to decarbonisation over the period 2010 to 2050 would cost £700bn more than a “Green Gas” solution – that is equivalent  to  £20,000 per  household  or  £10,000  per  person.  The  report  proffered  an alternative route: “Pathways with ongoing gas use could offer a cost‐effective solution for a  low‐carbon  transition  relative  to  scenarios with higher  levels of electrification”.  There is value in continuing to enjoying the sunk costs in the gas mains: “The costs of maintaining  the  existing  gas  transmission  and  distribution  networks  are  relatively small in comparison to the other system costs associated with a low‐carbon transition.” This  solution  offered  “consequential  benefits  for  consumers,  the  economy,  and  the competitiveness of GB industry”. The Green Gas/biomethane solution is not necessarily reliant  on  CCS,  and  the  Committee  has  left  this  potential  pathway  out  of  their consideration. As Pöyry states, gas could not just be a transitional technology, it could be the “endgame”: We have seen that a gas‐based solution adds more flexibility to the power  generation mix,  requires  less  infrastructure  expansion  as we  can  rely  on  the existing  network,  improves  conversion  efficiencies  using mature  technologies  (CHP, CCGTs and condensing boilers) and delays the need for major investment.” . A Role for Distributed Generation  Given that there is going to be a need for unabated gas generation as part of the price we pay  for massive  investment  in wind, which does not blow all  the  time,  is  there a further way of mitigating our need to build gas on standby?  There is indeed, and it accords with Government policy:  “This Government wants to see distributed generation become the norm not the exception…That way we can literally bring power to the people, to communities, to local businesses,” Greg Barker MP, Minister of State for Energy and Climate Change, 25th November, 2010.  An Alternative to Expensive Centralised Distribution for Peak Generation  National Grid projections1 show that by 2050 they expect the 31 coldest days of the year to  account  for  20%  of  the UK’s  annual demand  for heating  (Figure  1). This  actually reflects the current situation in 2010 and highlights the “peaky” nature of heat demand. It  also  sets Government  a  significant  challenge  as heat demand  is difficult  to  shift  – when  it’s  cold  it’s  cold – and  climate  change will  lead  to more  extreme winters and 

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even greater heat spikes. Only last December we at Calor Gas delivered 50% more gas than we do in an average year – we would have delivered even more if the roads had been clear! Therefore we believe 20% significantly underestimates  the potential spike under changing climatic conditions.  

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  Fig. 1 ‐ Heat curve flattens with improved insulation but still peaky compared with electric  This  is  in  the  context of  the National Grid  expecting  far  less heat  to be  supplied by natural gas, and proportionately far more by electricity2. This reflects the Government’s energy policy:  “Decarbonisation will require an increased use of electricity in domestic and  industrial  heating  and  transport,  which…will  outweigh  increases  in  energy efficiency, potentially leading to a doubling of electricity demand by 2050” .  This 20% has to stand idle for the rest of the year. It is intended that this peak demand for  electricity will  be met  by  unabated  gas  generation  (carbon  capture  and  storage cannot  be  used  on  standby  plant).  Because  a  gas  fired  power  station  is  a  very  big investment, and  it has  to stand  idle  for 334 days a year  it would mean  that  the plant would  need  to  sell  its  electricity  at  a  very  inflated  price  or  it  would  have  to  be compensated in some other way (e.g. contracts for differences – CFD). Either way this boils down to a very expensive way of generating electricity for the consumer and/or taxpayer. If, as certain climate change scientists believe, we are going to be facing more extreme winter variations in future, the demand for heat could be even more spiky, in which case  the demand  for standby generation would be even greater, and  the costs consequently greater. Might there be a cheaper, more efficient way of providing heat in the home for the 31 coldest days of the year?  

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The most modern CCGT gas fired generating plant does not yet achieve 60% efficiency in generating electricity. A further loss is occasioned through the transfer of the energy over the GB electricity transmission system and    is typically of the order of 2% of the energy transferred across the network4.  An Energy Networks Association’s report5, “points out that an all electric “solution” to decarbonisation over  the period 2010  to 2050 would cost £700bn more  than a “Green Gas” solution – that is equivalent to £20,000 per household or £10,000 per person. The report proffered  an alternative  route: “Pathways with ongoing gas use  could offer a cost‐effective  solution  for  a  low‐carbon  transition  relative  to  scenarios  with  higher levels of electrification”.  There is value in continuing to enjoying the sunk costs in the gas mains:  “The  costs  of maintaining  the  existing  gas  transmission  and  distribution networks are relatively small in comparison to the other system costs associated with a low‐carbon  transition.”  This  solution  offered  “consequential  benefits  for  consumers, the economy, and  the  competitiveness of GB  industry”. Heat does not have  to  come from expensive electricity, wastefully centrally generated by unabated gas.  Besides, projects are underway to decarbonise gas in the home (deploying biomethane or biopropane  in urban and  rural areas  respectively)  so  this  should not be  seen as a transitional  solution  but  a  permanent  solution. Meanwhile we  can make  gas work harder  by  deploying  micro‐generation  for  distributed  rather  than  centralised generation. Micro‐CHP (mCHP) involves the use of gas using a fuel cell boiler boasting 80‐90% efficiency ratings to generate both heat and electricity. It is a technology that is available  now.  It  is  a  low  cost,  low  carbon  solution  delivering  secure  low  carbon electricity. One possible component of the domestic heating scenarios contemplated in DECC’s “Pathways Analysis” is mCHP – reaching up to 90% of the technology mix in one  illustrated  case,  and with  a maximum  penetration  of  36 million  households  by 2050. There are high efficiencies in generation and no losses in transmission.   Why  doesn’t  the  Government  cost  this  Pathway  and  compare  it  with  the  cost  of maintaining central unabated gas generation to cater for peak needs for but 31 days of the year?  

          

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   A  study  by  Delta  Energy  and  Environment,  “Micro‐CHP  Savings  in  the  UK” (September 2010) confirmed the green benefit of the solution.  It found that natural gas mCHP saves carbon until well after 2030 when compared to a decarbonising electricity grid  and  until  2030  on  LPG.  If  anticipated  improvements  to  mCHP  technology materialise,  and  the  natural  gas  network/LPG  is decarbonised,  this window  extends further – towards 2040 and beyond. In addition, as a consequence of mCHP generating electricity, electricity from fossil plants is displaced – this will reduce the level of capital investment required in centralised generating plant due to the load‐following ability of fuel cell mCHP technology.  Fuel  cell  mCHP  units  can  reduce  total  household  energy  bills  by  25%  (a  figure confirmed by Oxera) and provide cost‐effective carbon emission reductions.   Owners of compliant mCHP units can sell electricity back to the grid. So, mCHP will lower, not raise  household  energy  bills  –  unlike most  other  strands  of  current  energy  policy. Indeed, because  the potential energy  cost  savings are  so  significant, a mass move  to mCHP could be an antidote to fuel poverty.  March 2011  Sources:  

1. “Meeting 2050 Climate Targets 2050” published by the National Grid. August 2010 projects the demand for electricity for heat at peak to be 3,000GWhrs; by the 31st coldest day that demand will have fallen to approximately 2,400GWhrs – slide 10 refers. 

2. Ibid. slide 9 refers. 3. Revised Draft Overarching National Policy Strategy for Energy para. 3.3.29, DECC, October 

2010. 4. National Grid estimate. 5. “Gas Future Scenario Project” (9th November 2010). 

   

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Memorandum submitted by the Confederation of UK Coal Producers (UKES 03) 1. Closure of Existing Coal-Fired Power Stations 1.1 Of the 28GW of existing coal-fired plant, 8GW will close by the end of 2015

because it has been opted-out of the requirements of the Large Combustion Plant Directive (LCPD).

1.2 Because carbon allowances under the European Union Emissions Trading

Scheme (EU ETS) will have to be purchased with effect from the commencement of Phase 3 of the Scheme in 2013, CoalPro believes that some of this plant may close before the end of 2015. Such premature closures will increase the risks to security of supply in the period 2013 – 2015.

1.3 The remaining 20GW of coal-fired plant will have to invest in additional

abatement equipment, particularly for NOx, to meet the requirements of the Industrial Emissions Directive (IED) if it is to continue to operate after the end of 2023. CoalPro is concerned that the uncertainties are such that it will be very difficult to take major investment decisions in respect of this 20GW of plant. If most of this plant closes, the risks to security of supply in the mid-2020s could be severe.

1.4 The provisions of the IED contain certain flexibilities. These are complex.

CoalPro understands that the UK Government is taking a liberal interpretation of these flexibilities. However, this may be subject to challenge. If the Government’s interpretation cannot be sustained, this may lead to more, and earlier closures than anticipated.

2. Construction of New Coal-Fired Capacity. 2.1 The Government has made it clear that no new coal-fired capacity will be

constructed unless at least partially equipped with carbon capture and storage (CCS). At the same time, the Government will fund, either directly or through a levy on electricity consumers, up to four demonstration CCS equipped power stations. The policy of the previous Government has been continued in this respect.

2.2 A competition, initiated by the previous Government for the first such

demonstration plant is now moving to a conclusion. CoalPro understands that there is only one remaining entrant in the competition. The invitation to participate in a competition for the remaining three demonstration plants has elicited an encouraging response with nine applications. However, the Government has opened up this competition to gas-fired plant and two of the applications are for such plant. There is no certainty, therefore, that the funded demonstration programme will lead to the construction of four new coal-fired plant.

2.3 Whilst the competition process has resulted in an encouraging initial response,

CoalPro is concerned that other Government measures pose major risks to the

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demonstration programme. If there is no relief from carbon price support for the abated element of such demonstration plant, there is no incentive whatsoever to invest in such plant as opposed to the alternative of investing in unabated gas plant. Furthermore, the lack of any relief from carbon price support in respect of the unabated portion of such demonstration plant will considerably limit the incentive to invest in such plant compared with the alternative of investing in unabated gas-fired plant.

3. Transition from Existing to New Coal-Fired Plant 3.1 CoalPro considers that the combination of the risk that more existing coal-

fired plant will close, and that such closures may take place earlier than anticipated, as a result of the LCPD and the IED on the one hand, and the limited incentive to invest in new, CCS equipped coal-fired plant on the other may result in very little coal-fired generation capacity being available in the mid 2020s.

3.2 CoalPro believes that the transition from existing to new coal-fired plant needs

to be very carefully managed. If not, the low level of coal-fired capacity in total that is likely to emerge in the mid 2020s may pose severe security of supply risks in a number of respects.

4. Overdependence on Gas 4.1 The expansion of renewable generation capacity between now and the mid

2020s offers superficial security of supply benefits in that the UK will not be dependent for this element of electricity generation on imported supplies of fossil fuel or uranium. However, renewable generation is intermittent and unreliable by nature and cannot supply electricity on demand. In particular, there is no guarantee that electricity from renewable sources will be available to meet demand at peak periods.

4.2 CoalPro recognises that some new nuclear plant will be constructed between

now and the mid 2020s. However, this is likely to do no more, by that time, than replace nuclear capacity that will close. Whilst the new generation of nuclear capacity will be more flexible that the existing fleet, it will not be capable of rapidly ramping up and down to meet peak loads.

4.3 If there is very little coal-fired plant available in the mid 2020s, CoalPro

considers that this combination of circumstances will lead to a massive overdependence on gas-fired plant at certain times. CoalPro invites the Committee to consider the scenario of a cold, still winter day in the mid 2020s. Renewable generation, whatever the level of capacity, will effectively be zero. Nuclear generation will provide some electricity but will not be able to respond to peak demands. At peak periods on such days, therefore, reliance on gas for electricity supplies could be as much as 80%.

4.4 Such conditions are hardly unknown. They occur at least once every winter

and usually more often than that. In long, cold winters such as those experienced over the last two years, they may occur for several days at a time.

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If little coal-fired capacity is available, CoalPro considers that the overdependence on gas poses unacceptable security of supply risks to electricity generation at the same time that industrial, commercial and residential demand for gas will be at its highest.

4.5 Apart from risks to security of supply, such an over-reliance on unabated gas-

fired plant will lead to long-term carbon lock-in making it difficult to achieve longer-term carbon reduction requirements for 2030 and 2050.

4.6 The security of supply and carbon lock-in risks will be correspondingly

greater to the extent that electricity replaces fossil fuel used for transport and heat.

5. Effect on UK Coal Production 5.1 Coal production in the UK is a growth industry. Output has increased over the

last three years and exceeded 18m tonnes in 2010. CoalPro believes that, with ongoing investment in new and replacement mining capacity, the reserve base is sufficient to attain an output of 20m tonnes a year and to maintain that level for many years. Some 90% of UK coal output is supplied to the electricity generation industry.

5.2 Investment lead times in the industry are long. If there is a perceived risk that

the demand for coal in the mid 2020s may be less than that necessary to sustain an output of 20m tonnes a year, bearing in mind that the industry’s customers will not wish to completely forego the import option, then investment will be at risk.

5.3 The UK’s deep mines require periodic tranches of investment to access new

areas of reserves if output is to be maintained. The investment decision cannot be delayed. There is a point of no return beyond which investment to access new areas of reserves cannot be completed in time. If investment decisions are not taken in time, then closure is inevitable.

5.4 Decisions on new investment at all of the UK’s deep mines will need to be

taken in the next few years, in some cases imminently. Without some confidence that there will be an adequate market in the 2020s, the risks are such that the investment will not take place resulting in premature closures. Similar, but less acute considerations apply in respect of surface mining capacity.

5.5 There is a real risk, therefore, that the growth in UK coal output will be

brought to a halt, followed by a decline. Investment will be stifled and employment will fall. UK coal production will be replaced by imported gas or, if the market for coal proves to be higher than is feared, by imported coal. Overall security of energy supplies will be adversely affected and the influence of a significant indigenous source of energy in mitigating fossil fuel price increases will be lost.

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6. Overall Security of Supply 6.1 CoalPro considers that security of supply is best assured by having a diverse

portfolio of sources available. This is particularly the case for electricity generation and particularly so at periods of peak demand. These considerations will become even more important as decarbonised electricity replaces fossil fuels used for transport and heat.

6.2 All forms of energy supply have advantages and disadvantages which do not

need to be repeated here. Coal has particular security of supply advantages in that it is abundantly available, including from UK sources, and can be transported and stored by flexible, low risk means. An energy portfolio without a significant contribution from coal is thus inevitably a higher risk portfolio.

6.3 UK coal production has been increasing in recent years and the opportunity is

there for it to increase further. Market uncertainties risk sending this into reverse. This will result in fuel produced in the UK being replaced by imported fuel, gas or coal, with the effect of reducing overall security of supply.

March 2011

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Memorandum submitted by Dr. Vlasios Voudouris (UKES 04)  

C , Dr. Vlasios Voudouris, 

entre for International Business and Sustainability (CIBS)London Met Business School, London Met University, UK 

 

NTRODUCTION  I 

1. This evidence is presented to the Select Committee to provide a perspective in terms of the threats,  vulnerability  and  consequences of the UK Energy Supply System within a global-national context characterized by unprecedented uncertainties and increasingly complex intertwines. This contribution is based upon the ACEGES project (www.aceges.org). ACEGES stands for Agent-based Computational Economics of the Global Energy System. The ACEGES models the energy demand and supply of 216 countries.

2. The aim is not to present another set of quantifications for policymaking, as there are a number of reports and papers published in recent years. Rather the aim is to provide a coherent overview of i) the assumptions of the energy models used to produce the published quantifications and ii) the approach used to develop energy scenarios for the assessment of the UK’s Energy Supply.

3. I am a specialist in the modelling of fuzzy phenomena and complex adaptive systems such as the Energy System. My research work aims to support evidence-based energy policy by means of controlled computational experiments. Currently, I am the Deputy Director of the Centre for International Business and Sustainability (CIBS) at the London Metropolitan Business School. I am also the organise of the “UK Energy Day: Sustainable

i t aSupply” wh ch is part of he Europe n network of events led by the Intelligent Energy Europe (IEE) agency of the European Commission (EC).

4. It  is  evident  today  that  the  long‐term  sustainability  of  the  UK’s  energy system  is under  acute  strain. Therefore the comments that follow mainly deal with the need to enhance:

a. The existing energy models to assess the sensitivity of the UK’s energy supply.

b. The way of developing multidimensional global-national continuous scenarios for long-term assessment of the resilient of the UK energy system to international events.

I will start with the latter.  

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NERG E 

Y SCENARIOS 

5. Energy  scenarios  are  empirical frameworks that provide summaries of possible futures. Scenarios should reflect past history (e.g., political, social, economic, technical) and should be based on informed views about past history. Scenarios also need to reflect current realities and not reflect naïve views based on fashion or hope. Scenarios shed useful light on future possibilities as far as the country is concerned and should incorporate ‘low (subjective) probability’ futures where these may have significant impacts on the country. Scenarios  aim  to  assist  policy  makers  making  long‐term energy  (and  environment)  related  policies.  These  policies  frequently involve investments with long payback periods, or investments of such a large  size  that  basic  uncertainties,  which  have  been  overlooked,  can prove very costly.

6.  Conventionally,  scenarios are based on a  sequence of events – meaning that  discontinuities  happen  one  after  the  other.  However  in  times  of unprecedented  uncertainties  and  increasingly  complex  intertwines, scenarios  should  be  based  on  networks  of  events  –  meaning  that discontinuities happen almost simultaneously.   A recent example  is the current geopolitical events in MENA (the Middle East and North Africa).  

7.  Conventionally, global and national energy scenarios attempt to portray future  possibilities  using  the  concept  of  ‘representative  country’  and conceptualise  the  country‐specific  energy  systems  as  consisting  of several identical and isolated components. This means that based on, for example,  historical  oil  production  of  key  producers  (e.g.,  the  US),  the world  oil  production  is  assumed  to  have  (more  or  less)  the  same 

c attrproduction  haracteristics.  This  is  effectively  the  ibution  of properties to a different level than where the property is observed. 

8.  Conventional  scenarios  attempt  to  assess  the  pathways  and  impact  of global  and  national  drivers  using  the  concept  of  ‘multi  pathways’. 

e most  uncertain  and  important  driving h o   

Selecting  specific  values  for  thforc s i  e m  o

9. Exhib te  does th s. An xa ple f this is given in Ex ibit 1 bel w. i  1 demonstrates that by:  o ey ta.  Fixing  two  f  the  k   uncertain ies  (growth  at  2%  and reserve/production at 10 based upon the US experience)  

  of  ultimately  recoverable  oil b. Taking  three  different  estimatesreserves 

three different pathways are plausible.   10. A key problem, for policy making, of the approach shown in Exhibit 1 is 

that it fails to emphasise the inevitable uncertainty around the outlooks for energy supply. It also fails to provide an assessment of the balance of risk  between  the  different  pathways.  At  a  more  technical  level,  the uncertainty is reduced to finite sets of certain values.  

 

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 Exhibit 1: Discrete scenarios for evidence‐based energy policy 

 11. To emphasise  the  inherent uncertainty  of  the  future outlook of  energy 

supply  and  to  avoid  oversimplifying  the  heterogeneity  of  the  energy system, a new approach has been develop by the ACEGES project at the Centre  for  International  Business  and  Sustainability  at  the  London Metropolitan  Business  School.    This  new  approach  suggests  the  use  of continuous  scenarios  that  emphasise  the  uncertainty  and  give  an assessment of the balance of risk.  Exhibit 2 demonstrates this approach, which adopts the approach used by the Bank of England for its ‘Inflation Report’.  

 Exhibit 2: Continuous scenarios for evidence‐based energy policy  

12. Exhibit  2  provides  probabilistic  pathways  associated  with  world  oil production.  The  use  of  probabilistic  pathways  avoids  suggesting  a degree  of  precision  that would  be  spurious  and  are  appropriate when exactitude is elusive (while being approximately right is still helpful for policy  making).  If  required,  I  am  happy  to  provide  further  and  more specific  continuous  scenarios  to  the  Select Committee. These types of

36

(both global and national) scenarios should be developed at regular intervals to reflect ‘forces in the pipeline’. Using a flexible decision-support tool such as the ACEGES tool (www.aceges.org), the anticipated overheads should be minimal.  

13.  To  assess,  for  example,  the  exposure  of  the  UK’s  Energy  Security  of supply  to  international  events,  both  global  and  national  scenarios  are required.  In  particular,  the  national  scenarios  should  not  only  include the main energy trading partners of the UK.  This is because events that are  not  directly  related  to  the  exposure  of  the UK’s  Energy  Security  of supply  can  affect  the  exposure  of  the  UK’s  Energy  Security  through secondary and tertiary routes.  

14. For example, taking Europe as a sing entity, 90% of oil is imported from the Middle East, North Africa, West Africa and Former Soviet Union. For the  UK  in  2010,  58%  of  gas  was  imported  from  Norway  (98%  was transported with pipeline) and 75% of all imported gas was transported with  pipelines.  These  realities  can  change  as  we  move  towards  2050 given  the  increasing  demand  for  electricity  and  transport  fuels  for  the UK and other European countries.  

15. Qatar (with substantial export capacity) might start to play, for example, a very important role by means of LNG imports to the UK, if home‐grown energy sources for electricity generation and transport fuels are not well targeted.    This  reality  clearly  can  have  significant  implications  for  the UK’s  Energy  Supply  as  diversification  of  resources  (oil  and  gas)  could lead to over concentration for energy imports on specific countries (e.g., over reliance on OPEC countries for oil and gas) and the need to update the UK’s infrastructure for imported energy.  

16. The implications can become even more important if a ‘low (subjective) probability with significant impact’ scenario is developed to explore the threat, vulnerability and consequence of extended OPEC to include gas: The  Organization  of  the  Petroleum  and  Gas  Exporting  Countries (OPGEC).  Similar  risks  and  hedging  strategies  should  be  assessed  if ‘renewable  energy  projects’  (e.g.,  DESERTEC  Concept)  are  located  in countries that already dominate the energy market.   

17. Exhibit 3 shows country‐specific conventional (cheap – also termed the Gucci  oil  by  traders)  oil  productions  (left  column)  and  their corr s n).    For  conventional  oil pro

e ponding  export  capacity  (right  colum

duction: a. The green colour means no production,  

g r p le a ll pe

b. The  rey colou  means  roduction  ss th n 1 mi ion barrels  er year and greater than z ro.  

sent,  the  higher  production  of c. The  darkest  colours  repre

          For  nconventional oil 

t  e p y t

co ven ional oil xport ca acit : d. Grey represents no export capacity (net importing coun ries). e. The  darkest  colours,  the  higher  the  conventional  oil  export 

capacity of the country.  18.  It is important to emphasize that these results are the output of a single 

simulation rather than the summary of a specific energy scenario.   The aim of presenting them is to demonstrate the type of scenarios needed to 

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assess  the  UK’s  Energy  Supply.  The  Select  Committee  can  experiment nwith  additional  simulations  usi g  the  ACEGES  tool  from 

www.aceges.org.  19. Given the outlook of  the UK’s oil and gas production and the  increased 

demand  for  flexible  energy  services  of  the  potential  energy  trading partners  is  demonstrated  in  a  visual  way  to  assess  the  UK’s  Energy Supply  in  terms  of  fossil  fuels  (a  similar  figure  can  supplied  for  gas). Note  that  although  MENA  accounts  for  more  than  one‐third  of  the world’s  oil  production,  their  share  of  world’s  oil  export  capacity  (e.g., domestic  production  minus  domestic  demand)  is  substantially  higher, particularly as we move towards 2050.  

 Exhibit 3 – Conventional oil production and export capacity 

 20. Given  the geographically concentrated production of cheap oil and gas, 

the  exposure  of  the  UK’s  energy  security  of  supply  to  international events  will  be  substantial  after  2030  (possibly  earlier)  unless  a significant acceleration of home‐grown energy production for electricity and transport fuels starts soon with a realistic evaluation of the speed of the diffusion of new technologies and their claimed capacity for energy supply. This should be checked against the UK’s energy demand and the need  for  a  sustainable  energy  import  policy.    This  will  have  the combined  benefits  of  improving  energy  security  and  resilience, addressing climate change and improving the sustainability of  the UK’s trade balance.   

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21.  Assessing  the  robustness  of  the  UK’s  energy  policy  and  identifying plausible  but  unanticipated  issues  that  can  challenge  the  level  of robustness  of  the  UK’s  energy  policy  requires  further  evidence  based upon an understanding and informed view of the past and a systematic exploration of the significance of the ‘driving forces in the pipeline’.  This requires  a  rethinking  of  how  to  support  the  UK’s  Energy  Policy.  It requires  an  exploratory  and  iterative  energy  policy  supported  by controlled computational experiments.  This will allow policy makers to rehearse  the  future  and  use  the  computational  experiments  as  ‘early warning systems’.   

22. To the best of my knowledge, this exploratory and iterative approach to assess  the  “threat,  vulnerability  and  consequence”  to  the  UK’s  energy policy has not been fully employed.  The ACEGES offers a way forward by allowing UK policy makers to simulate an artificial energy system under different UK policy scenarios and quantitatively explore how likely is the 

eact uenergy  system  to  r   nder different  policies  or  international  events (e.g., geopolitical unrest south of MENA and/or north‐east of MENA).   

23. A  country‐specific  tool  to  meet  the  UK’s  targets  for  greenhouse  gas emissions reductions for public use is HM Government's 2050 Pathways Analysis. The ACEGES is a global‐national decision‐support tool to assess 

  supply  lobal‐national the UK’s energy  within a g context as it models the demand and production of 216 countries around the world (Exhibit 4).  

24. I  argue  that  a  country‐specific  representation  of  the  world  energy demand and supply system using the concepts from complexity science (see Epoli

  ‘ nergy Models’  below)  can  substantially  support  the UK’s  energy cy in: 

a. Assessing where  the UK Energy Policy might be out of alignment with emerging megatrends. 

b.  Assessing the effectiveness of any hedging strategies for the UK’s Energy Supply System. 

  Exhibit 4 – The ACEGES laboratory for Energy Policy 

  

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 ENE YRG  MODELS 

25. For energy policy, energy supply modelling techniques can be classified into  two broad categories, namely  i) Resource‐constrained models and ii)  Econometric  models.  The  most  widely  used  models  for  long‐term policy  are  resource‐constrained  models.  Resource‐constrained  models are  of  two  classes,  namely  a)  curve‐fitting  models  and  b)  heuristic models.    Exhibit  1  shows  the  results  of  a  heuristic  model.  The  most popular curve‐fitting model is the Hubbert curve or the oil mountain in the  form  of  a  normal  distribution.    The  majority  of  publicly  available 

evidence for the UK’s Energy Policy (particularly oil and gas outlooks) is based on the curve‐fitting models.  

26. Conventional energy models use computation for the empirical analysis of observational data and the calculation of the equilibria of systems of equations  approximating  (poorly)  the  energy  system.  They conceptualise  the  energy  system  as  consisting  of  several  identical  and isolated  components  from which  the  solution  is  obtained  by  a  simple summation  of  least‐cost  optimization  through  the  operation  of  the Walrasian Auctioneer. These  conventional models have a  sorry history in  terms  of  anticipating  discontinuities  because  they  are  successful  as long  as  things  stay  more  or  less  the  same.  These  models  assume  a perfect world, and by their very nature rule out crises of the type we are experiencing now. 

27.  It  is  important  to make  a  distinction  between models  that  assess  the potential profit and the risk of individual trades or investments and the models  that aim to assemble heterogeneous pieces and understand the behaviour  of  the  whole  national  energy  system  within  a 

lo l a emultidimensional  g ba ‐n tional  nvironment.  Conventional  models can be useful for the former rather than the latter.  

28. Fortunately,  there  is  a  better  way:  Agent‐Based  Computational Economics  (ACE)  models  based  on  complexity  science.  ACE is the computational study of systems modelled as dynamic networks of interacting and heterogeneous agents with bounded rationality. Agents operate in an environment on which they live and with which they interact. Thus, the main building blocks of ACE are: i) the agent (e.g., country, multinational energy companies, national energy companies), network of agents (e.g. OPEC) and the Environment (e.g., Estimated Ultimate Recovery of fossil fuels).  

29. ACE models do not rely on the assumption that the energy supply system will move towards a predetermined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation (e.g., domestic energy production and demand), the state of the world around (e.g., net demand for electricity and transport fuels) it and the rules governing its behaviour (these rules are primarily defined by policy initiatives).

30. To the best of my knowledge, the only ACE model of the global-national energy system is the ACEGES model. The ACEGES model has been developed to support iterative and exploratory energy policy by means of continuous energy scenarios. The ACEGES laboratory is a 'wind tunnel' that allows regulators to test policies and explore their emergent effects

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on the energy system. As a result, policymakers can use a computational aboratory to rehearse plausible futures and use it as an ‘early warning omputational system’.  

lc  

UM RS 

MA Y 

31. I  hope  I  have  convinced  you  that  the  UK’s  Energy  Policy  should  be supported  by  controlled  computational  experiments  simulating increasingly  complex  intertwines  within  a  multidimensional  global‐national  environment.  The  UK’s  Energy  Policy  should  not  rely  on evidence based upon over simplified models that assume that the energy 

ssupply system will move toward  a predetermined state or profile (e.g., Hubbert curve or a variant of an oil mountain).  

32. The  history  of  energy  supply  is  complex,  and  the  interplay  of  climate, economy,  investment,  geopolitics,  and  many  other  factors  defies simplistic  analysis  for  evidence‐based  policy.  A  creative  and  organized modelling  of  energy  resources  is  urgently  required  to  better  support evidence‐based energy policy, regardless of future climate change. 

33. In seeking to explore the indirectly and uncertain, and in some respects unknowable, future, the use of scenarios offers a solution. However, the UK’s Energy Policy needs to move away from discrete scenarios that fail to  emphasise  the  inherent  uncertainties  and  the  balance  of  risk. Assessment  of  the  UK’s  Energy  Supply  needs  to  move  towards continuous  scenarios  satisfying  the  ‘generative  explanation’  as  a  new way  of  i)  explaining  the  past  and  the  present  and  ii)  structuring  the uncertainties  of  the  future.  Only  then  policy  makers  will  be  able  to realistically  assess where  the outlook of  the UK’s Energy Supply might be out of alignment with emerging megatrends, particularly  in relation to electricity generation and transport fuels. 

34. Given the current state of knowledge, there is an urgent need to rethink the  balance  of  home‐grown  energy  and  energy  imports  (in  relation  to transport  fuels  and  electricity  generation)  to  improve  energy  security, address  climate  change  and  improve  the  sustainability  of  the  UK’s balance of trade.  

35. I  should  emphasize  that  diversification  of  energy  sources  (e.g.,  oil,  gas and clean energy from desert) does not necessarily lead to an improved energy system if these diversified energy sources are located in a small number  of  countries.  This  still  results  in  reduced  market  diversity  in terms  of  production  capacity.  This might  also  lead  to  a  new  and more powerful organization such as the Organization of the Energy Exporting Countries  (OEEC)  as  opposed  to  the  Organization  of  the  Petroleum Exporting  Countries  (OPEC).    The  creation  of  the  OEEC  will  add  a substantially higher geopolitical risk premium in the energy market.  

36. I  should  also  emphasize  that  spare  production  capacity  for  fossil  fuels might  run  out without  a war,  say  in  the  Arabian  Gulf,  as  evidenced  in 2008. Therefore, the UK’s Energy Supply is interlinked with national and bilateral  political  relationships,  particularly  in  periods  of  squeezed production capacity.  The UK’s Energy Supply should be assessed within 

41

an environment of  increasingly complex  intertwines rather than within an environment characterized by sequential events.   

37. Furthermore,  local  patterns  of  supply  and  demand  can  generate  price spikes  within  price  spikes  as  exemplified  by  the  price  differential between Brent crude and   West  Texas  Intermediate  (WTI)  in  2011. These  local patterns of supply and demand emerge in situations where the opportunities for substitutions between qualities of, for example, oil will be  fewer  (e.g.,  Saudi  crude oil by  its heavier and more  sulphurous quality,  in  general,  is  more  suited  to  the  Asian  market  than  those  of Europe). This implies that the UK’s Energy Supply needs to be assessed within a global‐national multidimensional environment, as regional and 

t s snational co‐ordination is a key issue  oward  increased opportunitie  for substitutions in the energy market.  

38.  Diversification  of  energy  supply  needs  to  take  into  account  the increasing  energy  demand  for  flexible  energy  services,  particularly electricity generation and (land, air and sea) transport fuels.  

39.  Demand growth for  flexible energy services should be checked against the  excessive  placing  of  wind  turbines  where  mean  wind  speeds  are relatively  low,  lack of overall cross‐border plan for electric cars,  lack of support  for  ultra‐high  voltage  direct  current  transmission  and 

tinadequate efforts to promote second‐generation biofuel  echnologies to name a few.  

40. This  emphasises  that  to  effectively  support  the  UK’s  Energy  Policy, scenarios  should  be  developed  in  ways  that  encapsulate  rational  and sub‐optimal  decision‐making  rather  than  assume  that  all  the  future decisions will be optimal (bounded rationality is part of reality).  

41. As a matter of extreme urgency to address short‐term energy challenges, the stud ’

UK’ s Energy Supply policy must certainly include a ‘global depletion y  for oil and gas to:  a. Assess  at  what  rate  over  time  can  the  oil  and  gas  from geographically dispersed nations be supplied to the marketplace. 

b. Develop a sustainable trading strategy for the UK’s Energy Supply System. 

Fossil‐fuel‐based electricity generation for base load and oil‐fuelled (land, ir  and  sea)  transport  systems  will  play  a  dominant  role  in  the  UK’s nergy Mix as we move towards 2030.  aE March 2011 

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Memorandum submitted by Gerry Wolff (UKES 05) Executive summary The UK is over-dependent on fossil fuels and its economy is vulnerable to disruption via rises in prices of those fuels arising from ‘peak oil’ and conflict in countries like Libya.

For that reason, and also because of the urgent need to cut emissions of CO2, there should be substantial increases in investment in renewable sources of power and conservation of energy.

There is good evidence from reputable sources that renewables, with conservation of energy, can provide all of the UK’s present needs for energy (not just electricity) and anticipated needs in the future. There is also good evidence that renewables can provide robust and resilient supplies of energy without the need for power from fossil fuels or nuclear plants.

For political reasons, the nuclear industry is vulnerable to events like the nuclear crisis at Fukushima in Japan. For that reason, and several others, nuclear power should be phased out in the UK.

1 Introduction Although I am Coordinator of Desertec-UK,1 of the Energy Fair group,2 and of the Kyoto2 Support Group (K2S),3 this is a personal response to the enquiry.

2 How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

Given the heavy dependence of the UK on fossil fuels, increases in the cost of those fuels could be very disruptive.

The cost of uranium is a relatively small part of the cost of nuclear power, and nuclear power provides only a small proportion of the UK’s energy, so any increase in the cost of uranium, within limits, is not likely to be very disruptive.

3 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

To reduce our dependence on fossil fuels (and cut emissions of CO2), substantially more investment is needed in renewable sources of power, conservation of energy, and associated infrastructure.

3.1 There are more than enough renewable sources of power to meet our needs There is good evidence from reputable sources that there are more than enough renewables to meet the UK’s current needs for energy (not just electricity),4 and anticipated needs in the future.5 For example:

1 http://www.desertec-uk.org.uk/. 2 http://www.energyfair.org.uk/home. 3 http://www.k2support.org/.

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• The Offshore Valuation Group has shown that for five offshore electricity generating technologies—wind with fixed and floating foundations; wave; tidal range; and tidal stream—the full practical resource, estimated to be 2,131 TWh/year, is nearly six times current UK electricity demand.

• A report from the European Environment Agency has shown that the “economically competitive potential” of wind power in Europe is 3 times projected demand for electricity in 2020 and 7 times projected demand in 2030. Offshore wind power alone could meet between 60% and 70% of projected demand for electricity in 2020 and about 80% of projected demand in 2030.

• A report from the Tyndall Centre has shown that photovoltaics (PV) could generate about 266 TWh/yr in the UK—about 66% of the UK’s present electricity demand.

• Geothermal company EGS Energy estimates that there is potential in the UK (mainly in Cornwall) to produce over 35 TWh/yr by enhanced geothermal systems (EGS)—almost10% of the UK’s electricity demand.6

• The Welsh Assembly Government has stated that renewables can provide twice the electricity that Wales is using.7

• Although the UK and Europe could be entirely self-sufficient in renewable energy, as outlined above, the Desertec Industrial Initiative aims to provide 15% of Europe’s electricity by 2050, with potential benefits both for Europe and the ‘desert’ countries.8 One advantage for Europe is that it is likely to help hold down the price of power throughout Europe, as described in detail in the ‘TRANS-CSP’ report from the German Aerospace Centre.9 As a source of ‘power on demand’, concentrating solar power in desert regions with heat storage and backup sources of heat can also make a useful contribution to balancing supplies with demands across the grid.

• In research published in the journal Energy Policy and reviewed in the Scientific American,10 Mark Jacobson and Mark Delucchi show that renewable sources of

4 Electricity may be used for such things as transport by road and rail where liquid fuels dominate at present. This is likely to mean an increase in the demand for electricity but not as much as one might think (see Section 4). There is likely to be a continuing need for liquid fuels for such things as air travel but that need may be met by biofuels or synthetic fuels (see Section 9). 5 See http://www.energyfair.org.uk/pren and http://www.mng.org.uk/gh/scenarios.htm. 6 See http://www.egs-energy.com/resource/uk-and-europe.html. 7 “A low carbon revolution: the Welsh Assembly Government energy policy statement” (March 2010, http://www.mng.org.uk/gh/resources/100315energystatementen.pdf). 8 See the Desertec Industrial Initiative (http://www.dii-eumena.com/). Research at the German Aerospace Centre (DLR, see http://www.desertec-uk.org.uk/reports.htm) has shown that solar and wind power in places like the Sahara could easily supply all of Europe’s needs for energy, not just electricity, now and in the foreseeable future. The DII’s goal of supplying 15% of Europe’s electricity supplies by 2050 (not total energy) is realistic, achievable, and provides for the integration of ‘desert’ electricity with a wide range of other renewable sources of power across the whole of Europe, the Middle East and North Africa, thus safeguarding the overall robustness and resilience of the energy supply system in the region. It is to be hoped that current political protests are resolved in favour of democracy but even if they are not, Desertec can be a substantial benefit for local people by providing jobs, earnings and plentiful supplies of clean electricity. The amount of desert that is required is tiny compared with the amount that is available and it is likely that Desert projects can go ahead successfully in several of the countries in the region. 9 The TRANS-CSP report may be downloaded from http://www.desertec-uk.org.uk/reports.htm. 10 “A path to sustainable energy by 2030”, Mark Z. Jacobson and Mark A. Delucchi, Scientific American, November 2009, 58-65, http://www.scientificamerican.com/article.cfm?id=a-path-to-sustainable-energy-by-2030. See also, by the same two authors, “Providing all global energy with wind, water, and solar power”, Energy Policy, 39(3), March 2011, “Part I: Technologies, energy resources, quantities and areas of

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power can provide 100% of the world’s energy, not just electricity, and that it is feasible to make the transition by 2030. In this connection, they make the interesting point that, although 51% of the world’s power in their scenario would be provided by 3.8 million large wind turbines, and although that number may seem to be a great challenge, it looks rather modest compared with the 73 million cars and light trucks that are produced in the world, every year.

There is now a large number of reports from reputable sources showing how to decarbonise the world’s economies using renewable sources of power. Details, with download links, may be found at: http://www.energyfair.org.uk/pren and http://www.mng.org.uk/gh/scenarios.htm.

3.1.1 Costs There is good evidence from a variety of sources that nuclear power is one of the most expensive ways of generating electricity.11 We do not yet know the cost of carbon capture and storage because no commercial-scale plant has yet been built. It is likely that, when the several distortions of the energy market have been removed,12 renewables will prove to be the most economical sources of power. Connie Hedegaard, the European climate commissioner, has said recently that offshore wind power is cheaper than nuclear power.13

It is widely assumed that decarbonising the world’s economies will be much more expensive than business-as-usual. But two recent reports suggest otherwise:

• An economic model conducted for the New Scientist suggests that radical cuts to the UK’s emissions will cause barely noticeable increases in the price of food, drink and most other goods by 2050.14

• A report from the European Climate Foundation found that in several scenarios, including the generation of electricity from 100% renewable sources, the future cost of electricity is comparable to the future cost of electricity under the current carbon-intensive infrastructure—and supplies would be at least as reliable.15

3.2 Transmission If ‘security’ is interpreted as robustness and resilience, then, with regard to electricity supplies, there are many advantages in integrating the UK transmission grid into an HVDC ‘supergrid’ spanning a large area, as proposed in the Desertec concept,16 by Friends of the Supergrid,17 and others,18 and now endorsed by our own Prime Minister.19

infrastructure, and materials”, pp 1154-1169 and “Part II: Reliability, system and transmission costs, and policies”, pp 1170-1190. 11 See http://www.mng.org.uk/gh/nn.htm#subsidies. 12 See http://www.energyfair.org.uk/reducing-subsidies. 13 See “Wind power cheaper than nuclear, says EU climate chief”, The Guardian, 2011-03-17, http://www.guardian.co.uk/environment/2011/mar/17/wind-cheaper-nuclear-eu-climate. 14 See “Low-carbon future: we can afford to go green” (New Scientist, 2009-12-02, http://www.newscientist.com/article/mg20427373.400-lowcarbon-future-we-can-afford-to-go-green.html?full=true). 15 See “Roadmap 2050” (European Climate Foundation, with others, in 3 volumes, April 2010, http://www.roadmap2050.eu/). See also “Europe's energy in 2050: cutting CO2 by 80% no more expensive than business as usual” (Financial Times, 2010-04-13, http://blogs.ft.com/energy-source/2010/04/13/european-energy-in-2050/). 16 See http://www.desertec-uk.org.uk/, http://www.desertec.org/, http://www.dii-eumena.com/. The Desertec concept proposes an HVDC supergrid spanning the whole of Europe, the Middle East and North Africa. 17 See http://www.friendsofthesupergrid.eu/. 18 See http://www.desertec-uk.org.uk/elec_eng/grid.htm.

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Even without storage, a shortfall in any area can normally be made good, via the supergrid, with supplies from one or more other areas. But, in addition, hydropower and pumped storage in places like Norway and the Alps can serve as a giant battery for the whole system.

There are several other potential benefits from such a grid, including smoothing out variations in supply and demand, avoidance of wastage by allowing a surplus in any one area to be transmitted to one or more other areas where it is needed, providing access to large but remote sources of renewable power (such as the EGS resources of Iceland), reducing the need for ‘plant margin’, facilitating the workings of a single market for electricity across Europe and beyond, and more.20

If ‘security’ means military security in the face of hostile neighbours, then the UK or Europe may be tempted to pull up the drawbridge and try to become a self-contained energy fortress. Even in those terms, there are potential advantages in staying connected:

• Solar and wind power from the Middle East and North Africa may help Europe to avoid over-dependence on gas supplies from possibly-unreliable sources such as Russia.

• Despite the import of ‘desert’ electricity into Europe, the Desertec scenario would mean an overall reduction of energy imports into Europe, an increase in the diversity of sources of energy (from a range of renewable sources across the whole of Europe, the Middle East and North Africa), and a corresponding increase in the security of energy supplies compared with what we have now.21

• By providing opportunities for win-win collaboration, the Desertec concept can help to improve relations amongst different groups of people, thus improving security for everyone.22

• Since the UK has clear potential to become a net exporter of renewable electricity (see Section 4), it will need good connections to other countries and regions to take advantage of that potential.

3.3 Storage: tidal lagoons In the UK, there appear to be limited opportunities for further development of pumped storage schemes such as the pumped storage plant at Dinorwig in North Wales. However, tidal lagoons, which are normally seen primarily as a source of power, may also serve as pumped storage devices, thus helping to match supplies of electricity with constantly-varying demand. This is achieved by the use of tidal lagoons in groups of 3 or more, together with clever computer systems to manage the interplay amongst tides, the generation of electricity, and the pumping of sea water to store power at opportune times.23 Since there are many places around the UK where tidal lagoons may be developed, this technology could provide a valuable means of smoothing out peaks and troughs in supply and demand for power.

19 See “PM back European supergrid plan”, DECC press release, January 2011, http://www.decc.gov.uk/en/content/cms/news/pn11_005/pn11_005.aspx. 20 See http://www.desertec-uk.org.uk/elec_eng/grid.htm. 21 See also “Desertec: security of energy supplies”, http://www.desertec-uk.org.uk/resources/desertec_security2.pdf. 22 See http://www.desertec-uk.org.uk/csp/bonuses.htm. 23 Peter Ullman of Tidal Electric (http://tidalelectric.com/index.html), personal communication.

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3.4 Other means of matching supplies of electricity with varying demands Apart from pumped storage and the use of tidal lagoons for storage (Section 3.3), and the provision of a large-scale supergrid (Section 3.1), there is a range of techniques for matching supplies of electricity with varying demands (see http://www.desertec-uk.org.uk/elec_eng/supply_demand.html). These include:

• Renewable sources of power that can provide power on demand. These include EGS power, hydropower, thermal power plants fired by biogas, tidal lagoons24 and concentrating solar power with heat storage and backup sources of heat. With the provision of an HVDC supergrid, we can draw on such load-balancing resources not only from within the UK’s borders but, in addition, from as far away as Iceland (EGS power), continental Europe (hydropower and EGS power), or the Sahara (concentrating solar power).

• Vehicle-to-grid technologies, using batteries of electric vehicles to store power.25 This option will become increasingly attractive and important with the roll out of electric vehicles and plug-in hybrid electric vehicles.

• A range of methods for managing demand, including ‘dynamic demand’, ‘interruptible service’, ‘time-of-use billing’, and reductions in demand from air conditioners by the use of excess electrical power to create ice, and systems for reducing demand in combined-heat-and-power plants by storing excess electrical power as heat.

• The provision of spare capacity or ‘plant margin’.

• Prediction of, for example, increases or decreases in wind speed in a given area.

A demonstration of the way that renewables can provide a comprehensive and robust source of electrical power is the “Combined Power Plant”26 which links and controls 36 wind, solar, biomass and hydropower installations spread throughout Germany. It has proved to be just as reliable and powerful as a conventional large-scale power station.

It is sometimes suggested that nuclear power is needed because it provides ‘base load’ power. This is misleading for two main reasons:

• Nuclear power stations can and do fail (see Section 3.5, next) and their capacity factors are normally well short of 100%.

• Nuclear generation is an inflexible source of power because it cannot easily be turned up or down according to need. For balancing supplies and demand, nuclear power is much less useful than the renewable generators that can provide power on demand, mentioned above.

3.5 Intermittency Contrary to what is sometimes suggested, all sources of electricity are intermittent because all kinds of generators can and do fail. When a nuclear or coal-fired power station fails, it is particularly disruptive because it removes a relatively large amount of capacity from the grid and it normally does so quite suddenly and without much warning. By contrast variations in wind power are much more gradual and there are normally several hours warning.

24 See http://tidalelectric.com/index.html 25 See, for example, http://en.wikipedia.org/wiki/Vehicle-to-grid. 26 See http://www.kombikraftwerk.de/index.php?id=27.

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The disruptive effect when a nuclear power station fails is described in “Exclusive: Will wind farms pick up the tab for new nuclear?”27

In a report published in 2009,28 independent consultant David Milborrow says that electricity transmission networks in the UK are already designed to cope with variability arising from the failure of power stations and from variations in consumer demand, and that, for a small additional cost, wind power could provide up to 40% of the UK's electricity. Further increases in the level of wind penetration are feasible and do not rely on the introduction of new technologies.

3.6 A flat calm with an increase in demand? It is sometimes suggested that a flat calm over the UK and neighbouring countries, coupled with an increase in demand, would be a problem if we were to rely on wind power.29 If we were to rely exclusively on wind power, that would be true. But:

• Apart from wind power, there is a wide range of renewable sources of power available to us which would not be affected by a drop in wind speeds. These include EGS power, tidal streams, tidal lagoons, wave power, power from biomass, photovoltaics, and concentrating solar power.

• There is a range of techniques for matching supplies to demand, outlined above.

• As mentioned in Section 3.1, there is now a large number of reports from reputable sources showing how to decarbonise the world’s economies using renewable sources of power.30

The weight of evidence is that renewable sources of power, with conservation of energy, can provide robust and resilient supplies of power even in the scenario outlined above.

3.7 “Nuclear plants are mutual hostages: the world’s least well-run plant can imperil the future of all the others.”31

Politics provides the main reason why nuclear power is a threat to energy security in the UK. The current nuclear crisis in Japan may not in itself lead to the closure of nuclear plants around the world—although Germany has already decided to close older plants, at least for a time, and the European energy commissioner, Günther Oettinger, has raised the prospect of a nuclear-free future for Europe.32 But it is likely that any repetition, anywhere in the world, of a nuclear crisis like that at Fukushima, would make it very difficult, politically, to continue running nuclear power stations in the UK and elsewhere. This is a good reason, but not the only reason, why the Government should not permit the building of any new nuclear power stations and should close down existing plants as soon as possible. Other reasons include:

27 Business Green, 2010-08-24, http://www.businessgreen.com/business-green/news/2268599/exclusive-wind-farms-pick-tab. 28 “Managing Variability”, David Milborrow, July 2009, commissioned by Greenpeace, WWF, RSPB, Friends of the Earth, http://www.trec-uk.org.uk/reports/milborrow_managing_variability_final_July_2009.pdf. 29 See, for example, “Will British weather provide reliable electricity?”, James Oswald et al., Energy Policy, 36(10), 4005-4007, 2008. 30 See http://www.energyfair.org.uk/pren and http://www.mng.org.uk/gh/scenarios.htm. 31 From “A plan to keep carbon in check,” by Robert Socolow and Stephen Pacala in the Scientific American, September 2006, p 33. 32 See “Political fallout of Japan’s nuclear crisis reaches distant shores”, Reve, 2011-03-21, http://www.evwind.es/noticias.php?id_not=10904.

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• The fact that nuclear power stations, and trains and ships carrying nuclear fuel and nuclear waste, are vulnerable to bombs or missiles from terrorists or enemy forces.

• The fact that most of the nuclear sites around the UK are vulnerable to flooding and will become increasingly vulnerable with rises in sea level from climate change.

• The high cost of nuclear power, draining resources from renewables and conservation of energy where the money would be better spent.33

• Incompatibilities between nuclear power and renewables, holding back the development of renewables.34

• The fact that most renewable sources of power can be built much more quickly than nuclear power stations.35

• The still-unsolved problem of what to do with nuclear waste that will be dangerous for thousands of years.

• And the several other problems with nuclear power detailed on http://www.mng.org.uk/gh/nn.htm.

4 What impact could increased levels of electrification of the transport and heat sectors have on energy security?

Electrification of the transport and heat sectors will increase the demand for electricity but not as much as one might think:

• Complete electrification of road and rail transport in the UK is likely to increase the demand for electricity by about 50%.36 Although the demand for electricity may increase by 50%, it is likely that a smaller increase in generating capacity will be required. This is because it is likely that electric vehicles will be charged mainly at night when there is likely to be surplus power available from wind farms, wave farms and the like, and because the use of vehicle-to-grid technologies will reduce the need for plant margin.

• With ‘zero-carbon eco-renovation’ of the UK’s stock of buildings,37 the need for electricity to drive heat pumps or other sources of heat, would be small.38

33 See http://www.mng.org.uk/gh/nn.htm#subsidies. 34 See, for example, “Slash renewables target to protect nuclear, says EDF”, ENDS Report Bulletin, 2009-03-12, http://www.mng.org.uk/gh/resources/ends_report_bulletin_2009-03-12.html. In a world powered by renewables, the inflexibility nuclear power is a problem. Much more valuable are the renewable sources of power that can deliver power on demand, mentioned in Section 3.4. 35 In 2010, Germany installed 8.8 GW of photovoltaic panels, producing about the same amount of electricity as a 1GW nuclear power station—but the nuclear power station would take about 7 years to build. In general, renewables can be rolled out much faster than nuclear power. They provide a much speedier solution to the urgent problem of cutting emissions of CO2. 36 See Appendix 8 of “Energy UK”, http://www.mng.org.uk/gh/resources/energy_UK3.pdf. This seemingly modest increase in demand is because electric vehicles are very much more efficient than vehicles power with the internal combustion engine. 37 See http://www.mng.org.uk/gh/ecorenovation.htm. 38 It appears that, at present, the Government’s policies on the ecorenovation of buildings is based on the document Element Energy: The uptake of energy efficiency in buildings, a report to the Committee on Climate Change (2009, http://downloads.theccc.org.uk/docs/Element%20Energy_final_efficiency_buildings.pdf). I believe the main shortcoming of this document is that it fails to recognise the urgency of the need to cut emissions from buildings and it fails to recognise the potential of ‘super’ insulation and other measures for making deep cuts in the need for heating or cooling of buildings.

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As we saw in Section 3.1, there is good evidence that there are more than enough renewable sources of power to meet the UK’s needs, now and in the future.

5 To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

Energy efficiency, especially zero-carbon eco-renovation of buildings (see Section 4), makes good sense but, as outlined in Section 4, it is probably not necessary for the UK to meet its needs for energy, now and in the foreseeable future.

Although the superabundance of renewable sources of power available to UK might tempt us to continue in our profligate ways, it would be prudent, and probably cheaper, to take advantage of the many opportunities that are available to reduce wastage of energy.

In this connection, it is pertinent to mention that a recent report from the Department of Engineering, University of Cambridge39 estimates that 73% of global energy use could be saved by practically achievable design changes to passive systems. This reduction could be increased by further efficiency improvements in conversion devices.

An interesting point is that, in the research by Mark Jacobson and Mark Delucchi, detailed in Section 3.1, they argue that a transition to renewables is likely to mean that the anticipated world demand for power in 2030 is likely to be 11.5 terawatts, compared with 16.9 terawatts if we were to stick with conventional sources of energy. This is because a transition to renewables would dramatically reduce the gross inefficiencies in power generation and in road transport that currently exist with conventional sources of energy.

6 What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

There is good evidence, outlined in Sections 3, 4, and 5, that renewable sources of power, with conservation of energy, can provide all the energy we need now in a robust and resilient manner, and anticipated needs in the future.

The UK is particularly well endowed with renewable sources of power and is likely to become a net exporter of renewable energy in the future. Even if we were surrounded by hostile neighbours, we could meet all our needs for energy from within our own shores and territorial waters.

But otherwise, ‘fortress UK’ would not be a good policy. There are substantial advantages, outlined in Section 3.2, for the UK’s energy supply system to be integrated with others across Europe, the Middle East and North Africa.

39 “Reducing energy demand: what are the practical limits?”, Jonathan M. Cullen, Julian M. Allwood, and Edward H. Borgstein, Environmental Science & Technology, 45(4), 1711–1718, 2011, DOI: 10.1021/es102641n, http://pubs.acs.org/doi/abs/10.1021/es102641n.

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7 What would be the implications for energy security of a second dash-for-gas?

Given that supplies of gas are apparently plentiful, and likely to remain so for some time, and that the price of gas has apparently become decoupled from the price of oil;40 and given that gas-fired power stations are relatively quick and cheap to build, it will be tempting for electricity supply companies to invest in gas-fired generation of electricity. There would be the added attraction that gas-fired generation is a flexible source of power that can help balance supplies of electricity with variable demands.

In terms of energy security, a dash-for-gas is likely to mean increased dependence on imports with corresponding implications for security of supplies.

There would be the added problem that, although gas-fired electricity (without carbon capture and storage) produces about half the CO2 emissions as coal-fired generation, it does still emit substantial quantities of CO2 and would be a hindrance in the urgent task of bringing down emissions of greenhouse gases.41

For those two reasons, it would be best for the UK to avoid another dash for gas. One way to discourage it would be to require that all power plants than burn fossil fuels, including gas, should be equipped with fully-effective carbon capture and storage.

As described above, there are more than enough renewable sources of power to meet our needs, and there is a range of techniques for balancing supplies and demand. If there was a real prospect of shortages of power then, as a stop-gap measure, gas-fired plants could be built quite quickly. But most renewable sources of power can also be rolled out fast,42 so there is really no need for us to go down the gas-fired route.

8 How exposed is the UK’s energy security of supply to international events?

At present, the UK is heavily dependent on oil for transport by road, rail, air and the sea, for some space heating and other applications. Since most of that oil is imported, international events may disrupt supplies and raise prices. Apart from the rebellion in Libya, the main worry now is that the world is at or past ‘peak oil’ and that prices could rise steeply in the future.43

The UK also depends heavily on imports of gas and coal. Although supplies may be less vulnerable to disruption and rising prices, the pressing need to cut emissions of CO2 means that we should wean ourselves off all fossil fuels soon as possible.

40 Although the Japan nuclear crisis appears to have produced a spike in the price of gas. 41 An analysis published recently by the Royal Society “suggests that despite high-level statements to the contrary, there is now little to no chance of maintaining the global mean surface temperature at or below 2°C.” and that “the impacts associated with 2°C have been revised upwards, sufficiently so that 2°C now more appropriately represents the threshold between ‘dangerous’ and ‘extremely dangerous’ climate change.” (see “Beyond ‘dangerous’ climate change: emission scenarios for a new world”, Kevin Anderson and Alice Bows, Philosophical Transactions of the Royal Society A, 369 (1934), 20-44, January 2011. 42 As noted earlier, Germany installed 8.8 GW of photovoltaic panels in 2011, producing about the same amount of electricity as a nuclear power station that would take about 7 years to build. 43 See, for example, http://en.wikipedia.org/wiki/Peak_oil.

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9 Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

The UK is far too dependent on fossil fuels and the UK economy is vulnerable to disruption via increases in the prices of those fuels. Here, in brief, are some of the steps that can be taken to improve energy security for the UK and, at the same time, help to solve the urgent problem of cutting emissions of CO2:

• Vigorously promote the development of the full range of renewable sources of power, both within the UK and elsewhere in Europe, the Middle East and North Africa.44

• Take steps to promote and develop technologies that can help to balance supplies of electricity with variable demands, including:

o EGS power and other renewables that can provide power on demand.

o Tidal lagoons, the HVDC supergrid, and other technologies for the storage of power and balancing the grid.

• Vigorously promote zero-carbon eco-renovation45 of the existing stock of domestic and public buildings throughout the UK, and ensure that all new buildings are zero-carbon with minimal need for heating or cooling, and without the use of carbon offsets.46

• Build on present policies to promote the electrification of transport by road and rail. Promote traffic-calming ‘home zones,’47 cycling and walking, and public transport.

• Promote research into the synthesis of fuels using clean sources of power,48 to meet the need for energy where electricity cannot be used (eg air travel).

• To help create an appropriate framework of incentives for these developments:

o Work to create a robust and effective successor to the existing EU Emissions Trading System via ‘upstream’ reform of the system.49 In accordance with the ‘Kyoto2’ proposals,50 part of the money from the auctioning of permits in the reformed system may help to bring forward early-stage renewables and the conservation of energy.

o Work to remove all subsidies for fossil fuels in the UK and elsewhere around the world,51 and, because nuclear power is a long-established technology that should be commercially viable without subsidies, and because unfair competition from a subsidised nuclear industry may divert funds away from

44 The Government may like to consider becoming a partner in the Desertec Industrial Initiative. 45 See http://www.mng.org.uk/gh/ecorenovation.htm. 46 Associated with this, there appears to be considerable potential for the use of inter-seasonal heat stores (see, for example, http://www.howedell.herts.sch.uk/eco_issues/sustainable_elements.pdf). 47 See, for example, http://en.wikipedia.org/wiki/Home_zone. 48 See, for example, http://www.desertec-uk.org.uk/csp/synthesis.htm. 49 See “’Upstream’ reform of the EU Emissions Trading System” and “Turn off greenhouse gases at source” which may be downloaded via links from http://www.k2support.org/. 50 See www.kyoto2.org. 51 In 2004, the New Economics Foundation estimated that, worldwide, subsidies for fossil fuels amounted to about $235bn and there seems not to have been much change since then (see “Fossil fuel subsidies ‘must end’”, BBC News, 2004-06-21, http://news.bbc.co.uk/1/hi/sci/tech/3818995.stm).

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renewables and the conservation of energy, withdraw the several subsidies currently enjoyed by the nuclear power industry.52

• For the reasons given in Section 3.7, prohibit the building of any new nuclear power stations in the UK and close down the existing plants as soon as possible.

March 2011

52 Those subsidies, and the way they may be withdrawn, are described in some detail in the “Nuclear Subsidies” report from the Energy Fair group which may be downloaded via http://www.energyfair.org.uk/. See also “Nuclear power: still not viable without subsidies” (Union of Concerned Scientists, February 2011, http://earthtrack.net/documents/nuclear-power-still-not-viable-without-subsidies). A formal complaint has now been made to the European Commission that subsidies for nuclear power in the UK are unlawful state aid under EU competition law (see http://www.energyfair.org.uk/actions).

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Memorandum submitted by B9 Coal Limited (UKES 06) 

 

About B9 Coal 

 1. B9 Coal is developing game‐changing projects in the field of carbon capture and 

storage, combining coal gasification with highly efficient alkaline fuel cells from AFC Energy to create first‐of‐a kind Integrated Gasification Fuel Cell (IGFC) power stations.   

2. AFC Energy’s alkaline fuel cell achieves 60% electrical efficiency and operates at low temperature and low pressure. The system has been designed for commercial application and is therefore low‐cost (the company has eliminated the need for precious metals) and easy to manufacture and maintain. In addition, the use of hydrogen allows the system to load follow to meet peak energy demand.   

3. With hydrogen as a feed‐stock, fuel cell power stations are not only highly efficient and flexible in output, but they are also fuel flexible. The system has the ability to switch between and mix hydrogen produced from coal, gas, biomass and electrolysis sources. Such characteristics offer strategic energy security benefits in terms of utilising potential UK coal resources as well as the ability for grid balancing and back‐up for intermittent sources of renewable electricity.  

4. B9 Coal’s pursuits have been underpinned by a strategic partnership undertaken with Linc Energy, the world leader in underground coal gasification. UCG technology potentially gives access in the UK to an extra 17 billion tonnes of coal without the major environmental impacts of conventional mining.  

5. In October 2010 B9 Coal announced a partnership with Powerfuel Power Limited, outlining plans to incorporate AFC Energy’s alkaline fuel cell at Powerfuel’s Hatfield site. The Hatfield project is among the most advanced CCS projects in Europe and has been entered for the European Union’s NER 300 funding mechanism for new renewable and CCS projects.   

 

 

 

 

 

 

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Executive Summary 

6. B9 Coal believes the issue of energy security is of paramount importance in the evolution to a low‐carbon energy sector in the United Kingdom. This issue is complex and will require collaboration across Government and industry to ensure it is adequately addressed in the coming years.  

7. B9 Coal believes the key elements of this debate are:   

• The projected increase in global energy demand by 40% in 2030 (BP Energy Outlook 2011); 

• the intermittent and unreliable nature of renewable energy sources, and hence the need for efficient load‐following CCS power plants to adjust output and meet peak energy demands; 

• the UK’s dependency on fossil fuel imports and the impact unforeseen events (natural disasters/political unrest) can have on this supply; 

• the need for investment in new technologies such as CCS (including B9 Coal’s IGFC model), UCG, Enhanced Oil Recovery (EOR) and the UK’s hydrogen infrastructure to ensure adequate developments are in place to ensure energy supplies are maintained and secure in a low‐carbon energy mix.  

8. UK electricity demand is due to increase in the next twenty years (2010, DECC, Electricity Market Reform), underpinning the need for a complete overhaul of the UK’s energy sector and a reassessment of consumer needs and behaviour. Events in recent years have highlighted the susceptibility of the UK and EU energy supplies to political events and natural disasters and the need to address the issue of supply security. This susceptibility will increase in the transition to an energy sector with high dependence on intermittent renewable energy sources.   

9. Recent events have also demonstrated how unexpected and unpredictable geopolitical and meteorological events may have major consequences for the supply of energy to the UK and across the European Union. Gas disputes between Russia and the Ukraine in recent years have resulted in supplies being partly or in some cases entirely cut off to up to 18 European countries, highlighting the need for internal energy security mechanisms to cope with future energy shortage scenarios. Furthermore, cold spells in winter 2010 highlighted the UK’s dependency on imported energy sources, with gas supplies reaching worryingly low levels in December. With increasingly harsh winters becoming the norm this will become a regular occurrence without policy and industry intervention to address the issue.  

10. The future energy infrastructure will also have to account for consequences stemming from a decarbonised electricity sector. Renewable energy sources are inherently unreliable in nature, necessitating an enhanced back‐up system to ensure capacity when wind, solar and wave power cannot meet base‐load demand levels.  

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 11. There must be a system in place during this transitional period to ensure the lights 

stay on and the disastrous consequences of black‐outs can be avoided. The 2003 blackout on the US east demonstrates the impact such events can have for industry; a quarter of businesses surveyed after the blackout reported losses of $50,000 per hour during the blackout (2004, Mirifex).   

12. B9 Coal’s proposition for fuel cell power stations offers a secure supply of low‐carbon energy with the ability to adjust output efficiently to meet demand and address the problems posed by unreliable renewable energy sources. The IGFC model being put forward by B9 Coal also has multi‐fuel potential and when coupled with hydrogen storage will ensure secure supplies of cleanly generated electricity.   

13. This game‐changing technology is currently restricted by the lack of financial incentives available and the uncertain policy landscape surrounding the green energy sector. While the UK Government has committed to funding four CCS demonstration projects, without long‐term clarity and commitment the UK will not maintain its position at the forefront of developments in alternative energy technologies.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Questions 

How resilient is the UK energy system to future changes in fossil fuel and uranium prices?  

14. In the coming decades fossil fuels will play an increased role in the UK’s energy mix. The Department of Energy and Climate Change’s 2050 Pathways (2010; DECC 2050 Pathways Analysis) scenarios all show CCS constituting a large proportion of the energy mix, confirming the UK’s reliance on fossil fuels far into the latter half of the twenty‐first century. This in turn means that fossil fuel price fluctuations are due to be reflected in retail electricity prices to a similar or even greater extent than at present.   

15. Huge increases in fossil fuel prices can be avoided by ensuring an uninterrupted, secure supply. New technologies such as underground coal gasification (UCG) and enhanced oil recovery (EOR) are examples of pioneering technologies which will permit the sourcing of previously inaccessible fossil fuels in the UK and EU. These technologies can be combined with carbon capture and storage to provide clean energy at a manageable cost, while reducing our reliance on imports from abroad.   

How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?   

16. The UK’s energy infrastructure is currently largely dependent on fossil fuelled power generation. Government targets intend for the electricity system to be almost entirely decarbonised by 2050, therefore necessitating significant transformations in the next twenty years. This overhaul of the electricity generation, transmission and supply networks will need significant investment, without which the system will almost certainly fail to function properly.   

17. Effective policy is a vital tool to underpin the transformative process, and will provide the necessary guarantees and confidence needed to incentivise investment in this fledgling sector.  

18. The B9 Coal proposition will generate electricity cleanly and efficiently by passing hydrogen through AFC Energy’s alkaline fuel cells. This highlights the potential of a hydrogen economy, and the need for investment in the necessary infrastructure for this to become a reality. The various options for green hydrogen generation must be developed and incentivised in order to underpin the evolution to a hydrogen economy alongside other alternative energy initiatives such as CCS and UCG.  

What impact could increased levels of electrification of the transport and heat sectors have on energy security?   

19. Electrification of the heat and transport sectors will significantly increase levels of electricity consumption in the UK. While this will be a welcome transition on the 

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road to a low‐carbon energy sector, it will require generators to devise low‐carbon solutions for large‐scale, reliable power generation.   

To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?   

20. It is vital to link electricity supply with demand, and for this to happen a greater emphasis must be placed on innovative technologies which allow us to use our resources not only cleanly but significantly more efficiently.   

21. The B9 Coal model will employ forward‐looking technologies such as coal gasification and alkaline fuel cells which maximise the calorific value of feedstock.  

22. CCS projects are traditionally hampered by the related reduction in efficiency; however the B9 Coal IGFC model differs in this regard through its unique blend of technologies which ensure efficient output of clean electricity. Ensuring efficiency from large‐scale generators will be vital in in the fight to tackle over‐consumption of fuel, and supply security in general.   

23. Smart grid technology and the digitisation of the UK’s electricity supply infrastructure will also be a vital tool in the electricity sector throughout the twenty‐first century. However, it must be noted that there is a limit to the effect greater energy efficiency can have on power consumption levels, and therefore these measures must be coupled with significant action across the board to ensure a positive outcome from such efforts.   

What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?   

24. The UK’s legally binding emissions reduction targets are the most ambitious in existence. Either rapidly reduced consumption is required or an overhauled low‐carbon energy sector. The Department of Energy and Climate Change has also projected that while meeting emissions reduction targets will be an expensive process, climate change and its associated effects would result in significantly higher costs if no action is taken to reduce global warming. Charles Hendry, Minister for Energy outlined this point in February 2011 when he noted that CCS has an “important role in balancing the electricity system. Without CCS, halving emissions by 2050 will be 70 per cent more expensive” (2011, DECC).  

25. International cooperation is an important factor in the development of global clean energy projects, and while other Governments have expressed the impetus for change they have not signed up to such ambitious goals. This state of play leaves the UK open to the risk of ‘going it alone’ in power sector overhaul, and while this may provide some key benefits it will also pose restrictions on knowledge‐sharing and innovation across borders, and force decarbonisation before sustainable, 

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secure alternative supplies are readily available. UK targets for greenhouse gas emissions reduction will require rapid action on the part of Government both at home and in a global setting.   

26. Renewable energy is intermittent in nature increasing the need for responsive back‐up capacity. CCS projects can provide this capacity, alongside 19% of emissions reductions, but only if the necessary incentives and investment are in place.   

27. Fossil generators currently adjust output to meet peak capacity, however this system is inefficient and will be called upon increasingly with the proliferation of intermittent renewable energy sources in coming decades. The B9 Coal IGFC model can adjust output quickly and efficiently to meet demand, as opposed to other traditional power plants that operate at reduced efficiency when output is reduced. The B9 Coal model can also be coupled with hydrogen storage and other technologies such as underground coal gasification to ensure a secure supply of power when other sources of energy are not an option.   

 What would be the implications for energy security of a second dash‐for‐gas?   

28. A dash‐for‐gas would be an extremely risky energy scenario and would result in other forms of low‐carbon electricity and CCS being disincentivised, alongside an increased fossil fuel dependency for the UK and in turn increased carbon emissions.   

29. B9 Coal supports the introduction of an Emissions Performance Standard (EPS) as part of the Government’s Electricity Market Reform package in order to disincentivise the construction of unabated fossil fuel power stations. However, the current model’s level is too high and will serve to encourage the development of unabated gas power stations and discourage investment in Carbon Capture and Storage projects. B9 Coal would therefore favour the introduction of an EPS set at a level low enough to include restrictions on gas power stations, in addition to coal. The proposed model as it stands runs the risk of jeopardising the UK’s ability to meet emissions reduction targets and leaving the UK reliant on imported gas. B9 Coal suggests the introduction of an EPS with a sliding scale to 2030 in line with CCC national emissions trajectories to 2030 and beyond. The EPS policy would have specific emissions limits for individual power stations set at the time of planning consent and ‘grandfathered’ over operational lifetime or through significant upgrade.  

30. The B9 Coal process is equally applicable to natural gas and coal projects; it has recently been partnered with Calix Endex carbon capture technology as part of the Powerfuel Power NER 300 funding application to develop a gas CCS project at Hatfield.  

  

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How exposed is the UK’s energy security of supply to international events?   

31. At present the UK imports a large proportion of the fossil fuels consumed here each year, making the energy system inherently reliant on foreign imports and in turn international events. UK coal imports currently account for approximately 70% of total coal consumption (2008, Association of Coal Importers), while oil and gas are also imported in significant quantities.   

32. There are examples throughout history of how geopolitics has impacted on fuel prices and supplies, with conflicts in fossil fuel‐rich regions of the world becoming commonplace in the twenty‐first century. The most recent example is in Libya where international forces are currently intervening. This current crisis has seen oil prices increase dramatically. Western Europe is also highly reliant on Russian gas exports, with cross‐border disputes impacting on the security of this supply to the EU.  

33. These events emphasise the need for adequate national energy supplies to ensure security during uncertain times. Pioneering technologies such as underground coal gasification and enhanced oil recovery can provide sourcing opportunities for fossil fuel stocks that were previously inaccessible. UCG alone could potentially give access to an additional seventeen billion tonnes of coal in the UK and employing the B9 Coal model in this process would ensure this coal is used cleanly and efficiently to maximise supply security, while maintaining low emissions levels.   

Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas?  If not, how could this be improved?   

34. Winter 2010/11 posed significant questions as to the resilience of the UK’s energy security when fuel supplies reached worryingly low levels. These challenges will increase as we move further into the twenty‐first century and towards an electricity system dependent on a significantly higher proportion of energy sources such as wind, wave and solar power.   

35. Given the projection that electricity demand is due to increase significantly in the next four decades it is vital that the policy regime is given an overhaul as soon as possible in order to prepare for the uncertain future ahead, and to highlight barriers and hurdles before it is too late.   

36. Current Government policy has been unreactive and uncertain in the field of low‐carbon energy, and has had the effect of disincentivising investment and development in this field.    

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Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?  

37. Carbon Capture and Storage technology is a rapidly developing field offering the opportunity to meet energy demand in the transition to a low‐carbon electricity sector.  

38. Other forms of low‐carbon electricity generation are necessary to ensure a diverse future energy mix in the UK; however it is evident from DECC projections that the wide‐spread adoption of CCS will be crucial in order to meet increased energy demand throughout the twenty‐first century.   

39. B9 Coal feels that the IGFC model will help to address some of the key challenges of energy security. The B9 Coal IGFC model can adjust output quickly and efficiently to meet demand, as opposed to other traditional power plants which operate at reduced efficiency when output is reduced. The B9 Coal model can also be coupled with hydrogen storage and other technologies such as underground coal gasification and enhanced oil recovery to ensure a secure supply of power when other sources of energy are not an option.   

 

 

 

 

 

 

 

 

 

 

 

 

 

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References 

Association of Coal Importers; 2008; http://www.coalimp.org.uk/3.html  BP Energy Outlook 2011; http://www.bp.com/sectiongenericarticle.do?categoryId=9035979&contentId=7066648.  DECC 2050 Pathways Analysis; 2010; http://www.decc.gov.uk/assets/decc/What%20we%20do/A%20low%20carbon%20UK/2050/216‐2050‐pathways‐analysis‐report.pdf  

DECC, Electricity Market Reform Consultation; 2010;  http://www.decc.gov.uk/assets/decc/consultations/emr/1041‐electricity‐market‐reform‐condoc.pdf 

 DECC, Charles Hendry Speech; 2011; http://www.decc.gov.uk/en/content/cms/news/chsp_ccs/chsp_ccs.aspx  

“An Analysis of the Consequences of the August 14th 2003 Power Outage and its potential impact on business: Strategy and Local Public Policy; Mirifex; 2004; http://www.acp‐international.com/southtx/docs/ne2003.pdf 

 

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Memorandum submitted from the Carbon Capture & Storage Association (UKES 07)

Introduction The Carbon Capture & Storage Association (CCSA) welcomes this opportunity to respond to the Energy and Climate Change Committee’s call for evidence, “the UK’s Energy Supply: security or independence?”

The CCSA brings together a wide range of specialist companies across the spectrum of CCS technology, as well as a variety of support services to the energy sector. The Association exists to represent the interests of its members in promoting the business of Carbon Capture and Storage (CCS) and to assist policy developments in the UK, EU and internationally towards a long term regulatory framework for CCS, as a means of abating carbon dioxide emissions and combating climate change.

Executive Summary 1. Fossil fuels provide over 70% of the UK’s electricity supply and are likely to

continue to play a major role in the UK electricity sector, at least in the short and medium terms.

2. However, their associated emissions represent a major source of CO2, an important greenhouse gas. Carbon capture and storage (CCS) is a key technology that enables fossil fuels to become a low carbon source of electricity through the permanent geological storage of associated CO2 emissions.

3. Electricity from fossil fuels is not subject to the intermittency of renewables, nor the inflexibility of nuclear, so they are an important tool for enabling generators to be able to meet variations in demand.

4. Pre-combustion capture CCS technology provides a cost-effective and low-carbon method of generating hydrogen from coal or gas. The “Hydrogen Economy”, in particular when applied to the transport and heating sectors, offers the opportunity to diversify fuel sources and reduce UK reliance on imported oil and gas.

5. There is a risk that if Government CCS policy does not provide adequate support or incentive, and with the current effective moratorium on unabated coal and planned closures under the Large Combustion Plant Directive, the UK will be increasingly reliant on gas for its electricity.

6. Fossil fuels with CCS will allow the UK to maintain a diversity of fuel and energy sources. Specifically, abated coal plant would reduce the UK’s exposure to gas price volatility, while supporting the low-carbon agenda.

7. CCS infrastructure projects are capital-intensive and will compete for capital with alternative investments. Fiscal, policy and regulatory uncertainty will inhibit investor confidence in funding CCS projects. Any new risks imposed by the authorities may deter investment and increase costs to the consumer.

8. It is important to note that according to the IEA and the EU, tackling climate change without CCS will be much more expensive. The development of CCS could also deliver substantial economic growth in the UK’s green economy.

9. The CCSA is concerned that CCS deployment is not advancing as quickly as necessary. This will compromise the UK’s ability to have secure, low-carbon

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electricity supplies. We eagerly await the conclusions of the Electricity Market Reform consultation which we hope and expect will contain the elements necessary to ensure CCS deployment and UK energy security - but only if properly implemented.

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

10. The CCSA only offers comments on the resilience of the UK energy system to changes in fossil fuel prices.

11. Fossil fuels provide over 70% (coal 25.8%, gas 47.7%)1 of the UK’s electricity supply and will continue to provide a significant proportion in the short to medium term. In the face of declining North Sea gas output, and the closure by 2015 of approximately 9000 MW of coal-fired plant due to the Large Combustion Plant Directive, the UK will become increasingly reliant on imported gas for electricity generation, as well as for domestic heating purposes.

12. Existing legislation requires all new coal fired power plant to be built with 300MW of CCS and, without appropriate support for CCS, there is a risk that no new coal plant will be built. If there are to be new coal plants built, it is likely that they will be parts of projects 2-4 of the CCS demonstration programme, although note that at least 1 of these will be gas. Clearly, a reduction in coal plant means the UK will become more reliant on imported gas.

13. Norwegian gas supplies are unlikely to be able to meet the gap created by increasing demand for gas and declining UK North Sea output, meaning the UK could become increasingly exposed to price volatility and potential geopolitical volatility in gas supplies.

14. Coal power plant, with CCS, will diversify the UK’s fossil fuel requirement, increasing security of supply. In the face of rising gas prices, the UK’s still significant coal reserves could provide added energy security. Therefore it is of paramount importance that CCS is rapidly deployed so that coal can provide cost-effective, low-carbon electricity for the UK.

15. While their overall use as a proportion of the energy mix may decline over time, it is important to keep fossil fuels in the UK’s energy mix as - unlike nuclear - they offer a flexible source of electricity generation and, unlike wind, tidal or solar - are not intermittent. Fossil fuels therefore play a key role in ensuring that the UK’s electricity supply can meet demand. When combined with Carbon Capture and Storage, the continued use of fossil fuels is fully compatible with the low carbon energy agenda.

16. Enhanced Hydrocarbon Recovery using captured CO2 could be used to extend the productive lifetime of UK oil and gas reserves and can mitigate rising oil and gas prices, reduce dependence on imported oil and continue to provide North Sea jobs, prosperity and revenue as well as permanently storing CO2.

1 DECC, UK Fuel Mix, disclosure period 1 April 2009 - 31 March 2010 http://www.decc.gov.uk/en/content/cms/statistics/fuel_mix/fuel_mix.aspx

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2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

17. Timely investment in the CCS industry is key to its wide spread deployment. Indecision in the critical near-term commercial scale demonstration of CCS and “first of a kind” implementation phases caused by near-term legislative, regulatory and policy uncertainty will delay investment and impair industry’s ability to meet Government goals.

18. Without pre-empting the outcome of the Electricity Market Reform (EMR), we are concerned that it does not properly address these investment concerns. The most significant risk is that the reform package militates against fossil fuels, especially coal fired generation, with consequent impact on supply security.

19. Infrastructure projects are capital-intensive and will compete for capital with

alternative investments. Hence any support provided must be structured to ensure that equity investors find them attractive. New risks imposed by the authorities may deter investment. It is also essential, if low cost to consumers is sought, to ensure that the project can be structured to allow a sizeable proportion of the capital involved to be provided by debt rather than relying solely on equity.

20. The EMR package will be good for mature technologies operating on a business-

as-usual basis. CCS is neither mature nor is it business-as-usual. Demonstration projects incur considerable first-of-a-kind costs which the EMR cannot be expected to cover. These “FOAK” costs break down into two parts: early-stage or emerging technology costs; and infrastructure costs. There is good reason to separate these costs and provide separate support mechanisms, noting that: there is no certainty that emerging technology costs will be driven out of the system after four CCS demonstration projects; and the demonstration programme will not have provided a comprehensive geographic spread of infrastructure to free subsequent projects from further infrastructure hurdles.

21. A crucial milestone for CCS in the UK – strongly supported by the CCSA - is to ensure that Government’s commitment to 4 UK demonstrations is maintained and delivered. Thereafter, the transition from CCS demonstration projects to progressively more widespread CCS deployment must be a continuous process. The operation of the electricity market around 2017-19 needs to show that CCS provides a business case for a new generation of plant. The CCSA is looking for the EMR to be a key element in the commercial deployment of CCS – thus enabling UK leadership in CCS.

22. However, CCS has not been advancing as quickly as it needs to. CCS technology is essentially proven but the policy and incentives framework is uncertain. DECC’s CCS Roadmap, originally due in spring, is now due in the autumn. Without greater certainty, potential CCS investors - backed by pension funds and global money markets - will not deliver. DECC’s 2050 Pathways confers on CCS playing an important role in meeting the UK’s energy security needs in a low carbon way. Level 2 CCS deployment under the 2050 Pathways analysis would lead to 40 GW of installed CCS capacity by 2050. Level 4 would lead to 40 GW of installed CCS by 2039, and 86 GW by 2050. This pace of deployment under Level 4 is achievable and is similar to the peak rate at which gas CCGT was delivered in the 1990s. However, even meeting the ambitions of Level 2 which are necessary to meet Climate Change Act commitments is

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extremely challenging given the current trajectory.

3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

23. Obviously, this development would increase overall demand for electricity. If this electricity is not derived from low-carbon sources, this will increase GHG emissions and make meeting Climate Change Act targets extremely challenging. Deployment of CCS is key to cost effective, low-carbon electricity in the UK and will support the electrification of the transport and heat sectors.

24. Potentially these developments could provide greater flexibility in fuel sources; electricity can be derived from the burning of coal or gas, whereas gas alone is currently dominant in the domestic heating sector. Thus coal with CCS would add diversity in heat sectors and increase energy security.

25. Pre-combustion CCS could be a key part of the “Hydrogen Economy”, providing hydrogen - a low pollution and zero carbon fuel - for vehicles. If the UK is to have a substantial Hydrogen Economy in the future, fossil fuels with CCS will be required to economically produce the necessary large volumes of hydrogen.

26. The Hydrogen Economy, particularly when applied to the transport sector, would help to reduce the UK’s reliance on imported oil. When applied to the heating sector it substitutes for imported gas.

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

27. Energy efficiency is important, but the rebound effect – where the potential benefits of efficiencies are diminished by increased consumption premised on the improved energy efficiency – will reduce its impact. Given the increasing need for electricity to meet modern consumer and industrial needs - and the extra demand from the electrification of the heating and transport sectors - energy efficiency measures alone will not provide energy security. Therefore, increased generating capacity will be required.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

28. An energy mix consisting of renewables, nuclear and fossil fuels with CCS provides an excellent basis on which to meet GHG emissions reduction targets and to provide UK energy security. However if CCS is not widely adopted and supported then there is a real risk that there will be insufficient low-carbon generating capacity to meet demand as well as provide the necessary flexibility to respond to variations in demand. It is necessary to consider separately three types of capacity shortfall; these types are discussed in the following paragraphs.

29. The capacity shortage that occurs at the relatively short teatime peak of demand

can be met by more interconnection, more pumped storage, demand-side reduction and open cycle gas turbines.

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30. The second type of capacity shortage is that which could occur due to the

difference in demand between day and night in winter - lasting, each day, for about eight hours and measuring around 20 GW. This is currently provided by older and less efficient coal power plant and gas CCGTs that are “two shifted”. These units have consequentially rather modest load factors (30- 35%); this is acceptable commercially because the capital investments in these plants have been written off.

31. The third type of capacity shortage is that which could occur at periods of low

wind across the whole generation system, sometimes lasting several days. If wind targets are met this shortage could measure up to 25 GW.

32. It is technically feasible for coal with CCS to provide the flexible, low-carbon capacity required to cover day-night and low-wind effects, but there need to be capacity payments to compensate for the modest load factors that are an inevitable consequence of such operating modes.

33. It should also be noted that the types of capacity shortages described above are additive in effect. Windless winter days are not uncommon.

6. What would be the implications for energy security of a second dash-for-gas?

34. While abated gas would be a low-carbon source of electricity, this would leave the UK highly exposed to volatility in gas prices.

35. The CCSA strongly believes that an energy policy that includes abated coal will provide diversity in fuel and energy sources, whilst also enabling reduced emissions.

7. How exposed is the UK’s energy security of supply to international events?

36. Enhanced hydrocarbon recovery, made possible through the use of captured CO2, could be used to extend the life of the UK’s oil and gas reserves, helping to reduce the UK’s reliance on imported fuels and thereby to reduce the impact of international events.

8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

37. The UK’s energy policy is very much in flux at the moment, given the EMR, Carbon Price Floor and the EPS. This makes it difficult to answer this question with any degree of certainty. It is certainly possible that these policies could deliver secure, low-carbon, energy supplies. However, whether they do will depend upon the policy options chosen and how they are implemented.

38. The CCSA believes that CCS on both coal and gas - as part of the UK’s energy mix with renewables and nuclear - will enhance UK energy security. Industry must be incentivised to ensure that CCS is delivered in a timely manner and this will only happen with credible, consistent and bankable policies.

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The Carbon Capture & Storage Association 6

9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

39. Energy intensive and other industrial users are under increasingly severe pressure as electricity costs increase to meet tightening environmental legislation. This sector is a large employer and to be sustainable requires stable energy prices with minimum exposure to price shocks and regulatory driven escalation of prices.

40. Diversity of supply and appropriate infrastructure are important factors. CCS contributes to both by allowing coal generation to be maintained as part of the energy mix, minimising dependence on gas generation and by providing the anchor for CO2 transport and disposal infrastructure, which is required by a range of industrial users in the medium term to underpin the reduction in emissions required from their operations.

The view expressed in this paper cannot be taken to represent the views of all members of the CCSA. However, they do reflect a general consensus within the Association.

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Memorandum submitted by Stag Energy (UKES 08) Our memorandum consists of; A. An Executive Summary

B. A background description of Stag Energy, which we believe qualifies us to be considered

a significant expert in explaining the current barriers to UK gas storage development. C. Brief comments on the need for additional gas storage, which aim to address Committee

question 2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

D. Brief comments on gas supply risks, which aim to address Committee question 7. How

exposed is the UK’s energy security of supply to international events? E. Detailed comments on the weakness of current government gas storage policy and our

proposals on what we think should be done, already made to both DECC and OFGEM, and which aim to address Committee question 8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

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A. Executive Summary 1. Stag Energy’s evidence is from the viewpoint of the largest new entrant stand alone

storage company– i.e. a company with no other gas market interests. We therefore consider we are qualified as an expert both as to the reasons why new UK storage projects are not proceeding to Final Investment Decision (“FID”), and to what is needed to change this situation.

2. Stag Energy does not seek to offer an expert view as to the amount of additional gas

storage required in the context of the supply risks. Nevertheless we calculate that around 5 bcm of additional storage needs to be built to meet a GB target of 30 peak day cover, which appears consistent with the NGG December 2010 Ten Statement (“TYS”).

3. We do not agree that future gas imports are as secure as recent Ministerial statements

made to Stag Energy in written replies to our concerns. We cite market intelligence and statements by NGG in support of this view.

4. We argue that the reality of the Government’s current approach towards new gas

storage is both ambivalent and not clearly thought through. 5. The general industry view is that current market forward prices do not incentivise new

storage build. This is either a case of market failure to provide security, or the market is simply signalling that it is not possible to price for such a significant but rare extreme event.

6. The Government appears to have compromised on policy and chosen a new gas

balancing measure that they claim will incentivise new storage against general industry advice that it will deliver nothing of the sort. Parliamentary approval to introduce this measure is sought in the current Energy Bill (Clause 77). This invited wider debate in the House of Lords as to whether they had chosen the correct measure.

7. OFGEM are now also implementing the EU 3rd Energy Package, in which the UK

Government wishes to take a lead. OFGEM proposes to “gold plate” GB storage regulations under this package. Paradoxically the “one size fits all” EU policy is quite unsuited to the GB storage market unless gas security Public Service Obligations (PSOs) are also brought into line with Europe. Implementation of the EU 3rd package will also come before Parliament later this year under the affirmation procedure.

8. Stag Energy advocates the following two changes in approach;

The OFGEM process should be used now to establish a framework for a wide GB PSO.

This is much more efficient in terms of time and removes regulatory uncertainty. However the new PSO would only be implemented if no new storage was committed to construction as a result of other Government measures now underway. This key difference between establishing a framework and its subsequent implementation has been put by Stag Energy both verbally and in writing to Ministers and their officials and OFGEM, but without response.

A calculation of the value of security needs to capture the whole supply chain – i.e.

society as a whole, rather than immediate gas customers. A “low margin” gas consuming activity that does not economically qualify for “protection” against gas supply failure may well be performing a vital public service. The OFGEM remit, which confines analysis to a framework where there are just gas customers who are somehow separate from the rest of society is too narrow to properly evaluate security issues.

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B. Background to Stag Energy 9. Stag Energy is a private company based in Edinburgh. We are developing the Gateway

1 Gas Storage project, which is a 1.5BCM salt cavern facility located offshore in the East Irish Sea.

10. Gateway 1 has received all necessary planning and consents and has completed Front

End Engineering and Design (“FEED”). Our second UK storage project, Gateway 2 has yet to apply for any consents but would add a further 1.5 BCM of storage. Both of these projects are listed in National Grid Gas December 2010 Ten Year Statement (“TYS”), and so comprise a significant part of the Government’s recent public claims that up to 18 BCM of gas storage projects are under development in the UK.

11. Stag Energy is a member of the Gas Storage Operator’s Group (“GSOG”). GSOG

aims to speak with one voice in areas of common interest, ranging from taxation issues to regulations affecting data disclosure and access.

12. However it should be understood that there are clear differences in view between

GSOG members when it comes to major policy questions depending on whether the relevant storage company is;

An existing storage incumbent, or a new entrant which may potentially challenge an

incumbent,

and/or

Part of a wider integrated gas group with other interests in the gas chain, or a stand alone storage company.

13. Stag Energy’s evidence is from the viewpoint of a new entrant stand alone storage

company– i.e. a company with no other related gas market interests. 14. Gateway 1 has reached the point where we have had extensive detailed negotiations

with potential equity investors and storage capacity holders, both UK based and overseas.

15. Necessarily we have also had discussions with relevant Government Departments and

the regulator OFGEM over gas storage regulation policy and licensing. 16. We therefore consider we are qualified as an expert both as to the reasons why new UK

gas storage projects are not proceeding to Final Investment Decision (“FID”), and to what is needed to change this situation.

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C. Need for additional gas storage in GB Q2: How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 17. The policy debate as to whether GB needs more gas storage is not new. Indeed it had

already featured in parliamentary debates in the late 1990s

18. Policy debate is confused by whether the UK needs any more gas storage, of what type, and what is the correct way to go about achieving this. It is a complex technical area with many different interests groups.

19. Stag Energy does not seek to offer an expert view as to the amount of additional gas

storage required in the context of the supply risks we have highlighted below in Section D. We also clearly have a vested interest. So we have focused on offering advice as to what is needed to support investment in new storage, where we are expert.

20. However DECC asked our view of the amount of additional storage needed in autumn

2010.

21. We responded suggesting a 30 days peak ratio would be prudent, in conjunction with other sources of flexibility, in accordance with the EU gas security Directive.

22. Quite how this 30 day peak cover translates into an annual cover yardstick depends on

the type of storage built, and therefore its deliverability characteristics, as well as its notional annual capacity.

23. Crudely, if the market were to focus on large scale inflexible reservoir storage, then a

higher level of notional annual coverage would be required than with flexible salt cavern storage or pressurised tanks.

24. Stag Energy's calculation is that around 5 bcm of additional storage needs to be built to

meet our 30 days peak cover target of which at least half will need to have high deliverability. We have never been advocates of matching French or German levels of annual cover, much of which is low deliverability.

25. We think this extra 5 bcm is consistent with the NGG December 2010 Ten Statement

(“TYS”).

26. This is a GB issue because Northern Ireland is considered to be part of the “All Ireland” energy market by the Republic and so gas storage development in Northern Ireland would be included in the Republic’s PSO framework, so giving confidence to potential new investors. (See paragraphs 74 to 82 below).

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D. Gas supply risks Question 7: How exposed is the UK’s energy security of supply to international events? 27. Future UK gas demand is likely to prove more volatile because of increased

intermittent renewables and a greater amount of gas fired generation, now even more probable post the Japanese nuclear crisis.

28. Ministers have consistently argued over the last decade, and continue to argue, that the

supply side of our gas market has responded well to the challenge of increasing import-dependence. They cite the fact that GB’s gas import capacity has increased by over 500 percent. Much of this, for example pipeline connections from Norway and Continental Europe as well as the major new South Hook LNG import terminal at Milford Haven, has been underpinned by long-term contracts.

29. On closer examination the picture is not nearly so robust. NGG published Transporting

Britain’s Energy (TBE) in July 2010.

30. Regarding Norwegian supply robustness NGG says;

“Norway prioritises gas supply to the Continent”

“For security planning we make the assumption that the loss of Norwegian production impacts the UK ahead of the Continent.”

31. There is a wide possible range of possible Norwegian imports but with a decline setting

in post 2015. The amount under long term contract is not transparent. It is also partly field specific and therefore subject to decline (Gateway estimate perhaps ~8 BCM at most, less than half, is at present is under long term contract and is therefore a “must flow” to the UK)

32. Regarding LNG supply robustness, NGG says;

“Of all of the supply components LNG imports provide the greatest level of supply

uncertainty due to numerous factors.”

“A view that most LNG imports to the UK may not be specifically contracted”

33. Stag Energy estimate less than half the LNG required on an annual basis, and shown in Figure 11, is long term contracted. The need for additional LNG supply becomes acute post 2016 as Norway falls away. Tightening of the global gas market by 2016/2017 is made even more likely as a consequence of China’s postponement/possible cancelation of nuclear reactors representing 40% of global demand for nuclear reactors.

34. Regarding the interconnectors, NGG says;

“It must be stressed that there is considerable uncertainty over future flows through

both BBL and IUK due to options to flow gas to alternative markets and possible gas quality issues.”

35. Stag Energy believes PSOs in most mainland EU states will remain in place, forcing

supply prioritisation of these markets whatever GB price levels may signal. (see paragraph 75 below)

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E. Government policy, and proposals already made by Stag Energy to address gas security of supply Q8: Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? 36. We answer this question in three parts;

E1. We summarise the different attitudes to gas storage amongst the various players

E2. We explain why we believe current Government policy will not result in any

significant new GB gas storage.

E3. We set out what we have already proposed to Government and OFGEM to promote more gas storage in GB.

E1. Different attitudes to gas storage 37. Ministers may appear to agree with a consensus view that the UK requires more gas

storage and it is merely a matter of how this can best be achieved.

38. However, we believe Government policy is also strongly influenced by groups opposed to increased gas storage and is rather ambivalent as a result.

39. The current position as we perceive them of the four major groups involved, on the

basis of their published written evidence to the OFGEM SCR, are summarised below;

Customers

40. Large gas customers argue more storage is essential because for them a reliable gas (and electricity) supply could be a matter of business survival.

41. Domestic gas customers’ appointed representatives Consumer Focus have argued

against more gas storage because they perceive this would add to gas bills, but only large customers would benefit.

Market Participants

42. Gas importers, shippers and suppliers argue that recent market experience clearly

demonstrates that UK gas security is more than adequate and therefore there is no need for new interventionist action to promote storage. They would wish to avoid the risk of additional costs that they may be unable to recover from the marketplace.

43. The gas storage industry puts forward inconsistent views, depending on whether it is an

incumbent or a new entrant or is part of a wider group with other interests in the gas chain.

44. New entrants such as Stag Energy argue that the structure of the UK gas market is such

that only direct market intervention by DECC/OFGEM will have a material effect on forcing significant levels of new storage. Other more established companies prefer to focus on tax and planning issues which would benefit their own operations.

45. Consultant reports commissioned by these different groups tend to support the views of

those commissioning them.

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Regulators

46. Historically OFGEM view’s was supportive of the gas supply side view that security

was not an issue.

47. However it changed its position post the 2008 Russian/Ukraine gas dispute. Project Discovery concluded that there is the risk of a major UK gas interruption which although of “low frequency” could be “potentially catastrophic”.

48. This conclusion is surely now significantly reinforced by recent events in Japan and the

Middle East. What should be done about this risk is however a matter for Government/DECC in policy terms, OFGEM being principally concerned with implementation.

49. At the EU level a gas security of supply directive requires a certain level of gas supply

security but is non prescriptive as to how precisely this should be achieved. The UK government argues it is compliant with this Directive. This may be a generous interpretation, but it is unlikely any legal cases will be brought to test this assertion.

50. The general established EU approach is to have a prescriptive level of storage which

gives storage operators a guaranteed potential market and so is quite different to the UK security approach post privatisation. The non-prescriptive aspect of the Directive was partly to accommodate current UK gas security policy.

51. The EU third Energy Package also affects gas storage by its “unbundling provisions.

Unbundling fits well with the EU approach of guaranteed throughput for storage facilities but is less appropriate for the “merchant” storage facilities in the UK which would be very high risk in an unbundled environment.

52. These are currently being interpreted by OFGEM for UK implementation although the

package will require parliamentary affirmative approval.

Government

53. The Government through DECC determines gas security policy and under Labour consistently took the view that there is no need for direct government intervention to promote gas storage.

54. The Coalition appears to remain content to let this area be driven by the market and is

therefore more supportive of the views of gas shippers and suppliers and the need to avoid extra costs being placed on consumers. They are mindful of the extra costs now beginning to being placed on energy consumers as results of renewables. Gas storage costs would be small in comparison. Stag Energy has calculated that the costs of renewables (ROCs and feed in tariffs) on domestic customers are approximately 45 times those of an extra 5 bcm of new storage. Nevertheless a PSO is possibly viewed as one more burden too many, even if the customer is simply paying in other ways through higher average gas prices.

55. Both Labour and the Coalition has maintained a consistent policy of being supportive

of gas storage development in removing artificial market impediments to storage in the planning and tax areas and easing the licensing regime. Historically these factors were thought to be the major impediment to gas storage rather than forward gas market prices, but currently are not material compared with the market environment.

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56. The Coalition is now considering revising the gas market balancing regime to ensure that the incentives on gas shippers and suppliers are properly market reflective with regard to supply risk. The Energy Bill currently being debated in Parliament will give OFGEM extra powers to expedite this process.

57. Under Labour DECC consulted and twice rejected any new measures to promote

storage, such as this gas balancing reform, so it could be argued that the Coalition is now taking some action. OFGEM have begun an implementation process under its Significant Code Review Process (“SCR”).

58. But it should be noted that the Conservatives in opposition had argued that direct

intervention on storage prescriptive lines, such as a PSO, was necessary to promote new storage, so, unlike renewables, the Coalition policy has changed to emphasising a market based approach.

E2. Current Government policy will not produce more gas storage.

59. We argue that the Government’s current approach is both ambivalent and not clearly thought through.

60. Ministers continually cite the 18BCM of existing storage projects which have not yet

proceeded to financial close to be the result of a successful policy.

Should we infer that, if few or none of these Projects proceed to financial close, then the current policy will be changed?

If policy is changed then what storage target (size and timing) will the government use

to base any change in policy?

61. Or, if the market arrangements are deemed “economically correct”, and still few or none of these storage Projects proceed, then;

Should we infer the logic of the Governments current position is that the market has

correctly decided more storage is unnecessary and it is safe to run gas security risk?

62. The view held by both DECC and OFGEM appears to be that changing the gas market balancing rules will probably incentivise more storage.

63. However consultants employed by DECC under Labour twice found this balancing

rules change approach to be the least effective of the measures available. (Oxera in 2008 and Poyry in 2010). It is a very complex approach, different to everywhere else in Europe, and largely untried except we believe in the very small Victorian (Australia) gas market.

64. Responses to the initial OFGEM SCR consultation generally confirm the view that

changes to the balancing rules are unlikely to produce more storage. They also highlight implementation difficulties and unintended consequences.

65. Stag Energy’s view is that the paramount problem remains the absence of a long term

gas summer/winter differential price signal for the bulk of the potential new storage projects. Most of the current projects were initiated during the period 2005 to 2008 when this forward price signal was present, and all appear to have stalled now that this signal has disappeared.

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66. It is a general industry view that changes to the balancing mechanism will not influence the forward curve significantly. This is because suppliers will find it too difficult to properly evaluate and price this new risk in the forward curve until after a supply failure event (the parallels with the 2008 banking crisis are striking).

67. There are a number of opinions as to why the GB market forward price curve

differential has weakened, albeit the absolute annual average gas price has remained unchanged and comparatively high. Some pundits consider it to be a fundamental structural change signalling a lower need for storage, others that it is a temporary feature driven by the marketing practices of a limited number of large importers and the differential will reappear by 2015.

68. Forward GB gas markets are thinly traded and capable of rapid shifts in sentiment.

When the differential finally reappears as a response to winter gas shortages it then may be too late for new storage to be developed.

69. Implementation of the EU 3rd energy package is taking place concomitant, but

independent from, the OFGEM SCR process.

70. The Government has chosen to “take a lead in Europe” on implementation of the 3rd Energy package regarding unbundling. This appears to be based on the belief that a more competitive EU gas market enhances UK gas security, despite the presence of PSOs in mainland Europe preventing responses to price signals.

71. Consequently OFGEM’s initial proposals on unbundling storage are to “gold plate” the

package. They go far further than the 3rd package requires, involving potentially tight price regulation and annual auctions.

72. We think OFGEM’s proposed regime fits well into the general EU environment where

storage has a guaranteed throughput via PSOs and so capacity holders need to be price protected. However it is likely to prove highly toxic to the possibility of any new entrant UK merchant storage under the different UK market rules.

73. In summary, while Ministers might state they wish to see more gas storage in the UK,

the renewables agenda and implementation of EU regulations appears to occupy a higher priority for DECC where there is any potential policy conflict.

E3. Measures needed to promote more gas storage in GB

74. France, Spain, the Benelux area and the Irish Republic all have mandatory levels of

storage imposed on gas market participants through a PSO framework.

75. These PSOs have a direct impact on the UK market because they override market signals that may suggest for example reverse interconnector flows to the UK, and they will not change. Hence taking a lead on unbundling is unlikely to improve interconnector gas supply flexibility.

76. We recognise EU Regulation prefers “market based solutions” but we understand this

to mean measures involving monopolist state or system operator roles are to be avoided. PSOs based on supplier shares obtained in competitive markets are the storage regulatory norm in mainland Europe and are interpreted as a market based solution.

77. We understand that it is the Government’s view that focusing on a prescriptive level of

storage through a PSO, and setting an annual target for that element, is inadvisable,

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because it would directly substitute one view of the appropriate mixture between the various balancing tools for the companies’.

78. Ministers argue that “second guessing” the market in this way would not be cost free –

for example, it would reduce the commercial incentive to construct what (on an ex ante basis) may appear to be marginally economic gas import capacity; during this winter we have seen just how valuable that capacity can be, in providing access to a benign international gas market.

79. Stag Energy’s contention is that it is DECC and OFGEM who are the ones focusing on

one solution. We do not see PSO and balancing changes as mutually exclusive. In fact there is a limited PSO already in place which was transferred from supplier to transporter licenses in 2007 following a DECC consultation.

80. Clearly there is a case for revisiting this PSO transfer and reassessing the scope of

the existing PSO as complementary to anything that may be changed with respect to balancing rules.

81. We are mindful it will be necessary to move rapidly to a PSO should a gas supply

shortage develop yet it takes some time (more than 1 year) to design a PSO under the OFGEM process, let alone finance and build a new storage facility.

82. We therefore also argue that it would be more efficient if the SCR process be used

now to establish rules for a wider PSO, with no need for implementation if more storage projects are committed to construction in the meantime.

83. The point that there is a difference between establishing a framework and its

subsequent implementation has been put by Stag Energy both verbally and in writing to Ministers and their officials. We have also put this point to OFGEM as part of the SCR consultation. We are therefore disappointed and that, what seems to us to be a helpful and constructive comment, so far seems to have received no acknowledgment.

84. No measure can be guaranteed to deliver 100 per cent supply security. However, by its

very nature, a PSO is guaranteed to produce a level of storage depending on how it is set and therefore is clearly more in tune with the spirit if not the legal niceties of the EU gas security directive.

85. It is also clearly the case that multiple storage projects within local GB jurisdiction

deliver a better quality of security than, for example, flexible supply contracts subject to force majeure or commercial non performance, or the vagaries of international spot LNG markets.

86. We also think the value of security needs to capture the whole supply chain – i.e.

society as a whole, rather than immediate gas customers. A “low margin” gas consuming activity may well be performing a vital public service.

87. Most major historic supply interruptions in GB have arisen from domestic

infrastructure failure rather than physical availability of gas. It is difficult to see how balancing changes address this point, or how the consequent penalties can be fairly allocated to those ultimately responsible.

88. We conclude that if the SCR is to place a sole emphasis on balancing reform rather

than a PSO it follows that balancing reform should be safely judged to deliver both the same level of security as a PSO, and at a lower cost. Balancing changes should

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not be prioritized as a sole measure if the level of security they deliver is uncertain and/or their associated costs are unclear.

March 2011

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Memorandum submitted by ReSus Techonology Ltd (UKES 09) Executive summary

The ‘Security’ and ‘Independence’ of the UK’s energy supply are not mutually inclusive

factors; in fact the only one of these terms that is essential is ‘Security’. If the UK’s energy supply is secure then ‘Independence’ is of secondary importance as this becomes primarily an economic factor relating in the main to cost of imports. Conversely if we have ‘Independence’ of supply without security then it is of limited worth.

In any event, Energy Independence is no guarantee of Energy Security; the only certain way of achieving this is through international social and political stability. We have only to look to Iraq, a country awash with independent energy, whose energy infrastructure was destroyed in days and yet years later they are still struggling to restore it and who knows what the international political landscape will look like by 2050.

The reality of the current situation is that we do not have guaranteed ‘Security’ or ‘Independence’ of energy supply but we rely on diversity of supply sources and sourcing from ‘friendly’ countries to maximise supply security, this is equally true for uranium as fossil fuels. Accordingly the main focus of this response is on supply security in an energy scenario that is sustainable.

Whilst on the topic of terms used in renewable and sustainable energy solutions, I believe the terms ‘low carbon’ & ‘de-carbonisation’ should be qualified because the fundamental problem is not the carbon but its origins, i.e. fossil fuels, personally I think these terms are inappropriate and should be replaced with something along the lines of ‘low fossil’ or ‘de- fossilisation’, because in principle there is no fundamental reason why an energy infrastructure cannot be based on carbon, the proviso being that it must be sustainable in the broadest meaning of the word. Moreover I strongly believe that ‘green carbon’, by which I specifically mean synthetic carbon (green coal) and carbonaceous fuels and generally not biomass, has the potential to address one of the key challenges of a renewable energy economy, namely that of energy storage, particularly for electricity generation.

Additionally, to maximise the chances of reaching the renewable and de-fossilisation targets it is important to consider our entire energy infrastructure in conjunction with environmental policies because much of our waste contains significant amounts of recoverable energy.

Key requirements to achieving our targets within the desired time frame are.

1. Maximise the efficiency of energy generation 2. Maximise the efficiency of energy distribution 3. Maximise the efficiency of energy use

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4. Minimise costs in order to accelerate uptake. 5. Provide of substantial long term energy storage.

The first three elements effectively reduce the amount of sustainable energy required, in general the less we need the faster we can provide the infrastructure to provide it, the third accelerates its implementation and the fifth improves security. Notes on responses I have split my response into two parts, the first (below) commenting on the specific questions in the terms of reference where I consider I am able to do so. The second part is a presentation of a scheme for a ‘Sustainable Integrated Energy Infrastructure’ incorporating substantial energy storage technology, primarily by the incorporation of a ‘CCC’ (Closed Carbon Cycle - see separate PowerPoint attachment “SustainableEnergyCycle+CCC.ppt”). The underlying concepts of the integrated energy infrastructure are given diagrammatically with supporting notes as this conveys the principles far more easily than trying to do so in words only. Please note; copies of this part of my response has been shown and/or given, to a few people but it has never been officially presented or published. Responses to questions:

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? Nuclear power for electricity production has to be seen as a better alternative to coal and oil, particularly if the new thorium and/or fusion technologies can be brought on stream. However I do not believe that renewables can provide a better alternative that can be economically viable and that the main driving force for nuclear is political which is bolstered by the current uncertain political environment in many countries that are rich in solar resources.

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? Energy storage is critical when large amounts of intermittent RE from solar or solar derived (wind, wave etc.) sources are included in the energy mix. Long term stable energy storage, several weeks or more, could also be a major contribution to energy security. The only current storage mechanisms that meet these criteria economically are chemical fuels, ideally in solid or liquid form. In a non fossil based energy economy these would need to be created either biologically or synthetically. One such mechanism for achieving this is the ‘CCC’ (see attachment “Sustainable Integrated energy infrastructure”) where the CO2 produced during energy conversion is captured and recycled back into synfuels or biofuels.

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3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? Substantial electrification of transport could very significantly reduce the amount of energy required, the less energy we need the greater the chance of providing it which translates to improved security. To give an example of the possible energy reduction; an internal combustion engine car running at 45mpg (which is better than current typical UK performance) consumes about 1,000Wh of energy per mile, by comparison well designed electric vehicles consume less than 250Wh of energy per mile (e.g. Tesla Roadster about 230Wh/mile) a fourfold energy requirement reduction or more. Electrification of heat, at least for space and water heating, I would suggest is of little or no benefit and because heat production from chemical fuels, particularly gas, is generally very efficient (modern condensing boilers can achieved about 90% efficiency and absorption heat pumps would go well above 100%) electrification of heat may well increase our input energy demand and thus reduce energy security. A far better approach would be to add solar thermal heat collection and storage to space and water heating systems, which are (or should be), lower cost and more efficient than solar PV. In the overall scheme a move to electric vehicles and a redirection of biomass from biofuels for cars to bio-methane for efficient space heating would make a much better use of our natural bio-energy resources. Liquid biofuels should be reserved for applications where electrification is inappropriate, such as air travel.

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? Anything that reduces our energy demand has to have a positive effect on energy security.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? No comment

6. What would be the implications for energy security of a second dash-for-gas? This could be beneficial if it were a ‘dash-for-biogas’ or grid injection biomethane. A significant proportion of the UK’s gas requirements could be met from energy recovery from municipal organic waste, that is currently either composted, incinerated or sent to land fill, by the use of bio-digesters. The waste from these digesters can also provide a useful fertiliser. Furthermore, there are projects exploring the possibility of harvesting seaweed for bio-fuel. Aberystwyth University has, and may still be, researching the use of seaweed as a biomass source for bio-ethanol production for transport, I strongly believe that bio-methane

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production would provide far better utilisation of such a resource.

7. How exposed is the UK’s energy security of supply to international events? No comment

8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? The only indigenous secure long term energy supplies we have are renewables, particularly wind, and coal. An energy strategy based around recycled carbon using solar energy to regenerate carbon (green coal), or other carbonaceous fuels, from CO2 and using DCFC (direct carbon fuel cell) technology for electricity generation could supply rapid supply response to mitigate renewables’ intermittency. There are thermo chemical processes that are well established for converting CO2 to carbon fuels (the Bosch, Sabatier and Fischer-Tropsch reactions) which if combined with the right solar technologies might be economically viable, though as far as I am aware there is no current research in this area apart from the very limited amount I have done myself. One big advantage of carbon is that being a solid it could be easily stockpiled in order to cover supply fluctuations and in extreme cases it should be possible to supplement or replace it with fossil alternatives.

9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? No comment

March 2011

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Memorandum submitted by Jonathan Cowie (UKES 10) Summary 1. Energy (certainly oil) has an elastic price and there are variations between nations.

However, markets are sensitive to sharp changes in supply. Meanwhile the UK markedly reduced investment in energy infrastructure from the mid-1980s to throughout the 1990s and so now relies on much foreign business and resources to manage and ensure its energy supply. Energy efficiency measures have seen some considerable success but are subject to the law of diminishing returns and Jevons paradox. Furthermore, there are perceptual dimensions to energy efficiency that (now that many of the basic energy efficiency measures are in place) that need to be considered. Yet energy security requirements do largely chime with those of reducing greenhouse emissions. There are difficulties with proceeding ahead of economic competitors and this necessitates reducing energy intensive industries (focussing on lower energy and high added value innovative industries) to ensure a strong economy; a strong economy is required to pay for the transition to a low-fossil, high energy society: this last, though, tends to incur fossil carbon leakage. While a second dash for gas might be tempting, it would not be a substitute for investing in a low-fossil transition now (or deferring this investment under the specious guise of gas being a ‘transition’ energy source). This is because not only is the UK, with its high dependence on fossil fuels and increasing reliance on fossil imports, is becoming more exposed to energy security risks, but because the whole world itself has 'cheap' fossil fuel security issues (notwithstanding greenhouse concerns) against a backdrop of increasing climate change already in train. Speed to abandon fossil is essential for medium-to-log term economic competition even if political perspectives (5-year election cycle) are short-term). Currently the UK is very exposed to a lack of energy security in the coming decades. Failing to address this (real material resource) issue will make the current financial sector crisis (based on notional banking values) seem trivial.

How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 2. Despite fossil carbon concerns (energy security and climate change) fossil fuels still

make up over 90% of UK primary energy supply, and here oil accounts for some 37%. With regard to the latter's long-term prices, between 1950 and 1973 crude oil prices remained constant in cash terms but declined in real terms by over 30%. October 1973 saw the oil crisis with OPEC crude rising from $1.77 a barrel to around $7.00 in thee months. The longer-term smoothed trend (taking out daily/weekly market fluctuations) saw Dubai crude rise from $1.90 in 1972 to $10.41 in 1974. This caused a profound shock to economies around the world that did not have domestic oil reserves: those that did had an economic advantage.

3. One important energy security matter to note from the 1973 crisis was that it was

politically induced through OPEC marginally restricting supply combined with its cartel imposing a unilateral price hike. However, the Middle East oil cut in supply at the time only represented less than 10% of global production yet the price the market

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was prepared to pay increased by four-fold: the fossil fuel market therefore seems to be supply sensitive and price insensitive.

4. What we are faced with in the early 21st century are twin threats. (i) potential short-

term political disruption of supply combined with medium-term manipulation of the market. (ii) the advent of peak oil (or table top oil might be a better description) and the longer-term decline in the global availability of oil cheap to mine.

5. However the question the Select Committee poses is carefully worded in asking how

resilient is the UK energy system to future changes in prices. There have already been marked long-term differences between nations in prices end-users pay for fossil fuel. This is illustrated by comparing station court petrol prices between the US and UK. (See table below.)

Prices for car petrol in the money of the day in mid-1992 and mid-2005 (prior to the 2005 sharp rise in crude oil). Note: fluctuations in the exchange rate mean that caution is advised when making strict comparisons and hence an allowance of around ±5% is advisable. Nonetheless, this price comparison between nations is fairly representative. Year Automobile fuel Price in UK (London) Price in USA (east)

1992 1 US gallon £1.75 ($3.24) $1.30 (£0.74) 1992 1 UK gallon £2.10 ($3.88) $1.56 (£0.84) 2005 1 US gallon £3.50 ($5.95) $2.04 (£1.20) 2005 1 UK gallon £4.20 ($7.14) $2.45 (£1.44)

Source: Cowie, J. (2007) Climate Change: Biological and Human Aspects. Cambridge, Cambridge

University Press. 6. Yet despite such long-term differences between nations, both the US and UK

economies continue to function. 7. So it is sharp changes in fossil fuel price to which nations tend to be less resilient than

actual prices per se even if users (such as the UK road transport sector) complain bitterly.

8. With regard to energy security, the Central Electricity Generating Board (CEGB) in its

40 years up to the 1990s took the long-term strategic view. This was particularly enhanced by political instruction in the 1980s so as not to be too dependent on any single fuel and particularly coal whose supply was at that time threatened by industrial action. Ironically, it was in part this redundancy in generating capability that was one of the major political reasons for citing the CEGB to be inefficient and so a raison d'être for the privatising of the industry (nuclear for a while being part excepted).

9. True, the UK gained with this privatisation cheaper energy supply, but it lost the more

strategic longer-term build of new more efficient power stations: new plant was constructed but at a lower pace. The UK also lost further development of its then embryonic 3rd nuclear (PWR) programme as well as much of its R&D capability that underpinned innovation of all fuel plant types.

10. The loss of the 3rd nuclear programme meant that we also lost much domestic

technical ability and today we must largely import this expertise.

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11. Meanwhile with regards to nuclear's contribution to energy security due to changes in

uranium prices, the advantage of fissile material is that it is energy dense and this facilitates storage (hence the potential ability to use stores to ride out short and even medium-term market blips). The disadvantage is that the UK supply of radioactive material that could be ultimately used in fission is not all in a suitable form and conversion costs are not cheap. What this means is that UK is capable of maintaining a stock of nuclear fuel and so nuclear power is reasonably resilient to short-term market blips in uranium prices bit not to medium-term changes in the uranium market. I am not familiar with the current situation but note that the Nuclear Decommissioning Authority's Uranium and Plutonium: Macro-Economic Study (2007) suggests limited medium-term generating capability from the UK materials stock then currently held. He recent A Low Carbon Nuclear Future David King report points to processing current waste as providing decades worth of UK nuclear supply at current usage: note that this time period would be greatly reduced with an expanded nuclear programme (as is envisaged) and further reduced taking into account increased electricity demand as we switch away from fossil carbon.

12. The Nuclear Energy Special Interest Group of the Energy Institute (made up of those

in the currently in the industry) and the Institute of Physics (who in the 1990s were concerned as to the loss of related physics training) are better placed to inform the Select Committee with further detail than myself should it be required.

13. Renewables are, of course, not prone to market vagaries in either fossil fuel or

uranium price change, however the contribution renewables make to UK primary energy demand is still very small with much kit having to be imported. Many comparatively small companies (together with renewable wings of a few of the giant energy companies) make up the renewable sector that is valiantly trying to grow despite current cheaper fossil fuel availability (which of course will not last). Mechanisms such as the feed-in tariff do critically help. The Renewable Energy Association is better placed to inform the Select Committee with further detail on these points than myself should it be required.

How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 14. Investment in the grid is required to facilitate the more disparate energy production of

renewables. Connection to the grid is presenting challenges for some renewable schemes.

15. With regards to natural gas, there are two levels of concern. (i) Of short term concern,

extra volume gas storage is required if the UK is to be able to ride out a month or two of interruption in supply (the Ukraine incident of January 2009 being an example) or a particularly marked market episode. (ii) Of long-term concern, the global supply of 'cheap' natural gas will only last a matter of decades at current rates of consumption. However, in the short term at least, global demand for natural gas is likely to rise and the UK further adding to this would not be prudent.

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16. With regards to nuclear, lack of investment since the halting of the PWR programme that began in the 1980s and the selling off of the state-backed CEGB, has meant that foreign investment has been required. Potential investors in nuclear might argue that the conditions (and long-term assuredness) under which they are expected to make investments have not been attractive. (Long-term market regimen stability concerns also apply to renewables.)

17. With regards to coal, the supply of domestic cheap coal will only last a decade or two

at current rates of use. However the supply of more expensive UK coal is far more extensive

18. Provided the UK is prepared to pay the price (both for fuel and the energy production

method) carbon capture and storage may well be a meaningful option to increase UK energy security. However, commercial-scale carbon capture and storage has yet to be proved in the UK.

19. Finally, there is the time factor. The delays in investment in energy infrastructure and

delays in implementing mechanisms mean that we run the risk of not achieving energy security goals for our economy ahead of our competitors. These delays have an additive effect. To get from where we are now (with high fossil dependence) to an energy secure future we need to make many changes to technology, infrastructure and market, so there will be a transition period involving up-front investment. Yet many of these stages each seem to be blighted with delays of months if not years. Add all these together and there is considerable lag in Britain moving forward. Current examples include delays in infrastructure/market in getting individual renewable projects connected to the grid and delays in initiatives such as the renewable heat initiative. (The Renewable Energy Association can tell you more.)

What impact could increased levels of electrification of the transport and heat sectors have on energy security? 20. In the medium-to-long term it is clear that the UK is to going to have to substantially

increase the electrification of its transport and heat sectors if it is to wean itself off of increasingly scarce, and climate-impacting, fossil fuel use.

21. However the laws of thermodynamics are such that there will be energy losses as

energy is both converted to electricity and (for transport) stored in electrochemical charge form be it as a more conventional accumulator or hydrogen cell. These inefficiencies will serve make the UK less energy secure (in that more primary energy will need to be produced to deliver the same amount of energy at the point of end-use) unless the UK develops the capability to harness a considerable amount of non-fossil fuel energy. In the event of the latter, the UK will become more energy secure and so this is the only long-term sustainable route to take.

22. The policy difficulty comes with the afore transition period (paragraph 19) especially

as political time frames do not match the transition time frame.

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To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 23. This is a more contentious subject than many concede. Regarding energy efficiency,

there are four main difficulties and two points of perception to bear in mind. 24. The first difficulty is that it is true that there is much that can be done to improve

energy efficiency in the UK. But equally it is true that much has already been done to improve energy efficiency in the UK. However there is a law of diminishing returns: it is easier to save the first 10% of energy wasted than the second to last 10% of energy wasted (and thermodynamically impossible to be 100% energy efficient). At some point one needs to know when to stop improving energy efficiency: when continuing the game is not worth the candle.

25. The second difficulty, in energy security terms, is that the benefit of improved energy

efficiency may not necessarily be taken in the form of reduced energy consumption but improved service or goods delivery/use. For example, improving heat insulation may not see a consumer reduced energy demand but a chance to have a house warmed to a degree that prior to improving the dwelling's energy efficiency would simply have been unaffordable. This is a variation of Jevons' paradox (or the Jevons effect) and was explored in relation to energy by a number of academics and subsequently popularised in academic circles as the Khazzoom-Brookes postulate.

26. The third difficulty is that our technologically based society continues to develop

(which is something we all want). What this means, for example, is that while in the 1950s most British households had radios, in the 1960s it was mono-TVs and, even though the energy efficiency of these mono-TVs improved, in the 1980s we saw many households acquire more energy-demanding colour TV. Today we have widescreen, high definition systems that operate often simultaneously in combination with DVD players and hard drive computation. And so while each individual technology becomes more energy efficient within its own time frame of use, new technology comes along and more often than not this incurs a higher energy demand. (Another example would be the evolution of fridges and the transition to fridge freezers.)

27. Another energy-related property of increasingly technologically based societies is that

they continually find new ways to increase energy demand (as opposed to the afore evolution of existing technology). And so in the early 1980s some of us had BBC Acorn Computers, a monochrome monitor and a printer. Then in the 1990s we had the first of the modern PCs. From then on not only did their processing power and memory capacity increase (hence power demand) but the add-ons were not just confined to a printer and monitor but other items that had never been domestically used before such as a scanner, router etc. etc. Yet today we have computer processing at a far greater energy efficiency (Joules per bit processed) than the Acorn but this is completely offset by both greater bit processing and accessory usage.

28. The fourth and final difficulty is that energy efficiency is sometimes undermined by

the way the market is structured. For example, domestic users of energy pay more for initial energy usage and less per unit of energy with further usage. This does not encourage energy saving. Furthermore, it penalises the energy poor. Taking a hypothetical average family household (DECC and the industry can tell us who these

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are in reality) suppose that a proportion (say a third) of their initial energy is cheaper and their subsequent remaining portion (two thirds) more expensive then swapping these so that the first two thirds of energy use was cheaper and the final one third more expensive would be cost neutral: the energy bill would be the same. However for those using less but needing energy (such as the elderly living alone) would find it cheaper, and those who use energy in a profligate way would find it more expensive and so consider being more energy efficient than they do now and so be more encouraged to reduce their demand. Domestic consumers’ initial energy for basic requirements needs to be cheap and after that further (more profligate) energy use needs to be more expensive: i.e. the reverse of the system we have now.

29. Then there are the two perceptual points with regards to energy efficiency and energy

security. The first is that what may seem inefficient may not actually be inefficient. Using cheap (and with low energy of construction) hot filament and low efficiency light bulbs in a living room in winter in not an inefficient use of energy as both the bulb's light and heat are used by the occupants especially as living room lights are on for longer in the winter and less in the summer. The heat contributed this way by appliances is called a 'free heat gain' in Gerald Leach et al 'A Low Energy Strategy for the United Kingdom' (1979). Conversely, a front door porch light clearly does necessitate high-energy efficiency as waste heat is lost to the outside. So the question remains as to whether it is best for UK PLC to have all lights with high-energy efficiency and high energy of construction or a mix with lower light efficiency, heat loss and cheaper (resource) cost of construction?

30. The second issue of perception to note is that there is no point of having high energy

efficiency unless there is something about which to be efficient. Energy efficiency is not a goal in itself as it is nothing unless set against energy consumption and production. As such improvements in energy efficiency by itself can never replace the need for energy production.

What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 31. Aside from the afore electrification transition problem, the impact on energy security

of trying to meet the UK's targets for greenhouse emission reductions are quite favourable. In the main, meeting energy security concerns chime with those of reducing greenhouse gas emissions. This has been known for a while even over a decade ago when there was more climate scepticism (cf. Cowie, J., (1997) Climate and Human Change: Disaster or Opportunity? Parthenon, London & New York).

32. Of course, the devil is in the detail. For example, a biofuel programme (often

considered 'greenhouse friendly') would necessitate fertiliser use that would increase agricultural greenhouse gas emissions, but then irrespective of the biofuel question, the UK is going to have to look to meeting its food security concerns as the global population increase towards the middle of this century who will go after the imports we currently take as being secure.

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33. Furthermore, if energy security is defined, not simply as ensuring that the UK is provisioned with energy but, as provisioned with cheap energy (and some might define energy security that way for international competition reasons) then moving towards a low fossil carbon economy before other nations do will make our energy intensive industries less competitive. (This medium-to-longer term view may be difficult for politicians with short-term five-year electoral horizons to consider.) Yet we require a strong economy so as to pay for a switch to becoming a low-fossil and a high energy security nation. The trick therefore is therefore to both balance long and short term considerations and with the latter to ensure that the UK focuses on high-value industries that do not require prodigious quantities of energy until we (and our competitors) have been weaned of fossil fuels.

34. Another key point here being that addressing energy security is should not simply the

province of DECC but other Government departments too (such as those responsible for business and industry). This matter is in the hands (or not as the case may be) of our politicians.

What would be the implications for energy security of a second dash-for-gas? 35. Not good. Domestic supplies and production of natural gas are declining. And though

while the medium-term supplies of imported gas are theoretically there (hence the potential for short term economic and political seduction), imported gas supplies are subject to potential disruption and will almost certainly be the focus of competition from other nations hence medium-to-long-term price increases. Furthermore, a short-term dash for gas would not in anyway substitute for the long-term need for investment in sustainable non-fossil energy resources: all that would happen is that the latter investment would be delayed to a time when natural resources were more expensive in real terms due to increasing global population and diminished 'fund' resources (any resource of which there is a fixed raw (as opposed to recycled) supply). A second dash for gas would be a fool's economy. Having said that, some limited new gas supplies will be required to ease the transition. The trick will be to keep dependence on imported gas low and temporary.

How exposed is the UK’s energy security of supply to international events? 36. Very. It has been known since the Jay Forrester World Models (1971) – and has

recently been popularised in policy circles by the Government's Chief Scientific Advisor John Beddington with his 'Perfect Storm' (2009) – that global population will peak (along with food and water demand) and cheap fossil fuel dwindle a few decades away, around the middle of this century, and that these demographic crunches will be set against a backdrop of increasing climate change stress worldwide.

37. A back of the envelope approximation suggests that annual global energy demand will

double in the 2040s from what it was in the first decade of the 21st century. How will this extra demand be met (especially given the increasing absence of cheap fossil fuel)?

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Present & Likely Future Global Energy Demand

0

5000

10000

15000

20000

25000

1964 AD 2004 AD 2044 ADYear

mto

e

New for 2044RenewablesNuclear CoalNatural GasOil

? ?

Fig 8.6

Population ~8.7 billionPer capita energy ~2.3 toe

Population 6.37 billionPer capita energy 1.6 toe

Population 3.27 billionPer capita energy 1 toe

Source: Cowie, J. (2007) Climate Change: Biological and Human Aspects. Cambridge, Cambridge

University Press.

8. Given that, the 21st century will see dwindling supplies of cheap fossil fuel (hence fossil fuel will be more expensive), and notwithstanding greenhouse concerns, the world will somehow need to double its energy production. Nations with well-above-the-global average of energy consumption per capita will be exposed to extreme energy security pressure unless they are energy self-sufficient and low fossil fuel reliant. Yet at the moment the UK, with its high dependence on fossil fuels and increasing reliance on fossil imports, is becoming more exposed to energy security risks both our own and internationally. This generic picture translates into specific episodes of energy security concern be they the Ukrainian gas pipeline incidents or the current Middle East political transformations.

s the UK’s energy security policy sufficiently robust to be able to deal ith uncertainties and risks inherent in all of the above areas? If not, ow could this be improved?

9. No. The UK is far from being able to deal with uncertainties and risks inherent in all y

estment thereof is required.

suppl 40. ods

on

3

Iwh 3

of the above areas? Strict (very strict) commitment to a medium-to-long term energstrategy and inv

Are there any other issues relating to the security of the UK’s energy

y that you think the Committee should be aware of?

The UK has energy leakage (fossil carbon leakage) in that we rely on imported gothat require others to expend energy on our behalf. If we want to continue to rely

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these imports then we need to ensure those on whose imports we depend are enersecure too.

Population is a key driver of energy consumption, hence energy in-security. More people means more energy demand. I fully rea

gy

41.

lise that population size is an issue that politicians find uncomfortable, but that is no excuse for not addressing it. Current UK population growth of around 2.7% between 2005-2009 makes for a trend that if

ental thinking and work to lower the UK population both for energy and food security as well as other reasons (such as lowering teenage

42. safety following the Japan tsunami as the

transition energy source to a low-fossil renewable/fusion future. First, I understand that the more modern reactors in the earthquake/tsunami zone were resilient and are a

how of magnitude)

than any radiation release from the damaged reactors. However this does demonstrate

43. een delayed due to both real-term under-investment (compared to the

original envisaged programme decades ago) and also (unnecessary) bureaucratic

44.

ity

o s due

largely to erroneous notional valuation of financial goods (sub-prime mortgages).

g

onathan Cowie has spent a number of decades working in science communication (policy,

ound concern tbooks on the ed.

ome of his science activities are summarised on the Concatenation Science Communication

continued would see the UK population double before the century's end. Western Europe is one of the most densely populated areas of the world. We really do need joined-up Government Departm

pregnancies, housing shortage, communication congestion, or whatever…).

Their may be concern as to nuclear fission’s

testimony to modern nuclear’s safety. Second, it is highly likely that history will sthat the earthquake and tsumani will have killed far more (by orders

the need to over-engineer nuclear plant and cover waste processing costs and so nuclear is not a cheap option. We are coming to the end of the era of cheap energy.

Fusion has b

hurdles. Yet fusion remains one of the better long-term sustainable energy options.

One final thought to lend a sense of perspective. Energy security is a vitally important issue that the UK has largely ignored due to copious domestic fossil fuel availabilfor much of the latter half of the last century and political brinkmanship its last quarter. Yet the hurdle we face in the first half of this century makes the current banking crisis-induced recession completely trivial by comparison. The banking crisis was not triggered by the loss of any natural resource: no blight affected crops, nmine collapsed or oil well ran dry, to trigger the crisis. The crisis instead wa

Conversely, with energy security we face the real depletion of cheap fossil fuel against a backdrop of actual global population growth and genuine climate change (Beddington's 'Perfect Storm'). The banking crisis is nothing compared to the need to get energy (and food) security issues clearly resolved. I mention this in the hope that it encourages the Select Committee's report to be clear and firm, to the point of beinblunt, so as to ensure incisive Governmental response.

Jpublishing and promotion) with scientific learned societies. His previous academic backgr

ed environmental aspects of energy use and he has written two undergraduate texsubject, the second of which has just had a revised and expanded edition commission

Swebsite – http://www.science-com.concatenation.org .

2011 March

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Memorandum submitted by The Crown Estate (UKES 11) 

 

1. Executive Summary 

The Crown Estate welcomes the opportunity to provide written evidence for the ECCC’s inquiry into the security of the UK’s energy supply.   As outlined in the Terms of Reference for written evidence, we have addressed some of the questions posed as well as provide further information of relevance to the inquiry. This is outlined in more detail below but the summary points are:  

• The Crown Estate is commenting from its unique position as steward of the UK marine estate which includes over half of the UK’s foreshore and vast majority of the seabed out to territorial 12 nautical mile limit and vested rights for the development of renewable energy in the UK Continental Shelf. 

 

• A mix of energy sources is essential to ensure the UK’s energy supply is secure. Renewable energy, in particular offshore wind, could make a significant contribution to the UK’s energy supply mix and mitigate the impact of the retirement of fossil fuel and nuclear generating capacity, while at the same time supporting the UK Government in achieving its carbon reduction and renewable energy targets. The offshore renewable energy programmes being promoted by The Crown Estate are also creating employment and business development opportunities in the UK. 

 

• The UK is signed up to the EU Renewable Energy Directive and has the most challenging targets of any EU member state: the Government needs to ensure continued commitment to the development of renewable energy industries in order to achieve these targets and ensure energy security.  

• The UK is entering a critical period of development for the offshore renewable sector where the ability to deliver the targets for 2020 and beyond will be dictated by market decision making and the policy which influences this over the next 2‐3 years.  

2. The Crown Estate remit and responsibilities 

The Crown Estate manages an estate worth £6.6 billion, which contains extensive marine assets, including over half of the UK’s foreshore and the vast majority of the seabed out to the 12 nautical mile territorial limit. Under The Crown Estate Act 1961, The Crown Estate’s permission, in the form of a lease or licence, is required for the placement of structures or cables on the seabed; this includes offshore wind farms and their ancillary cables and other marine facilities. In addition to this, by virtue of the Energy Act 2004 (and Energy Act 2008) it has the rights vested in it for the 

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development of renewable energy within the Renewable Energy Zone and to the UK Continental Shelf for development of natural gas and carbon dioxide storage.   In carrying out this duty, under the core values of commercialism, integrity and stewardship, The Crown Estate is concerned to deliver the maximum renewable energy potential of the marine estate, in line with government policy and consistent with the requirement to oversee the estate in accordance with the principles of good management.  In its role as steward for the marine estate The Crown Estate is working with the grain of government to develop this new energy mix through several programmes of work including offshore wind, wave and tidal, carbon capture and storage and natural gas storage.   It has instigated major Rounds of offshore wind leasing, the most recent being Round 3 with a target delivery of up to 32GW of electricity generating capacity as well as a Round in Scottish Territorial Waters with potential generating capacity in the region of 5 GW.  The Crown Estate recently announced offshore wind and tidal leasing rounds in waters off Northern Ireland. The Crown Estate has entered into agreements for wave and tidal projects in the Pentland Firth and Orkney Waters: the world’s largest Wave and Tidal programme, with potential capacity of 1.6GW and opened a subsequent tender for projects of up to 30 MW installed capacity in connection with the Scottish Government’s Saltire Prize.    In addition, The Crown Estate is facilitating investment in and identifying areas suitable for carbon dioxide storage. The Crown Estate intends to award an exclusive lease option to the winner of the current DECC CCS competition, which commenced in 2007. The Scottish Power Longannet consortium is the sole bidder remaining in the competition and a decision is due during 2011.   In addition, The Crown Estate will award a lease option to any recipient of the European Economic Recovery Plan (EERP) funding for CCS. As of January 2011 a consortium developing the Hatfield project has received such funding. Discussions are ongoing with the selected storage operator for this project. It is waiting for the sifting process being conducted by DECC in selecting the projects that will be eligible to apply for NER300 funding; again the “winners” will be able to discuss how to obtain a consent from The Crown Estate for use of the porous space.   Another offshore activity that The Crown Estate is involved in relates to natural gas storage. In 1983 it granted a lease to British Gas for the Rough Field and this is still operational. Natural gas storage takes place in depleted gas fields or in engineered caverns in subsurface salt domes. In 2007 The Crown Estate signed an Agreement for Lease with Gateway Storage Company Limited for their salt cavern project in the East Irish Sea. Similarly in October 2010 it signed an Agreement for lease with ENI for the Deborah field off Bacton. Negotiations continue with other potential storage developers, with the aim of utilising the offshore space to meet UK government aspirations for storage.   The marine environment has ample capacity to provide sufficient varied electricity sources to meet and exceed future national need, and this will be possible while continuing to deliver its more established roles with oil & gas, marine minerals dredging, fishing, shipping, cables and pipelines etc. This is provided there is proper approach to Marine Spatial Planning, use of resources, interactions, 

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consenting and is dependent on expanding energy sources being able to achieve acceptable relative Cost of Energy.      The Crown Estate’s revenue surplus is paid to HM Treasury on an annual basis and it is important that the nation secures the benefit of the UK seabed being utilised for commercial purposes.   The Crown Estate’s unique perspective on the UK offshore energy sector and programmes outlined above allows us to comment under a few of the focus areas requested in the inquiry, as shown below:   

3. Sensitivity of the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage: 

• The Crown Estate is working to deliver programmes of renewable energy, in line with government policy, in order to achieve the sustainable and secure future energy mix required in the UK.  

• The Electricity Market Reform [EMR] comes at a pivotal time for commitments in development and construction of renewable energy projects as well as investment in the supply chain. The EMR provides an opportunity to address one of the key challenges of the programme: ensuring the economics of the projects are sufficiently robust to attract the required long term investment.  At the same time, the other programme challenges (grid, supply chain, consenting, managing construction risk etc) will require continued focus. Practical solutions to these challenges should be developed in parallel with EMR solutions and the solutions should not unwittingly add to the challenges in these areas.  

• The UK is entering a critical period of development for the offshore renewable sector where the ability to deliver the targets for 2020 and beyond will be dictated by market decision making and the policy which influences this over the next 2‐3 years.   

• To date, the offshore wind industry has responded to government policies and signals. This response is evidenced by the substantial pipeline of projects currently at various stages of development1. This pipeline is sufficient to deliver new capacity up to the National Grid’s ambitious ODIS “Sustainable Growth” trajectory to 20252. There is now great momentum behind the programme, presenting a considerable opportunity for the UK for developing new technologies, creating new businesses and inward investment, resulting in new jobs.   

                                                            

1 http://www.thecrownestate.co.uk/uk_offshore_wind_report_2011.pdf  

2 Offshore Development Information Statement: http://www.nationalgrid.com/NR/rdonlyres/99312A31‐9D0A‐42B6‐8098‐39D6CCC83A78/45576/Scenario_Paper.pdf  

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• Wave energy and tidal energy are two further forms of offshore renewable energy with significant potential for development in ways which could benefit security of UK electricity supplies.  DECC has indicated they could make a ‘significant’ contribution to achieving the UK’s 2050 carbon reduction target. Compared to offshore wind, wave and tidal energy are at relatively early stages of development.  The emerging industry is currently focusing on testing and demonstration projects, as well as preparing to install in the Pentland Firth and Orkney waters later this decade.  The Crown Estate is actively assisting these activities and working closely with DECC, the Scottish Government and the other parts of government on key challenges facing development – including the need to attract greater capital to technology development and manage high fixed costs and technology risks in initial projects.  

• With regards to CCS, as highlighted above, The Crown Estate is working with companies subject to UK and EU funded projects (and therefore external deadlines). Conclusion on the first DECC competition is anticipated in 2011.  

• Whilst uncertainty currently surrounds the outlook for the natural gas storage sector in the UK due to the supply in international natural gas and LNG markets, The Crown Estate has signed agreements with two potential developers for offshore projects.   

• By 2015 required gas storage capacity in the UK is forecast to be about twice present capacity.  Forecasts of natural gas storage capacity required by 2020 to ensure security of gas supply during peak demand winter months vary widely, but a value of about four times current developed capacity is not unreasonable.   

4. The impact on energy security trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector:  

• The Crown Estate supports the Government’s continued commitment to develop renewable energy industries in the energy sector at an increasing scale. This commitment is affirmed by the Energy Acts of 2004 and 2008 and the leasing activities that we have put in place alongside them. 

• The UK has signed up to the EU Renewable Energy Directive, which includes a UK target of 15 percent of energy from renewable sources by 2020. This target is equivalent to a seven‐fold increase in UK renewable energy consumption from 2008 levels: the most challenging of any EU Member State. It is therefore important for Government to maintain commitment to the development of renewable energy industries in order to ensure security of supply. 

 

5. Other comments relating to the security of the UK’s energy supply: 

• The deployment of certain low carbon energy types presents opportunities for job generation and business and economy stimulation in the UK and as such, ensuring a robust, sustainable, secure and diverse energy supply from the UK is important. 

March 2011 

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Memorandum submitted by Food and Drink Federation (UKES 12)

Summary

• This submission is made by the Food and Drink Federation, the trade association for food and drink manufacturing. Food and drink is the largest manufacturing sector in the UK (about 15% of total manufacturing output) turning over almost £73bn per annum; creating GVA of around £22bn; employing around 440,000 people; and contributing around 2% of the UK's total GDP.

• The sector comprises some 7000 enterprises which between them consume around 50TWh of primary energy per annum split almost equally between electricity and fuels used on site for heat raising and as input to Combined Heat and Power. In the coming decades, as ever tighter carbon budgets lead to a lower carbon economy, we anticipate that a significant part of that heat demand will have to be met by the electrification of heat supply and that this electricity will need to be generated from low or zero carbon sources.

• Our sector plays a key strategic role in respect of the nation’s future food security. As the recent Foresight report on the Future of Food and Farming1 highlights, we are faced with the challenge of producing more food from fewer resources and with less impact on the environment. We agree with the report’s conclusions that sustainable food production needs to be a key strategic priority for Government in its own right. We see secure energy supplies, and specifically, a low carbon electricity market in the UK and access to low carbon heat energy as key to our sector helping deliver secure and sustainable food in the future.

• We are, however, having to deal with these challenges in the face of an unprecedented combination of cost pressures, from global commodity price increases through to transport fuel and energy costs.

1 http://www.bis.gov.uk/foresight/our-work/projects/current-projects/global-food-and-farming-futures/reports-and-publications

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Answers to Specific Questions To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

1. We believe energy efficiency has a very important role in ensuring future energy security and Government needs to provide the appropriate policy and financial mechanisms for supporting energy efficiency.

2. For food and drink manufacturers, Climate Change Agreements (CCAs) have been the main policy aimed at improving energy efficiency. Since 2000 participants in the FDF CCA has reported an improvement in energy efficiency of 21% (energy/tonne of production) and has saved over 800,000 Te of CO2 emissions against a background of growth of around 20% in GVA. We believe that CCAs are a particularly effective instrument in that they provide a reduction in the Climate Change Levy for a required energy efficiency and emissions reduction outcome. This ensures that CCAs participants fully factor the market cost of carbon into their emissions and energy reductions projects and investments. This provides a real incentive for such investments whilst at the same time ensuring our sector can continue to grow and remain competitive in global markets. We therefore welcome the announcement in the 23rd March Budget2 that CCAs will continue to 2023 and that our sector will continue to be eligible. We will be working closely with DECC in the coming months on this new stage of CCAs and will respond to their proposed consultation on new CCAs later this year.

3. Combined Heat and Power (CHP) is a highly efficient method of simultaneously

generating electricity and heat at or near the point of use and an important energy efficiency measure and contributor to energy supply security. The food and drink manufacturing sector is a major user of Combined Heat and Power with around 500MWe installed capacity. The Government provides a number of policy mechanisms to support CHP which includes Climate Change Levy exemption for fuels used in Good Quality CHP plant. In its planned reform of the Climate Change Levy to provided a carbon floor price, Government must ensure that current support levels are maintained, and, indeed, extended if the aim is to promote the further take-up of this technology

What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

4. We noted the comments in the recent DECC consultation on Electricity Market

Reform3 that, to date, the UK electricity market has provided affordable and secure energy since the 1990’s. However, it is clear that that current market arrangements have not provided the long term price, regulatory and investment signals needed to replace ageing nuclear capacity, to replace coal generation (due to be phased out as a result of the Large Combustion Plant Directive) and to deliver further capacity to meet growing UK demand – whilst at the same time placing the electricity generating sector onto a path towards meeting UK carbon budgets and the 80% 2050 emissions

2 http://www.hm-treasury.gov.uk/2011budget.htm 3 http://www.decc.gov.uk/en/content/cms/consultations/emr/emr.aspx

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reduction target. We understand it is the absence of long term regulatory and carbon price signals that now necessitates a more interventionist approach to ensure supply security as well meeting the UK’s carbon budgets.

5. In taking forward its plans, Government needs to take into account the full impact of cumulative policy costs on manufacturing industry - particularly at a time when the Government Growth Review and the Advanced Manufacturing Review4 seeks to introduce the best conditions for business and private sector growth and to maintain the competitivity of UK industry in global markets.

Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

6. We also recognise that industrial consumers, amongst others, could have a role to play in maintaining electricity supply at times of peak demand by helping achieve short term balancing of supply and demand. All food and drink manufacturing plant needs electricity to operate. But the idea of stopping production of food and drink products that are often perishable and part of a highly integrated food supply chain tends to preclude most manufacturers from considering a voluntary demand reduction option. This is not to say that, with greater awareness of the issues, the advent of a ‘smart grid’ and increased on-site generation being installed in the coming years, that suitable opportunities for food and drink manufacturers to participate in demand side response to ensure wider supply security could not be developed. In its response to the Electricity Market Reform consultation, FDF has proposed to DECC its willingness to explore how to best take this issue forward.

March 2011

4 http://www.bis.gov.uk/policies/business-sectors/manufacturing-and-materials/manufacturing

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Memorandum submitted by Ofgem (UKES 13) Introduction Ofgem is the Office of the Gas and Electricity Markets. Protecting the interests of current and future consumers is our first priority. This includes helping to secure Britain’s energy supplies by promoting competitive gas and electricity markets - and regulating them so that there is adequate investment in the networks. In 2009, we launched Project Discovery, a comprehensive review of Britain’s security of supply prospects. In February 2010, we concluded that significant energy market reforms are needed to secure supplies and meet climate change targets1. We also published four scenarios on the risks facing energy security, looking at how security of supply and progress towards climate change targets would be affected by the rate of recovery from the worldwide recession and the rate of concerted global environmental action. We estimated that the cost of the investment needed to secure energy supplies and meet Britain’s climate change targets could be as much as £200 billion between now and 2020. Even though the short term outlook is relatively benign, the scale of this investment, as well as other challenges facing the GB energy markets, caused us to have concerns about the ability of the current market arrangements to deliver security of supply in the longer term. These concerns sit behind our Gas Security of Supply Significant Code Review and also mean that we welcome that security of supply is a key element of the Energy Market Reform. Ofgem and the Department for Energy and Climate Change report annually to Parliament on security of supply. On gas, the July 2010 report2, found that outlook is broadly benign in the near term but that it is not risk-free; there are risks, both in the short term, and towards the second half of the decade, when some uncertainties remain. On electricity, the report highlighted that the coming decade will see many changes in the electricity markets, including the closure of fossil fuel and nuclear plants. While new capacity is planned to replace the capacity due to close with cleaner technologies, it also noted that in practice projects might slip, and not all of this capacity might come forward on schedule. We welcome the opportunity to contribute to this inquiry and have taken each of the questions posed by the Committee in turn and sought to provide information where it is within Ofgem’s remit and expertise.

1) How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

This table shows the current UK generation mix using data from DECC’s digest of UK energy statistics (DUKES). UK energy generation is currently heavily dependent on fossil fuels, with over 70% from coal, oil and gas. A further 19.4% comes from nuclear generation. 1 Project Discovery - Options for delivering secure and sustainable energy supplies, Ofgem, February 2010. 2 Statutory Security of Supply Report. A report produced jointly by DECC and Ofgem, November 2010.

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2010 2025 DECC DUKES Discovery scenarios

Green transition

Green stimulus

Dash for energy Slow growth

Coal 31.5% 17.8% 15.7% 12.4% 11.8% Oil 2.0% 0.0% 0.0% 0.0% 0.0% Gas 39.0% 30.8% 32.4% 55.9% 56.5% Nuclear 19.4% 7.3% 7.7% 4.1% 2.9% Wind 1.0% 31.0% 30.6% 17.5% 17.7% Other 5.7% 7.1% 7.2% 5.2% 5.5% renewables Other fuels 1.1% 2.6% 2.7% 2.5% 2.8% Net imports 0.3% 3.4% 3.6% 2.4% 2.6% Total 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Digest of United Kingdom Energy Statistics, Department for Energy and Climate Change, 2010 and Project Discovery, February 2010 (as above)

Under all four of the scenarios modelled by Project Discovery we predicted that nuclear would provide less generation in the future because of the high costs of this technology, which would in turn improve our resilience to changes in uranium prices. However, the financial position of nuclear may be affected by DECC’s EMR proposals. All the Discovery scenarios show a similar decline in coal-fired generation but gas fired generation will continue to be a significant part of our energy mix, thus exposing the UK to gas price movements that reflect changes in demand and supply. It should be noted that higher energy prices are necessary to stimulate investment and demand side response, such as the capacity that is necessary at peak times of demand, for example ‘peaking plant’ that typically relies of fossil fuels. If environmental action is rapid, as shown by the green transition and green stimulus scenarios, our resilience will be improved as our dependence on fossil fuel and nuclear generation falls.

2) How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

Project Discovery predicted that substantial investment would be necessary in energy infrastructure until 2025. Growing exposure to a volatile global gas market and ageing power plant nearing the end of its life, along with the need to tackle climate change, are the central challenges the country faces. Our scenarios show that gas and electricity supplies can be maintained to customers provided the market participants respond adequately to market signals - but each scenario comes with real risks, potential price rises and varying carbon impacts. Our estimates indicate that 2016 and 2024 will be particularly challenging years because of the lower electricity generation capacity available caused by plant closures associated with the Large Combustion Plant Directive, Industrial Emissions Directive and natural ageing.

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The table below shows the investment figures for the four different scenarios that we estimated were necessary to maintain energy supplies and represented a range of investment from £129.4bn to £236.1bn. Discovery also concluded that leaving the current arrangements as they are is not in the interests of consumers and that there is a window of opportunity over the next two to three years to put reforms in place. Taking action in this window could avoid the need for more costly action being taken later.

Cumulative investment, £bn, 2025

Green transition Green stimulus Dash for

energy Slow growth Nuclear 12.8 12.8 6.4 3.2 Renewables 67.2 62.7 35.7 31.3 CCS 15.8 16.7 3.3 0 CCGT 4.4 4.3 20.9 17.3 Distribution 26 26 26 26 Onshore transmission 19 19 17.3 17.3 Offshore transmission 7.9 7.4 4.3 3.7 Interconnectors 1.0 1.0 0.5 0.5 Energy efficiency 16 16 8 8 Renewable heat 52.8 52.8 9.5 9.5 Smart meters 10 10 10 10 LNG terminals 0.9 0.6 1.5 0.7 Gas storage 1.1 0.7 4.6 0.7 SCR 1.2 0.6 1.2 1.2 Total 236.1 230.6 149.1 129.4

Source: Project Discovery, February 2010

Within our own remit as regulator of the energy networks Ofgem is working to reduce the costs of investment to consumers. This is important as we have estimated that network investment accounts for between £34-39 billion of investment needed in UK energy to 2020. This is a massive challenge for an industry worth £43 billion today, representing an increase in value of 75 per cent – and a doubling of the rate of investment from the previous 20 years3. In order to attract efficient investment, Ofgem’s new performance based RIIO model for price controls rewards companies that innovate and run their networks to better meet the needs of consumers and network users. It does this by setting longer eight-year price controls, offering incentives focused on delivering results, and expanding the £500 million Low Carbon Network Fund to encourage the growth of smart grids. We are fully aware that over the next few years, this investment will take place in difficult financial conditions and one of the many benefits of this model is the greater certainty that the longer eight-year model delivers. Ofgem estimates the RIIO model could cut the cost of investment to consumers by £1 billion compared to the previous regulatory framework in the next ten years. 3 RIIO - a new way to regulate energy networks - factsheet, Ofgem, April 2010

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3) What impact could increased levels of electrification of the transport and heat sectors have on energy security?

Electrification of heat and transport will increase demand for electricity and will change how and when consumers use energy, for example, charging electric cars overnight. Smart meters will give consumers the option to shift some of their electricity use to off peak hours. However, there will be challenges with this transition, including the likely increased overall demand for electricity and possibility of greater demand peaks. The security of supply implications will depend on the extent of the electrification and the sources of decarbonised/low carbon heating and transport. Increased demand side response could mitigate security of supply issues created by electrification of heat and transport. A key objective of our £500 million Low Carbon Networks Fund is to help to address increasing use of low-carbon electric heat and transport technologies. Last year we announced the results of the first annual competition, which included projects to monitor the effect of increasing connection of heat pumps and electric car charging points to the network. Trials and projects will ensure that the knowledge gained today can be applied at a larger scale tomorrow, keeping costs as low as possible for consumers across Britain4. A diverse energy mix is essential for developing secure and sustainable supplies. Electricity generation itself offers some diversity of renewable, low carbon and fossil-fuel options. In addition, renewable heat and combined heat and power technologies, with the appropriate heat network infrastructure, would also help to mitigate the security of supply issues that could accompany the electrification process. For example, capturing the waste heat from power stations could reduce the demand for electricity to power heat pumps, and heat storage could help to smooth local and national electricity demand.

4) To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

The success of energy efficiency schemes is essential for limiting the extent to which consumer bills will rise in the future, and can provide a cost-effective source of carbon reduction. Impact assessments that accompany the Government’s renewable and carbon reduction strategies assume that energy efficiency schemes will successfully drive down energy use, and these assumptions are then integrated into the cost and impact analysis of wider strategies and associated policies. It is vital that these schemes are well coordinated and deliver on their ambitions as efficiently as possible. The uptake of these schemes will depend on customer awareness/uptake, fossil fuel prices, and the strategies of energy suppliers and energy services companies. If this demand-side reduction does not deliver, consumer bills will rise without increasing security of supply.

4 Low Carbon Network Fund, Ofgem website

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Energy efficiency faces an additional challenge as it is the only part of the EU 2020 Green Package that does not have a legally binding target.

5) What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

The table below provides information from our assumptions in Discovery about the extent to which different technologies are generally available (the de-rating factor) and their costs.

De-rating factors

Capital costs

(£/KW)

CCGT 0.9 600

Coal 0.9 1300

Nuclear 0.7 2000

Hydro 0.4 4000

Biomass 0.4 2500 Onshore wind 0.15 1200 Offshore wind 0.15 2800

Source: Project Discovery, February 2010

As the table shows, low carbon technologies tend to have more variable availability and higher investment costs for generating electricity than fossil fuel ones. To ensure security of supply, it is critical that there is sufficient flexible plant, or appropriate demand-side response arrangements, to backup intermittent generation such as wind. The incentives faced by investors to invest in each technology depend on how it fits within the overall mix. For example, it will be very important that the features of the flexible plant can readily accommodate the intermittency of wind. Having said that, there are a range of possible technologies that can be used to decarbonise the UK’s energy system (with a range of flexibility characteristics), and if used in appropriate combination, there is no reason per se why these technologies might pose risks to security of supply. Nonetheless, affordability remains an important issue, depending on learning effects that will occur in the future and the stability and level of the carbon price over time. This also applies to the development of carbon capture and storage for conventional gas and coal-fired generation, which has the potential to complement intermittent generation while meeting our carbon targets. Again, however, affordability is a key issue, as CCS technology is not yet proven or commercialised, and is dependent on finite resources with security of supply implications.

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6) What would be the implications for energy security of a second dash-for-gas?

In the first dash-for-gas, Great Britain mainly relied on the UK continental shelf (UKCS) for its supply of natural gas, but production from the UKCS has passed its peak and is projected to continue to decline. In a second dash-for-gas, the UK would have to rely far more on natural gas arriving through interconnectors and LNG terminals which exposes the GB to a range of additional risks that may undermine security of supply. This dependence on international markets increases the risk that GB might be more exposed in the future to political considerations overriding the economic decisions of gas production and the free flow of energy from international markets. For a number of years, Ofgem has expressed concerns with the ability of the current market arrangements to deliver secure gas supplies over the longer term. These issues primarily concern the emergency arrangements, though changes to these arrangements alone may not fully alleviate our concerns. In January 2011, in light of these concerns Ofgem launched a Gas Significant Code Review to assess whether reforms to the current gas market arrangements are required to improve security of supply, and if so, what these reforms should be. We are particularly concerned with improving incentives and/or obligations on shippers to deliver secure gas supplies in the long term5.

7) How exposed is the UK’s energy security of supply to international events?

As the UK becomes more reliant on sources of energy that are external to it, so it becomes more exposed to international events. However, the increasing range of energy sources that the UK is drawing on provides diversity and resilience to any given international event. Project Discovery highlighted that the security of GB’s energy system is vulnerable to some international events under certain scenarios, including the re-direction of LNG supplies, a Russia-Ukraine dispute and electricity flowing out of the UK through the interconnectors because of higher prices in Europe during a peak demand day.

8) Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

We welcome the Government’s Electricity Market Reform consultation as a positive step forward in looking at electricity security of supply. We are committed to working with the Government to deliver EMR objectives at the best possible value for consumers. We will be providing constructive and expert input to the design process and anticipate having a significant implementation role. Properly functioning energy markets remain central to the Government’s proposals and, in accordance with Ofgem’s duties, we shall be concluding our work to improve electricity market liquidity in the Spring, to align it with DECC’s wider reform package. As discussed above we are also taking forward

5 Initial Consultation - Gas Security of Supply Significant Code Review (SCR), Ofgem, January 2011

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7

reform proposals to ensure electricity and gas wholesale prices properly reflect the value of security of supply and will be advising DECC on issues such as generation capacity.   

9) Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

In light of the unprecedented levels of investment that need to be made in our energy system over the next 10-15 years, we are particularly concerned with delivering this investment in a way that delivers the policy goals at the most efficient cost to consumers. We have concerns about the affordability of energy in light of the need for increased investment, and whether the customers most benefiting from this investment are the ones that are paying for it. The Committee could also consider how flexibility in demand might develop. In our demand-side response (DSR) discussion paper6, we qualitatively assessed the benefits that DSR could deliver in terms of delivering secure and sustainable energy supplies. Increasing DSR could reduce the amount of peaking plant capacity needed to meet demand in the short term. DSR is also likely to have an impact on security of supply where real-time pricing tariffs encourage demand to shift or reduce in response to market signals to help balance the system or overcome constraints. Finally, as intermittent generation increases its share of our energy mix, DSR could become increasingly valuable by displacing plant otherwise needed to generate during periods of low wind output, as well as high demand. March 2011

6 Demand Side Response Discussion Paper. Ofgem , July 2010

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Memorandum submitted by British Geological Survey (UKES 14)

EXECUTIVE SUMMARY

1) Britain should consider more onshore and offshore gas storage in depleted gas fields and salt caverns, and more options for compressed air energy storage, but the geology for these may be specialised and will need specialist survey.

2) Shale gas, of which Britain may have considerable resources, might be an important guarantee of secure gas supply into the future.

3) Britain should consider developing independent strategic intelligence about oil and gas supplies in the Middle East and Russia, as well as long term monitoring of global uranium production and trade to support the proposed UK nuclear new build.

CONTENTS Question: How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? ........................................................................................................... 2 Question: What would be the implications for energy security of a second dash-for-gas? ................................................................................................... 9 Question: How exposed is the UK’s energy security of supply to international events? .......................................................................................................... 11

Total 3000 words excluding tables and diagram captions

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Question: How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

1. UNDERGROUND GAS STORAGE. Britain’s energy security is closely bound up with how much gas it stores. Surface storage in the form of tanks exists, but underground gas storage (UGS) provides significantly greater volumes and meets differing strategic requirements and delivery rates. At present our country does not have the UGS volumes of comparable countries, despite having suitable geology or both salt cavern and depleted field storage.

2. Introduction. Until recently, abundant offshore gas reserves have meant that swings in UK demand could readily be taken up by increasing, or decreasing, output from North Sea and East Irish Sea gasfields. However, UK offshore fields in particular are rapidly depleting and the UK became a net importer of gas during 2004. Consequently, offshore gasfields will no longer provide this flexibility and the UK is becoming increasingly dependent on imports from the global gas market. Government predicts that over 80% of UK gas supply will be imported by 2020. Figures from National Grid suggest that current usage led to imports levels of 40% in 2009, indicating that the predicted import levels of 2020 may be reached sooner rather than later. Security of supply will become a matter of growing national importance.

3. Current UK annual gas consumption is around 103 billion m3, but storage capacity of approximately 4.6 billion m3 is only 4% of annual consumption; much less than many European countries (Figure 1; Table 1). This storage volume is equivalent to about 14 day’s supply, which is again much less than many European countries and the USA (Table 2). A report by Cedigaz in 2009 found that 638 underground gas storage (UGS) facilities operate worldwide, providing a total working capacity of 328.9 billion cubic metres (bcm) (10.7% of global gas consumption). Of these, 446 are located in America (395 in the United States). Europe ranks second with 129 underground gas storages, with more than half located in three countries: Germany (47 sites), France (15 sites), and Italy (10 sites). The Cedigaz report found 199 new storage facilities or expansions of existing ones that are either under construction, under development, or planned. Of these, Europe has the most with 123 projects, representing more than 75 bcm of additional working capacity, compared to the current 82 bcm available. Tables 3 & 4 illustrate the relatively small number of proposed developments that exist in the UK compared to planned European projects.

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Figure 1. Comparison of European gas storage capacity as a percentage of National demand. Sources: Gas Infrastructure Europe, CIA World Fact Book 2009, National Grid and International Energy Agency Table 1. National demand, storage capacity and planned new storage capacity of European countries. Sources: Gas Infrastructure Europe, CIA World Fact Book 2009, National Grid and International Energy Agency

Country National demand (bcm)

Storage Capacity

(bcm)

Storage capacity as %age National Demand

Planned new

capacity (bcm)

Austria 8.44 4.2 50 3.2

Belgium 17.4 0.63 4 0.08

Bulgaria 3.5 0.35 10 0

Czech Republic 8.62 3.1 36 0.9

Denmark 4.6 1 22 0

France 42.7 12.3 29 1.8

Germany 101 20 20 9.5

Hungary 13.4 3.72 28 2.3

Italy 84.9 14.34 17 11

Netherlands 46.4 5.1 11 4.5

Poland 16.4 1.58 10 1.23

Romania 17.1 2.69 16 2.35

Slovakia 6.22 2.75 44 0

Spain 34.4 4.14 12 5.59

UK 104 4.3 4 11.7

Ukraine 66.3 32.13 48 0

Table 2. Annual gas consumption and gas storage volumes in the UK and other countries. Annual consumption

(Billion m3) Storage Capacity

(Billion m3) Storage capacity relative annual consumption

Days storage

Country

UK 103 4.6 4% 14 Germany 101 21 21% 69 Italy 81 12.9 16% 59 France 46 12.1 26% 87 USA 653 114 18 66

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4. The UK has an ageing stock of nuclear and coal-fired power stations, of which about one third will need replacing by 2015. If these plants are not replaced by new build, then it seems likely that much of the new capacity will be provided by conversion of plants to gas-firing, further increasing demand. In the event of supply disruption the lack of storage and increased consumption leaves the UK more vulnerable. Whilst a number of underground storage facilities are in various stages of planning or construction (Tables 3 & 4), these will not be available for a number of years during which time imports will rise.

5. Britain’s largest gas storage facility is the depleted Rough Gasfield lying offshore in the southern North Sea. The construction of salt caverns in offshore regions has also been proposed, with one site in the East Irish Sea (the ‘Gateway’ project) having been granted the first offshore storage license in 2010. Construction will not begin until late 2011 at the earliest. Other sites might be available in the Zechstein (Permian) salt structures of the Southern North Sea.

6. Onshore storage facilities would provide capacity closer to market demand, but such facilities are strongly opposed by local residents. If it is decided that more UGS is required onshore in Britain then it must be recognized that it is only possible to develop these facilities in certain geological strata or structures, which occur in only a limited number of locations. Onshore, six UGS facilities are in operation: two depleted fields and four salt cavern sites, one of which comprises only one cavern. A number of gas storage projects have gained planning consent and are currently under development/construction, but the majority of proposed facilities are held up by the current planning regime.

7. The following sections outline the areas onshore Britain most likely to attract interest. The technology involves the injection of gas from the National Transmission System (NTS) into the pore spaces of the aquifers, depleting hydrocarbon reservoir rocks or salt caverns during periods of low demand and its withdrawal during periods of high demand. For pore storage injection is generally during the late spring, summer and early autumn months with withdrawal during the higher demand winter months. Salt caverns can be filled and emptied more rapidly and so can accept or deliver gas more readily. Pore storage facilities therefore offer more strategic and longer-term seasonal storage, helping to balance long term requirements and complement the medium to shorter term, higher deliverability function offered by salt cavern storage.

.

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Table 3. Operational underground LNG and gas storage facilities in man made caverns.

Area Site Owner/operator Storage capacity

(Mcm)

Number of caverns (Chalk & salt

storage)

Approx. depth of storage (top-bottom

if known - m) Comments

Operational facilities – Chalk caverns North Lincolnshire Killingholme ConocoPhillips and Calor Gas 0.1 (liquid ≈ 60,000

tonnes of LPG) 2 180-?210 Two mined caverns in Chalk c. 180 m below ground level, operational since 1985.

Operational facilities – salt caverns Cheshire Basin Holford H-165 IneosChlor (formerly operated

by NG (Transco), now Ineos 0.175 1 350-420 Planning approval granted 1983. Ten-year inspection completed 2006. One of number of abandoned brine cavities with ethylene & natural gas storage since 1984.

Cheshire Basin Hole House Farm (Warmingham Brinefield) Energy Merchant (EDF Trading) 75 4 300-400 Planning permission granted 1995. Four caverns, operation commenced in February 2001. East Yorkshire Hornsea/Atwick Scottish & Southern Energy 325 9 1730-1830 Planning permission granted 1973, operating since 1979

Teesside Saltholme SABIC (formerly IneosChlor/Huntsman) Up to 0.12-0.2 18 (plus 9 redundant) 350-390

Development in 1950s, storage started 1965-1982. 18 ex ICI caverns in operation. One ‘dry cavity storing nitrogen; 17 ‘wet’ storage cavities containing hydrocarbons ranging from Hydrogen to Crude Oil; nine redundant storage cavities; 75 redundant brine wells/cavities never used for storage; five in service brine wells.

Teesside Saltholme IneosChlor/Northern Gas Networks 0.08 4 340-370 Four ex ICI Natural Gas cavities. Development started 1959-1983, storage started 1959-1983. Now owned by IneosChlor

& operated by NGN for Natural Gas.

Teesside Wilton SABIC (formerly IneosChlor/Huntsman) Up to 0.04 5 650-680 Storage started from 1959 to 1983. Eight caverns leached, five operational cavities in total leached for storage purposes:

four cavities storing Ethylene, one cavity storing Mixed C4’s. Three cavities redundant or never in service for storage. Teesside Wilton SembCorp/BOC Not available 2 650-680 Two ex ICI cavities - operational & storing nitrogen (for BOC Nitrogen).

Table 4. Underground gas storage facilities planned or under construction in salt caverns or of type as yet unknown.

Area Site Owner/operator Storage capacity

(Mcm)

Number of caverns (Chalk & salt

storage)

Approx. depth of storage (top-bottom

if known - m) Comments

Planned facilities – salt caverns

Cheshire Basin Byley/Holford (southern end of Holford Brinefield - Drakelow Lane area)

Scheme initiated by Scottish Power, sold to E.ON UK plc 2005

160-170 (working volume) 8 630-730

May 2004 Deputy Prime Minister and Secretary of State reversed Public Inquiry decision. Decision upheld by High Court Dec 2004. Under construction. Salt caverns to be leased from Ineos who own the salt & will construct the caverns that will be approximately 100 m high by 100 m in diameter.

Cheshire Basin Hill Top Farm (Warmingham Brinefield) Energy Merchant (EDF Trading) – formerly British Salt

10 existing brine caverns: c. 299

4 new caverns: c. 115 (11 new caverns: c. 317)

10 existing brine caverns & between 4 (possibly 11?)

newly constructed caverns 240-300

Planning permission gained for conversion of 10 existing brine caverns and between four and 11 new caverns by British Salt in May 2008 – this figure could include the Parkfield Farm caverns (7). Storage volume expected to be: 0.69 Mcm (22,400 tonnes/29.9 Mcm) for each existing brine cavern and 0.6 Mcm (21,600 tonnes/28.8 Mcm) for each new cavern. Interests sold to Energy Merchant (EDF Trading) July 2009. EDF Energy now plans to develop the project alongside EDF Trading using a revised planning permission designed to take advantage of synergies with the adjacent Hole House Farm gas storage facility.

Cheshire Basin Parkfield Farm (Warmingham Brinefield) Energy Merchant (EDF Trading) – formerly British Salt c. 201 7 240-300

Planning permission gained for seven new caverns by British Salt in May 2008. Storage volume expected to be 0.6 Mcm (21,600 tonnes/28.8 Mcm) for each new cavern. Interests sold to Energy Merchant (EDF Trading) July 2009. EDFT will not develop new caverns but use the Parkfield site to support operations at the adjacent Hole House (operational) and Hill Top (approved) storage facilities.

Cheshire Basin Stublach (Holford Brinefield between Drakelow Lane and Lach Dennis) Ineos Enterprises Ltd 540 (storage volume)

430 (working volume) 28 > 500 Planning application December 2005, permission received late 2006. Under construction in two phases with initially 8-10 caverns constructed. Expected to be operational for about 40 years.

Cheshire Basin King Street (Holford Brinefield) King Street Energy (NPL Estates)

c. 263 (storage volume) 160 (working volume) 10 >400 Proposed construction of ten caverns. Planning application turned down Dec 2008, decision appealed by applicant and

Public Inquiry held July-August 2009, with the Secretary of State granting permission on 9th December 2009.

East Yorkshire Aldbrough South – Phase I Scottish & Southern Energy and Statoil 420 9 1800-1900

Planning permission granted 2000, two sites with three and six caverns initially – Scottish & Southern Energy and Statoil combine ownership and development. Under construction, with storage commencing in 1st two caverns in 2009, with capacity in another three caverns expected to become available by the end of 2010 and full commissioning of the Phase 1 operations expected in 2012.

East Yorkshire Aldbrough South - Phase II Scottish & Southern Energy and Statoil 420 9 1800-1900 Consent sought for extension to phase 1 development. Permission to increase storage capacity granted by East Riding of

Yorkshire Council in May 2007. Final size of Aldbrough facility will be 18 caverns

NW England Preesall Canatxx Gas Storage Ltd c. 1700 (storage volume) 1200 (working volume) up to 42 245-510

Significant public objection to proposals. Public Inquiry held (late 05-early 06), with planning permission refused by Secretary of State (DCLG), October 2007. Second planning application submitted Feb 2009 and refused by County Council January 2010.

East Yorkshire North of Aldbrough (Whitehill) E.ON UK plc 420 10 c. 1800 Geological feasibility studies carried out 2006 on land to the north of Aldbrough. Planning application submitted to East Riding of Yorkshire Council, January 11th 2007. Still in planning in late 2009, delaying anticipated completion date of 2013.

Wessex-Weald Basin, Dorset Isle of Portland Portland Gas Ltd. 1000 14 2100-2300 Planning permission granted by Dorset County Council 16th May 2008. Struggling to raise investments to commence

project, which began with site construction at end July 2009. Drilling is expected to commence towards the end of 2010.

East Irish Sea (offshore) ‘Gateway Project’ Gateway Gas Storage Limited/Stag Energy 1512 20 c. 700-875

Planning application submitted October 2007. Barrow Council approve plans for onshore gas compression station June 2008, which was followed by UK Government approval in the same year. Granted first offshore storage permit by UK Government in February 2010. In FEED process 2010-2011.

Islandmagee, Larne, N Ireland Larne Lough Portland Gas

Group/Islandmagee Storage Ltd) 500 (working volume) Not available 1500 Planning application submitted Mar 2010

Planned facilities – salt mines

Cheshire Northwich Consortium Not available Not available > 250 m Proposals put forward in November 2009 to convert and use former ICI salt mines in the north Cheshire Basin area.

Facilities of unknown type under review

Offshore Bacton Southern North Sea Stag Energy 1500 Not available Not available Included in National Grid’s 2009 review of underground gas storage developments and proposals. No details available.

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8. Natural gas storage in depleting oil/gasfields. Many UK onshore basins are now at a mature stage of exploration. Nevertheless, they continue to attract interest and large areas remain licensed for production and continued exploration (Figure 2). With improving technology modest onshore discoveries continue to be made. However, depleting oil and gasfields also have the potential to provide significant volumes for underground gas storage. During gas storage operations, some remaining natural gas will also be produced and consequently a production licence will be required.

Figure 2. Prospective onshore sedimentary basins and significant oil and gasfields. Licence areas also show areas of Coal Mine and Coal Bed Methane prospectivity. Source: BGS 

9. Salt caverns. Former brine caverns created by solution mining of salt have been used to store hydrocarbon products for many years. At Billingham (Saltholme) and Wilton on Teesside storage of gases, which include methane, nitrogen and hydrogen, commenced in the late

113

1950s. This included the Northern Gas Board’s use of a solution-mined cavity on Teesside to store town gas in 1959. There are about 30 caverns currently in use. Completed solution cavities in Cheshire are also used for ethylene and natural gas storage.

10. However, these former brine caverns are not ideally shaped or spaced for natural gas storage and today specially designed caverns are engineered. Gas storage in salt caverns is covered by British (and European) Standard (BS EN 1918-3:1998). Salt caverns are advantageous because salt is impermeable and under most engineering and relevant geological conditions (increased temperatures and pressures at proposed storage depths), deforms in a ductile manner (creeps or ‘flows’) rather than by brittle fracturing or faulting. Fractures due to faulting in the geological past are, therefore, likely to have been ‘annealed’ and sealed.

11. In the UK a number of proposed schemes are at varying stages in the planning and construction process, including (Table 4): an extension to Hole House and at Byley, Stublach and King Street near Holford in Cheshire; the Isle of Portland in Dorset and at Islandmagee near Larne in Northern Island Preesall in Lancashire was rejected by the Secretary of State (DCLG) in late 2007, following a Public Inquiry that ran from October 2005 to May 2006 and a further planning application in January 2010 was refused by Lancashire County Council. The developer is now preparing to seek planning permission through the Infrastructure Planning Commission (IPC).

12. COMPRESSED AIR ENERGY STORAGE (CAES). Wind power generation is set to increase in the UK. At lower levels of installed wind capacity, studies have shown that the intermittency of wind is unlikely to create a problem. The aggregated output from wind farms distributed around the country is unlikely to ever fall to zero and the short term variations of wind generation are small compared to the corresponding variations in demand. However, as wind generating capacity rises beyond about 20% the requirement for back-up generation or energy storage increases. In addition at times of excessive wind generation the power cannot be accepted onto the grid leading to “constraint costs” that raise the cost of wind generation; energy storage can therefore utilise all of the available wind energy. Wider dispersion of wind farms, possibly including super grid connections between countries, will help to smooth wind generation, but does have security of supply issues. Increased wind generation is likely to need some energy storage, although this may only need to be a percentage of the installed generating capacity.

13. Compressed air energy storage (CAES) and pumped hydro energy storage have been demonstrated as the only technologies that could have the capacity for large scale energy storage within an electrical power grid. However pumped hydro can only operate onshore and is

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restricted by the number of available hillsides where a scheme could be constructed. CAES needs to be located above suitable geology for either aquifer storage or cavern storage. There are competing demands for aquifer storage, especially offshore, from CO2 sequestration, conventional gas storage and direct use geothermal. Cavern storage is ideally created within salt deposits, but onshore there are competing demands from conventional gas storage.

14. Compressed air energy storage is being considered in many countries, including the UK. The basic concept of CAES is more than 30 years old and involves using off peak electrical energy from renewable sources such as wind, or excess output of power plants, to compress air, which is then stored under pressure underground. The compressed air is then released through a gas turbine to generate electricity during periods of peak demand.

15. Storage can be in porous rocks (aquifers or depleted oil/gasfields) or, more commonly, in large voids such as salt caverns or former mine workings. The first CAES facility using salt caverns was created in the Huntorf salt dome near Hamburg in Germany in 1978. A second plant near Mobile in Alabama, USA was constructed in 1991 and others are being planned around the world. CAES facilities are being developed in large (unlined) limestone caverns in Ohio, USA and in an aquifer to be jointly used for gas storage (Iowa, USA). Similar CAES facilities could be developed in the UK in impermeable rocks of suitable quality (e.g. salt beds or ‘hard rocks’) in conjunction with, for example, near shore wind farms. CAES feasibility studies were undertaken in the UK during the 1980s by, the Central Electricity Generating Board (CEGB). However, no development has yet taken place.

16. Similar proposals, but using rock caverns to store water at different levels for closed loop pump storage, have been suggested for Scotland.

17. If renewable energy is to become an important element of the energy mix, then options for energy storage, including CAES, may have to be considered. This might be facilitated by distributed generation and microgrids, in which small CAES plants distributed around the UK could play an important role in the storage of off peak renewable energy.

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Question: What would be the implications for energy security of a second dash-for-gas?

18. Further delays on decisions on new nuclear power plant build and the requirements for carbon emissions reductions and clean coal technologies are likely to lead to a second dash-for-gas for electricity generation. Given the preceding commentary on the already increasing reliance on imported gas/LNG and a shortfall in UK UGS volumes, this would have an immediate and potentially important impact on national security of supply and energy issues. Immediate UK requirements are thus likely to be for increased storage volumes of various types, including salt caverns and depleted fields. However, an increased awareness of alternative, unconventional gas sources like shale gas and environmentally acceptable methods of exploitation would be advantageous.

19. Organic-rich shale contains significant amounts of gas held within fractures and micro-pores and adsorbed onto organic matter. Shale gas prospectivity is controlled by the amount and type of organic matter held in the shale, thermal maturity, burial history, micro-porosity and fracture spacing and orientation. In the UK licences have already been taken up by forward-thinking companies and the interest will be high for the next licensing round.

20. It is too early in exploration of UK shales to be certain about the contribution which shale gas production could make. In the US, shale gas extracted from regionally extensive units such as the Barnett Shale currently accounts for ~6% of gas production. Comparisons with the US suggest that there will be some production in the UK and all organic-rich shales in the UK are likely to be tested for their resource potential.

21. The lowest risk exploration is where source rocks have accompanying conventional hydrocarbon fields, which in the UK include the Upper Bowland Shale of the Pennine Basin, the Kimmeridge Clay of the Weald Basin and possibly the Lias of the Weald Basin. Deeper Dinantian shales should also be tested in the Pennine Basin and possibly in the Oil-Shale Group of the Midland Valley. Higher risk is attached to the Upper Cambrian source rock on the Midland Microcraton, which although it has not been severely tectonised, has not sourced conventional fields that have been preserved. The highest level of risk is attached to black shales within the Caledonian and Variscan fold belts, which have high organic carbon but are tectonised (affected by thrusts, intruded by igneous intrusions and converted to slates) and also have no overlying fields.

22. British shale gas might be regarded as ‘stored gas’ if reasonable assessments of the potential can be made.

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23. BGS reports on Worldwide Shale Gas and UK prospectivity are on the DECC Promote website: (https://www.og.decc.gov.uk/upstream/licensing/shalegas.pdf)

Conventional gas Associated gasCoal bed methane field

Outcrop of formations with best shale gas potential

Kimmeridge Clay FmOxford Clay FmLiasMillstone Grit (Carb.)(overlies UpperBowland Shale)

50 km

Figure 3. Main potential source rocks at outcrop, in relation to the conventional gasfields and gas discoveries. Larger subsurface extents of the source rocks are excluded from this simplified map. Lower Palaeozoic, higher risk prospects not all shown and partly underlie Mesozoic formations.

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Question: How exposed is the UK’s energy security of supply to international events?

24. Britain has long term interests in obtaining oil and particularly LNG from the Middle East. The events of the ‘Arab Spring’ in the last few months have highlighted the fragility of the system that delivers oil and gas. 80% of the world's oil reserves are located in the Middle East, 62.5% coming from the ‘Arab 5’: Saudi Arabia, UAE, Iraq, Qatar and Kuwait and most of this is controlled by national oil companies (NOCs) like Saudi Aramco, Kuwait Oil Company and ADNOC. NOCs may become even more dominant as oil production dwindles in areas which are open to all comers, such as the North Sea and the Gulf of Mexico. Much new oil is likely to be found in the NOCs' territory, precisely because it is largely out of bounds to multinationals such as Shell and BP, and so has not yet been thoroughly explored. Therefore future oil and gas production may be even more concentrated in the hands of the national firms of Russia and the Gulf, most of which do not publish details about reserves or prospects. Currently consultancies such as IHS and McKinsey collect data on basins and regions in the Middle East and worldwide, but these are primarily aimed at investors, not governments and policy makers (E.g. IHS ‘Basin Monitor’: http://www.ihs.com/products/oil-gas-information/basins-data/monitors.aspx). The only long term strategic survey of worldwide petroleum prospects, including the Middle East, is that of the USGS’ World Petroleum Assessments (http://energy.cr.usgs.gov/oilgas/wep/products/dds60/wepdata.htm) which are essentially long term and strategic hydrocarbons ‘intelligence’ about the region. It may be worthwhile for Britain to begin collecting information about Middle East reserves and prospects, so that it has an independent view of this vital economic area.

25. In addition to oil and gas, many renewable/ low carbon energy technologies (including wind turbines and electric vehicles) rely on small, but critical amounts of key metals for their manufacture. Almost all of these metals are sourced from outside the EU and the supply of some is subject to significant geopolitical vulnerabilities (such as rare earth metals from China or cobalt from Democratic Republic of Congo). The current Commons Science and Technology Committee inquiry into 'Strategic Metals' and the European Commission 'Raw Materials Initiative' are addressing this issue, but it is important to understand that security of supply applies to key metals as well as oil and gas.

26. The UK is wholly reliant on imported uranium to fuel its nuclear generating plants. Determining the ultimate country of origin of uranium imports to the UK from published statistics is problematic. In 2010, Uranium metal enriched in U-235 was imported into the UK from Germany, France, the Netherlands and Russia. Of these countries, only Russia has mines producing uranium.

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27. Global demand for uranium for electricity generation is currently much higher than mine production. At present the shortfall is met by reprocessing, from stockpiles and by conversion of weapons-grade uranium into fuel. However, global mine output is increasing, with production in 2009 at the highest level since 1981. The top four global producers are Kazakhstan, Canada, Australia and Namibia. Uranium occurs in economic quantities in a range of geological environments across the world. As such, the geological and geopolitical constraints on supply are not as severe as those relating to some other metals and fossil fuels. Increasing demand is prompting the development of new mines in a number of countries and production from these is likely to reduce the current shortfall of supply considerably. However, concerns related to the Japanese nuclear disaster notwithstanding, global demand for the low carbon energy which nuclear power provides is burgeoning. The success of the proposed UK nuclear new build will depend on securing supply of uranium fuel in the face of increased competition from other consumers around the world. Long-term monitoring of global uranium production and trade are a vital part of this process. For more information see the BGS Mineral Profile on uranium at: http://www.bgs.ac.uk/downloads/start.cfm?id=1409

March 2011

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Memorandum submitted by The European Azerbaijan Society (UKES 15) 

1. Executive Summary   This submission considers the importance of energy security for the UK, and the vital role that the South Caucasus, Azerbaijan in particular, plays in achieving this aim.  Gas power for electricity generation is destined to remain one of the main pillars in the energy security mix for the UK. The situation after the Japanese earthquake and resulting problems at the Fukushima nuclear plant have resulted in many countries, such as Germany1, scaling back nuclear generation projects. This  is  likely to further raise demand for gas as the only alternative clean energy source2.  As  was  seen  in  the  Russia  –  Ukraine  disputes  of  2009,  the  UK  gas  market  is inextricably linked to that of the EU. Unease that 40 per cent of the EU’s gas imports originate from Russia3 has led to the EU Commission implementing a strategy aimed at achieving diversification. Central to this aim is establishing a southern corridor to lessen  dependence  on  Russia. Nabucco  is  currently  the  front  running  project  and Azerbaijan is essential for the success of any such scheme. 

1. Submission of evidence to the Energy and Climate Change Committee inquiry on The UK’s Energy Supply: security or independence? 

Submission by The European Azerbaijan Society (TEAS)  1.1‐ The European Azerbaijan Society (TEAS) is headquartered in London but also has offices in Brussels and Berlin. The Society regularly organises events across Europe in 

 as a networking centre, order to raise awareness of Azerbaijan. TEAS also operates

                                                        1 REUTERS ‐ Germany’s nuclear program in the balance h /germany‐nuclear‐election‐ttp://www.reuters.com/article/2011/03/25idUSLDE72O0F420110325 2 UPI ‐ Natural gas to gain from nuclear crisis h ‐Wars/2011/03/22/Natural‐gas‐ttp://www.upi.com/Science_News/Resourceto‐gain‐from‐nuclear‐crisis/UPI‐26471300819545/ 3 Euractiv ‐ Geopolitics of EU Energy Supplies. ttp://www.euractiv.com/en/energy/geopolitics‐eu‐energy‐supply/article‐h142665  

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focusing on such areas as business development, diplomatic relations, culture and education, thereby promoting greater understanding and co‐operation between the UK, Europe and Azerbaijan.  1.2‐ This submission is specifically structured to address points 6 and 7 from the terms of reference specified for the inquiry: 6) What would be the implications for energy security of a second dash‐for‐gas? 7) How exposed is the UK’s energy security of supply to international events?  1.3‐ The instability in the Middle East has already caused energy prices to new highs and the nuclear emergency in Japan has had a direct effect on gas prices. Many countries are now scaling back or delaying their nuclear programs, with the direct consequence of higher demand for gas, currently the only viable alternative to nuclear in terms of low carbon emissions. Germany in particular is looking likely to reverse its nuclear programme and close power stations ahead of time4. This can only result in more demand for gas from Russia, with resultant price hikes.  1.4‐ European reliance on Russian gas has been called into question for many years, but it was not until the gas disputes of 2008–9 that energy security emerged as a priority. In January 2009, disagreements between Russia and the Ukraine resulted in supply disruptions with 18 European countries reporting major falls or cut‐offs of their gas supplies. Although at this time, the UK was not receiving supplies direct from Russia it was still affected by the resultant spike in gas prices. Potential repercussions in the future are set to rise as the UK’s dependency on gas imports increases and as the UK is set to start receiving Russian gas through the soon to be complete Nord Stream pipeline5.  

2. The UK Position  2.1‐ A recent Chatham House report stated: “By 2020, around 20–30 per cent less natural gas will be available from UK production. This means that imports are likely to rise from a third to around 70 per cent of gas consumption.”6  2.2‐ The UK is facing a challenge in securing reliable energy supplies for the future, particularly in respect to natural gas. It currently imports around 30 per cent of its gas, with this figure being predicted to rise to around 70 per cent by 2020. Increased 

                                                        4 Bloomberg ‐ Carbon, power advance as German state election may hurt nuclear h 3‐25/carbon‐power‐advance‐as‐ttp://www.bloomberg.com/news/2011‐0german‐state‐election‐may‐hurt‐nuclear.html 5 Nord Stream – General background paper http://www.nord‐stream.com/fileadmin/Dokumente/1__PDF/3__Background_Infos/General_Background/Nord_Stream_White_Paper_General_Background_eng.pdf 6 Chatham House Report, Investing in an uncertain future: Priorities for UK Energy and Climate Security, Nick Mabey, July 2010 

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reliance on gas imports will further link UK energy security needs to those of the EU as a whole.  2.3‐ At present, only three countries supply the vast majority of EU gas imports – Russia accounts for 40 per cent, Algeria 30 per cent and Norway 25 per cent7. In the past the EU has had no clearly defined unified energy policy, however in recent years concrete steps have been taken to address this shortcoming. The Southern Gas Corridor is designed to address this by opening a new supply route for gas from Caspian and Middle‐Eastern regions to Europe.   2.4‐ Europe’s total gas imports in 2007 amounted to 300 billion cubic metres (bcm)8. Together, the Southern Corridor projects could provide the necessary capacity to annually deliver 60–120 bcm of Caspian and Central Asian gas to Europe, amounting to between 20–40 per cent of overall imports. This would amply meet the EU’s targets for supply diversification and also help ensure the UK’s own energy security needs.  

3. Azerbaijan  3.1‐ Azerbaijan is already supplying both oil and gas to the EU. Since the Shah Deniz natural gas field was inaugurated in 2007, Azerbaijan has become a gas exporter, shipping increased amounts of natural gas via Turkey to Europe. Operated by BP, the Shah Deniz gas field holds 600bcm of natural gas and 101 million tonnes of condensate. It could potentially hold reserves amounting to 1 trillion cubic meters 

(tcm) of gas and 400 million tonnes of condensate. BP is the biggest foreign direct investor in Azerbaijan9.  3.2‐ Azerbaijan supplies gas to the EU through the only current gas pipeline that avoids Russian territory. The South Caucasus Pipeline (SCP), also known as the Baku–‐Tbilisi–‐Erzurum (BTE) pipeline, transports natural gas from the Shah Deniz gas field in the Caspian Sea to Turkey. Running parallel to the SCP is another Azerbaijani pipeline, the Baku–Tbilisi–Ceyhan (BTC) oil pipeline, which opened in July 2006. This exports oil from Azerbaijan, and up to 600,000 barrels a day from Kazakhstan, running along a 1,040‐mile route from Baku to the Turkish Mediterranean port of Ceyhan and on to Europe. 

 3.3‐ The UK is already the largest foreign investor in the country through BP. On the 

OCAR  (The  State  Oil  Company  of  the  Republic  of 7th  October  2010  BP  and  S

                                                        7 Euractiv: Geopolitics of EU energy supply ­ h ergy‐supply/article‐ttp://www.euractiv.com/en/energy/geopolitics‐eu‐en142665 8 l on Foreign Relations. The EU and Russia’s Gas  European Councihttp://ecfr.eu/content/entry/commentary_the_eu_and_russias_gas/ 9 BP in Azerbaijan http://www.bp.com/sectiongenericarticle.do?categoryId=9015374&contentId=7028018 

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Azerbaijan) announced a major new production sharing agreement (PSA). This gives BP 30 years of  rights  to exploration and production  rights over  the Shafag‐Asiman Structure.  Reserves  are  said  to  estimate  500  bcm  of  gas  and  65 million  tons  of condensates,  this alone could  supply  the Nabucco pipeline  running at  full capacity for 16 years.   3.4‐ Azerbaijan is an essential element of any of the plans supported by the EU. The Caspian and Middle East region are estimated to have  in excess of 88 trillion cubic metres  (tcb)  of  reserves,  dwarfing  Russia’s  reported  estimates  of  43  tcb.  The International  Energy Agency  (IEA)  reported  in  its  2010 World Outlook  report  that Caspian natural gas exports are expected to more than triple during the next decade. Producers including Turkmenistan and Azerbaijan are expected to export almost 100 bcm of gas in 2020, compared with less than 30 billion last year10. Even setting aside political considerations, Russia simply does not have enough reserves  for  the  long‐term  supply of Europe’s energy needs. Production  from  its  largest  three  fields has already begun to fall11 while at the same time internal consumption is going up. For these reasons any long term solution for the UK must include access to the massive resources of the Caspian and Middle East. 

4. Nabucco   4.1‐ Nabucco is the preferred project to bring gas to the EU and increase diversity of supply.  The  cost  has  been  estimated  at  €7.9  billion  and  an  intergovernmental agreement between Turkey, Romania, Bulgaria, Hungary and Austria was signed on 13 July 2009. The pipeline is expected to be operational by 2015 and when complete it will carry up to 31 bcm of natural gas per year.  4.2‐ Widely regarded as a competitor for Russia’s South Stream project, Nabucco has the advantage of having  lower overall build costs than South Stream, but has been hampered  by  disjointed  European  policy  and  lingering  questions  over  supply. However, despite scaremongering, mainly from the South Stream lobby and Russian Prime Minister Vladimir Putin, studies suggest that supplies would not be a problem and  could be  sourced  from Azerbaijan and other Middle Easter producers  such as the Kurdistan region of Iraq.   4.3‐ Azerbaijan is well placed to cover the initial 8 bcm phase of the project through expansion of  it’s Shah Deniz gas  field.  It  is expected  that when  the project moves into  it’s second phase the Kurdistan region of  Iraq will provide supply to cover the remaining capacity needed to fill the pipeline at 31 bcm. Additional supply could be sourced from Kazakhstan and Turkmenistan with Azerbaijan acting as a conduit. This could  be  undertaken  utilising  existing  infrastructure,  connecting  Azerbaijani  and 

 the Caspian Sea, these are barely 70 km apart.  Turkmen offshore platforms in

                                                        10 IEA – 2010 World Energy Outlook ‐ http://www.worldenergyoutlook.org/ 11 European Council on Foreign Relations ‐ Beyond dependence, How to deal with Russian Gas ‐ http://ecfr.3cdn.net/c2ab0bed62962b5479_ggm6banc4.pdf 

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 4.4‐  The  Kurdistan  Regional Government  (KRG) Minister  of Natural  Resources, Dr Ashti Hawrami, announced  in  June estimates of gas  reserves of between 100 and 200  trillion  standard  cubic  feet.  This  would  be  more  than  enough  to  meet  all domestic requirements and to generate substantial revenues for  Iraq from the sale of excess gas to Turkey and Europe.  4.5‐  RWE,  one  of  the  partners  in  Nabucco,  has  already  signed  a  Cooperation Agreement with  the  Kurdistan  Regional Government. Under  the  agreement,  RWE will provide assistance to the KRG in the development of a gas distribution network and training aimed at  increasing the necessary technical skills of the citizens of the region.  4.6‐  Both  Azerbaijan  and  Kurdistan  are  integral  to  the  project  and  both  have declared  their  interest  in  being  involved.  The  key  to  securing  these  supplies will however be decisive UK and EU action in pushing the project forward. Azerbaijan will then have the confidence to invest in expanding the Shah Deniz field while the KRG can work on developing it’s infrastructure towards export. 

5. Russia’s “great game” play          5.1‐ South Stream  is a Russian supported project  to  transport Russian and Caspian gas to Europe via the Black Sea. Combined with Russia’s Nord Stream pipeline, the two will only serve to increase the EU’s dependence on Russian gas.   5.2‐ With Nord Stream scheduled to be operational by 2011 it is hard to see why Russia would be so intent on promoting this South Stream if it were looking to Russian gas supplies alone. Critics say that Russia is simply pushing South Stream in order to derail Nabucco.  By so doing, it would retain a virtual monopoly of distribution, not just of it’s own supplies but of most supplies from the Caspian and Central Asia. These theories have been given credence by Russian Prime Minister Vladimir Putin’s efforts to talk down Nabucco’s chances of success, while making it clear Russia would not entertain any thought of convergence or collaboration between the two pipelines despite the obvious economic advantages.   

6. Recommendations  

a) The UK’s dependence on external energy sources is set to increase dramatically by 2020 with imports of natural gas set to rise to 70 per cent of requirements. Although Norway will provide part of this increase, the UK is still vulnerable to price fluctuations and restriction of supply on the European market. The UK therefore has a vested interest in ensuring the EU has stable and diverse supplies of energy. 

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 b) The EU’s dependence on Russian gas has received a lot of attention, mainly 

due to political considerations. The 2008 war in Georgia and the Ukraine gas disputes of 2009 have shown that these worries are not without foundation, but there are also practical reasons for the EU to increase its diversity of energy sources. Russia simply does not have enough reserves for the long term supply of Europe’s energy needs; production from its largest three fields has already began to dwindle12; internal consumption is going up; and increasing supplies could be diverted to China. For these reasons any long term solution for the EU must include direct access to the massive resources of the Caspian and Middle East. 

 c) The “Southern Corridor” is the best way for the UK and EU to achieve 

diversity of supply. Nabucco is currently the favoured project but along with any other proposals it can only succeed if the support of Azerbaijan is secured. It is earmarked as a supplier for all the projects promoted by the EU but more importantly it also holds the key as a transit route for further supplies from Kazakhstan and Turkmenistan.  

 d) If the EU and UK are not successful in securing these supplies the likely 

outcome is that Azerbaijan and other Caspian producers will be forced to sell the energy to Russia who will in turn sell it to the EU at a higher market price. The key to securing these supplies will be decisive UK support and EU action in pushing the EU Southern Corridor projects, Nabucco in particular, forward.  

 March 2011       

 12 European Council on Foreign Relations ‐ Beyond dependence, How to Deal with Russian Gas ‐ http://ecfr.3cdn.net/c2ab0bed62962b5479_ggm6banc4.pdf 

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Memorandum submitted by E.ON (UKES 16) 

Summary of key points 

• The electricity market faces significant investment challenges as we replace aging infrastructure and  plant  closes  as  a  result  of  environmental  legislation.  In  their  2010  Statutory  Security  of Supply Report DECC and Ofgem estimate closures of around 12GW of generation capacity by 2016 as a  result of  the Large Combustion Plant Directive  (LCPD) and up  to 7.4GW of nuclear capacity by 2020. At the same time the UK energy system is decarbonising which could result in more  intermittent plant and a more decentralised generation structure. To ensure security of supply Government policy needs to consider not only the direct  low carbon  infrastructure but also  the  investment  challenges  for  the  supporting  infrastructure,  including peaking plant and improved networks.  

• Decarbonisation  of  the  energy  system  is  also  likely  to  dramatically  change  demand characteristics  through  electrification of heat  and  transport  and  energy  efficiency. Predicting these  changes  and  developing  the  capability  to  manage  them  (through  demand  side management) will be crucial. 

• Fossil fuels are likely to remain an important part of the UK’s energy system for the foreseeable future as carbon capture and storage technology develops and through their role  in providing peaking capacity when required. 

• Diversity of  the UK’s energy system  is crucial  to reduce  the risk of both supply shortages and fuel price volatility. Government policy should encourage investment in a wide range of energy sources. 

• We believe  the UK  is unlikely  to experience physical  supply  shortages of  fossil  fuels used  for electricity generation and heating but price volatility could remain high. 

• Policy uncertainty could  lead to a hiatus  in  investment. Given the challenges the UK faces and the  long  timescales  of many  infrastructure  developments,  policy  certainty  including  further development and finalised proposals from the electricity market reform (EMR) process should be a priority for Government. 

The Committee’s specific questions are addressed below. 

 

Q1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 

1. The UK  energy market  is  competitive  and  any  long‐term,  fundamental  changes  in wholesale market  fuel  costs  will  ultimately  be  passed  on  to  energy  consumers.  Industrial  consumers generally prefer more market reflective pricing so may therefore be more susceptible to short‐term changes in fossil fuel costs.  

2. We believe fossil fuelled plant running at low load factors will remain an important part of the future  low‐carbon  energy  mix  in  the  UK  in  order  to  meet  peak  demand  when  renewable generation is low (for example when the wind doesn’t blow). Fossil fuels could also play a role 

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in baseload supply with carbon capture and storage technology. Therefore the UK is likely to be sensitive  to  fossil  fuel  prices  to  some  degree  for  the  foreseeable  future.  The  long  term relationship  between  the  prices  of  different  fossil  fuels  is  also  significant  as  it  could  drive switching between fuels used for generation.  

3. As  the UK  energy market  decarbonises,  fossil  fuel  prices  could  have  less  influence  over  the electricity  price;  the  extent  of  this  depends  on  the  uptake  of  carbon  capture  and  storage technology and the role of fossil fuels in providing marginal capacity. 

4. In order to manage future volatility in fossil fuel prices it is crucial that investment in UK energy infrastructure  facilitates  a  diverse  range  of  energy  sources  both  in  terms  of  electricity generation technologies and interconnection, and gas import and storage capability. 

5. E.ON  is developing  its electricity generation mix  in the UK through development of Combined Cycle Gas Turbine  (CCGT) plant, renewables projects such as the London Array wind farm and nuclear  generation  through Horizon Nuclear  Power. We welcome DECC’s  recognition  of  the need for diversity in its EMR consultation but how effective the policy will be can only be judged when proposals are more certain.  

6. A  diverse  gas  infrastructure  is  emerging  in  the  UK  and  DECC’s  Statutory  Security  of  Supply Report concludes that, should the currently planned  import and storage capacity proceed, the UK will be well‐served  in  the coming years. E.ON’s gas storage business  is  investing  in UK gas infrastructure with the Holford project which is expected to begin commercial operations in Q4 2011 and the Whitehill project which is in development.  

7. The cost of uranium  is a relatively small element of the total cost of nuclear power; therefore fluctuations in its cost have a limited impact. Uranium is a relatively abundant resource which is mined  in  a diverse mix of  countries.  It  is widely  accepted  that  significant uranium  resources exist which could become economic to mine if supply shortages pushed prices up. Uranium can also be relatively easily stored which provides opportunities to manage price volatility. 

 

Q2. How  sensitive  is  the UK’s  energy  security  to  investment  (or  lack  of  investment)  in  energy infrastructure, including transmission, distribution and storage? 

8. Investment  in  energy  infrastructure  often  involves  significant  capital  and  takes  time  to complete.  In  the  current  economic  environment  potential  investors  with  limited  funds  are making investment decisions on a global basis. The industry cannot react quickly to price signals in wholesale  fuel markets,  for example  the  timescale  from  initiation of a CCGT or Open Cycle Gas Turbine  (OCGT) project to commissioning can be up to nine years. The UK needs a stable and  predictable  policy  framework  to  attract  the  investment  it  needs  within  the  necessary timescales.  

9. Effective  and  timely  implementation  of  planning  reform  is  crucial.  Delays  to  infrastructure projects  as  a  result  of  planning  issues  could  have  a major  impact  on  energy  security.  The National Policy Statements (NPS) provide a coherent and practical framework within which the decision maker  can  assess  future  planning  applications  for  energy  infrastructure.  The  NPSs 

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should be ratified by Government as soon as possible as they are central to the new planning regime being effective.  

10. The pre‐application requirements of  the new planning system  introduced by  the Planning Act 2008  could  introduce  additional  risks  for  investors.  To  ensure  investment  is  not  delayed  or deterred  the  system  should  be  clear  and  transparent,  allowing  developers  to work with  the Infrastructure  Planning  Commission  and  Major  Infrastructure  Planning  Unit  to  understand requirements early in the process. 

11. Investment  in  transmission and distribution networks  is  important  to maintain  the quality of electricity  supply  in  the UK and  facilitate continued demand and generation access while  the industry decarbonises. Most of  the current network  infrastructure was built  in  the 1950s and 60s and so will become less reliable without the continuing increase in investment started in the last  two price  control periods. As we move  to a  low  carbon generation model, networks will need to support an  increasingly decentralised generation  infrastructure. The network  industry also needs  to establish how greater and more widespread demand  side management can be achieved. We believe demand side response will be one of the most crucial elements needed to support  security  of  supply  in  a  low  carbon  future.  The  Government  needs  to  ensure Transmission  and  Distribution  Network  Operators,  suppliers,  generators  and,  importantly, customers understand  their  roles  in enabling demand side management.  Investment  in smart technology  and  a  smart  grid will  help  the  UK  to maximise  the  use  of  the  current  network infrastructure. 

12. We welcome Ofgem’s recognition of the investment challenge the network industry faces with its announcement last year of new price controls to help deliver efficiently the estimated £32bn of  investment over the next ten years. Ofgem has also recognised the need  for  investment  in the  transmission network  through  the Electricity Networks Strategy Group. This  investment  is crucial to avoid the network  infrastructure becoming a barrier to other developments needed to achieve a secure, low carbon electricity supply. 

13. The UK needs to ensure a diverse mix of generation technologies is developed and investment in back‐up or peaking plant  is  just as  important as  low carbon plant. Any  feed‐in  tariff model introduced by  the Government should ensure a  functioning market  remains and  incentivise a range of technologies; the proposed contract for difference model could achieve this if designed appropriately.  

14. A wrongly  designed  capacity mechanism  could  distort  the  efficient mix  of  peaking  plant  the market would otherwise  incentivise. We believe that, wherever possible, energy only markets combined  with  functioning  balancing  markets  should  be  used  to  incentivise  investment  in capacity.  If  a  capacity mechanism  is  introduced,  the most  efficient  approach  is  to  create  a market for capacity where all generation (or demand side response) providing firm capacity (or an  equivalent  reduction  in  demand)  is  rewarded  at  the  same  value.  The  analysis  we  have undertaken  suggests  that  a  system  of  capacity  credits  is  the  mechanism  which  is  most market‐based and would involve least disruption to the existing UK market structure.  

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15. Investment  in  any  infrastructure  relies  heavily  on  the  wider  supply  chain  providing  both materials (such as turbines, reactors and so on) and skills. Security of supply is very sensitive to the availability of these. 

16. Investment  in  interconnection  could  help  balance  the  risks  of  generation  intermittency  and demand peaks across Europe. A period of low wind and cold temperatures in the UK could well extend to other areas of Europe; in these conditions interconnection can only play a limited role in ensuring security of supply. We believe an efficient and integrated EU wide market is crucial as  it will  provide  price  signals  that  ensure  that  electricity  flows  are  received  by  the  tightest markets, but interconnection should be just one part of a diverse mix of energy sources. 

17.  The UK gas market has a well proven track record of delivering even under extremely tight and challenging  circumstances.  The  Ukraine  gas  crisis  in  2009  was  well  managed  without  any intervention  and  the  2010  Pöyry  report  “GB Gas  Security  and  Future Market Arrangements” states: 

“Experience of  the 2009/10 winter with sustained high demand confirms  that  the market has delivered  and  is working  fine.”  and  that  “our  general  conclusion  is  that  there  is  no  need  to fundamentally change the market. If it is allowed to work effectively, then the pricing signals can be expected to drive the necessary investment”. 

18. In  their 2010 Statutory Security of Supply Report DECC and Ofgem predict  the UK will have a large and diverse  range of gas  import sources, provided planned  import and storage capacity comes forward. 

Q3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? 

19. Electrification of these sectors will undoubtedly increase overall levels of demand for electricity. Forecasting  the  timing and  level of  this  increase  is extremely  challenging. As outlined above, investment  and  development  of  energy  infrastructure  takes  several  years  so  a  short‐term, unexpected  increase  in electrification  could bring  security of  supply  risks. Poor  infrastructure could become a barrier to electrification and a move to a low carbon economy. 

20. Without  demand  side  management,  the  electrification  of  heat  and  transport  could  have significant  consequences  for  the UK  energy  system.  The  impacts on  generation  capacity  and networks  (particularly  the  lower voltage networks) could be particularly severe. Electrification needs  to  occur  alongside  improvements  in  demand  side  management  technology  and appropriate incentives for customers. Increases in demand can then be managed or substituted into  periods  of  low  demand.  This  will  allow  the  UK  to  make  the  best  use  of  its  existing infrastructure, minimising  the  investment needs and could even provide  significant electricity storage opportunities. 

21. As well as reducing carbon emissions, electrification of these sectors could help reduce the UK’s reliance on fossil fuels such as gas and oil. However, this will only be achieved if investment in a diverse, low‐carbon and secure electricity generation mix occurs. 

Q4. To what extent does the UK’s future energy security rely on the success of energy efficiency measures? 

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22. Energy efficiency will help  reduce  the overall  levels of average demand  in  the UK. This could help  offset  some  of  the  expected  increases  in  demand  from  electrification  of  heat  and transport. Achieving long term carbon reduction targets will be very difficult without significant improvements in energy efficiency. 

23. Energy efficiency alone  is unlikely  to  reduce capacity  requirements significantly; many energy efficiency measures involve reductions in non‐essential energy use which often occur outside of peak  times. On  its own,  it  therefore has a  limited  impact on one of  the key challenges  in  the development  of  a  low  carbon  energy  infrastructure  of  ensuring  energy  security  at  times  of generation intermittency.  

24. As with  electrification  of  heat  and  transport,  the  extent  to which  energy will  be  used more efficiently is difficult to predict. This has consequences for investors and could lead to over‐ or under‐ investment if demand doesn’t reduce as expected. In the EMR proposals there are many assumptions about energy efficiency, the Government needs to consider the  impact of  limited policy success. 

Q5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 

25. Policies designed  to achieve  these  targets  in  the UK will distort  the  current operation of  the market with  energy  security  implications.  Some market  intervention  is necessary  in order  to correct the market’s failure to accurately reflect the cost of carbon (the EU ETS aims to achieve this)  and  incentivise  low  carbon  generation  given  the UK’s opportunity  to  replace  its  closing generation fleet. 

26. Nuclear can provide high and consistent levels of baseload power, helping to maintain sufficient margin  at  peak  times.  Increased  renewable  generation  could  lead  to  lower  load  factors  for non‐renewable plant, requiring this plant to make a return from higher revenues over shorter periods. In the current market, prices would need to rise to exceedingly high levels, which might attract regulatory or political scrutiny, in order to reward peaking capacity. This creates a more difficult environment in which to attract the required investment in peaking capacity. 

27. The change to a low carbon economy could have a significant impact on the demands placed on the UK’s networks and  the way  in which  they are planned, designed, built and operated. We therefore welcome Ofgem’s  Low Carbon Network Fund  introduced  for electricity distribution and proposed for gas and transmission businesses.   

Q6. What would be the implications for energy security of a second dash‐for‐gas? 

28. The International Energy Agency’s World Energy Outlook published in November 2010 predicts a glut  in global gas  supply. Production of  shale gas  in  the USA has  led  to an  increase  in  LNG supply to the rest of the world. As the UK’s LNG infrastructure develops, the UK becomes more open to the international gas market.  

29. Since 2009 the UK power generation market has already seen an  increase  in gas capacity, we expect  this  trend  to  continue  until  at  least  2014  given  current  CCGT  and  OCGT  plant  in 

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operation or under construction. If further planned or consented gas capacity comes online this will continue even further into the future.  

30. Recent  events  in  Japan  have  shown  how  an  unexpected  event  can  dramatically  change  the economics  of  a  commodity  very  quickly.  The German Government’s  decision  to  temporarily take Germany’s seven oldest nuclear power plants offline has resulted in increased gas and coal prices  based  on  expectations  of  future  demand.  An  over  reliance  on  gas  based  on  current availability and price expectations could increase our energy security risk.  

31. We  believe  a  diverse  energy mix  is  crucial  and  the  UK  Government  should  encourage  this. Reliance on any single fuel through a generation investment cycle could have consequences in terms of volatile prices and  limited ability  to balance  these by switching  to other  fuels  in  the short term. 

32. Through the EMR consultation the Government has recognised the risk of reliance on gas. We support  the  proposed  contract  for  difference  (CfD)  based  feed‐in‐tariff model  which  could promote a diverse energy mix;  further  consultation  is needed on  the design of  this policy  to ensure its effectiveness.  

Q7. How exposed is the UK’s energy security of supply to international events? 

33. In terms of physical availability of energy the UK is relatively well insulated against international events. Global availability of gas and coal is relatively good and sources are relatively diverse so the UK is highly unlikely to experience long‐term supply shocks.  

34. International  events  could  have  a  significant  impact  on  price  given  the  global  nature  of commodity markets. As outlined  in our response to question 1, price  increases will eventually pass  through  to  energy  consumers  which  could  have  significant  consequences  for  the  UK economy. Recent events  in Japan and also  last year  in the Gulf of Mexico have shown us how sensitive commodity prices can be to disruptions. 

35. Investment in a diverse energy infrastructure will help to reduce reliance on a single fuel or fuel source and in turn help stabilise prices for consumers. 

Q8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? 

36. The UK has previously relied on the market to provide sufficient capacity margins and has been successful at doing so. We recognise the changing risks to security of supply as the Government intervenes in the market to promote low carbon development. EMR could result in fundamental changes to the energy  industry so security of supply risks will not be clear until policy  is more developed. Further development of the EMR proposals and finalised reforms should therefore be a priority for Government to ensure certainty for investors. These investors will spend their money elsewhere if the regulatory framework in the UK is uncertain. 

37. Demand side response and energy storage should be considered as a means to manage energy security risks before intervention in the form of capacity markets. 

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38. The  emissions  performance  standards  (EPS)  proposals  in  the  EMR  consultation  could significantly affect investment decisions for generation plant that could be crucial in maintaining security  of  supply.  If  introduced,  the  EPS  should  remain  at  a  level  that  allows  crucial  fossil fuelled peaking plant to operate before CCS is fully developed. Enforcing future retro‐fit of CCS technology could distort current investment as the technology is so uncertain. 

Q9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? 

39. In  paragraphs  9  and  10  above  we  outline  our  concerns  around  effective  and  timely implementation  of  planning  reform.  Planning  is  a  crucial  element  of  any  infrastructure investment project and could have a significant impact on energy security. The NPSs should be ratified by Government as soon as possible and pre‐application  requirements should be clear and transparent. 

March 2011  

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Memorandum submitted by UK Coal Mining Limited (UKES 17) Executive Summary 1. Greater emphasis should be placed on indigenous coal as part of a diverse, secure and

affordable energy policy 2. Current planning policy on new fossil fuel stations, which only requires carbon capture

and storage (CCS) on coal plant, is influencing developers build gas to meet the forthcoming energy gap. This will have a negative effect on both security and affordability of supply.

3. New gas fired power stations should be subject to the same requirement to fit CCS. 4. The current winter cold spell has highlighted our reliance on gas with two national

balancing alerts in the first week of January and many industrial consumers having their supply cut off. Future planned gas build will exacerbate this position.

5. Coal fired generation could virtually disappear from the UK electricity mix in the mid

2020s with only up to four UK Government supported commercial demonstration CCS stations in operation.

6. The uncertainty over the future size of the coal market for power generation is

hampering current investment in deep mines which has a long development lead time and payback.

Introduction 7. UK COAL Mining (UKC) welcomes the opportunity to submit evidence to the Energy and

Climate Change Committee looking into the UK’s Energy Supply. UKC is Britain's biggest producer of coal, supplying around 5% of the country's energy needs for electricity generation. The Group has three deep mines and six surface mines located in Central and Northern England with substantial reserves and employs 3,100 people. Around 95% of the Group’s 7Mt/year production supplies the electricity generation market and as such we are heavily influenced by policy objectives affecting the electricity sector.

8. The UK is facing energy security challenges presented by a dramatically changing global economic, geopolitical and energy landscape. Global reserves of oil and gas are increasingly concentrated in a limited number of countries and there is a clear risk that global supplies will not keep pace with demand. The market for energy in itself is becoming global; meaning more countries are now competing for those limited energy supplies.

9. Norway has just slashed its estimates for undiscovered gas resources by 31%1, which could lead to a decline in its gas production from 2015. The sharp revision comes following a lack of significant new discoveries in Norwegian waters last year. Norway, which supplies Europe with 20% of its gas, cannot be seen as a long term secure supplier.

                                                            1 Norwegian Petroleum Directorate – press release 13th January 2011

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10. This winter’s extreme cold spell has highlighted our reliance on coal, with it supplying almost half nation’s electricity requirements at peak periods. At the same time virtually nothing at all was produced from our windfarms, as high pressure weather systems dominated resulting in no wind.

11. Coal generation, therefore is vital to the UK’s diversity and security of energy supplies especially at time of dwindling indigenous gas supplies and volatile international energy markets. It needs to be part of the UK’s energy mix during the transition period to a low carbon economy. Coal stations are now likely to close early because of the introduction of carbon price support which was announced in the March 2011 Budget. As a result the capability for coal to contribute in the transition to a low carbon economy over the next 10-15 years is lost. This capacity will be replaced gas plant, more reliant on imported supplies.

12. Indigenous coal can provide security of supply during the transition to a low carbon economy which includes CCS and it is vital that the proposal to introduce a carbon price floor does not squeeze coal out of the energy mix.

13. UK considers that security of supply is best assured by having a diverse portfolio of sources available. This is particularly the case for electricity generation and particularly so at periods of peak demand. These considerations will become even more important as decarbonised electricity replaces fossil fuels used for transport and heat.

14. All forms of energy supply have advantages and disadvantages which do not need to be

repeated here. Coal has particular security of supply advantages in that it is abundantly available, including from UK sources, and can be transported and stored by flexible, low risk means. An energy portfolio without a significant contribution from coal is thus inevitably a higher risk portfolio.

Specific Questions posed by the Committee How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 15. As the UK becomes more reliant on imported energy it will become more exposed to

changes in international fuel prices. Energy is an international traded commodity and in a world where energy demand is forecast to rise by 49%2 between 2007 and 2035, it will become highly sought after. Therefore to secure the country’s energy requirements the UK will have to compete on the international market with the result that prices will inevitably rise.

16. The UK energy system can cope with higher prices, but can the UK consumer? If the UK ignores indigenous energy resources such as coal, then higher energy prices could drive UK businesses overseas to regions with lower energy costs. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

17. At present there is 28GW of coal plant on the system, this equates to around 35% of current generation capacity. Of this 8GW will close by 2015 under the provisions of the Large Combustion Plant Directive (LCPD). Because carbon allowances under the

                                                            2 US Energy Information Agency – International Energy Outlook 2010 (July 2010)

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European Union Emissions Trading Scheme (EU ETS) will have to be purchased with effect from the commencement of Phase 3 of the Scheme in 2013, some of this plant may close before the end of 2015. Such premature closures will increase the risks to security of supply in the period 2013 – 2015.

18. The remaining 20GW of coal-fired plant will have to invest in additional abatement equipment, particularly for NOx, to meet the requirements of the Industrial Emissions Directive (IED) if it is to continue to operate after the end of 2023.

19. UKC is concerned that the introduction of the carbon price support mechanism and other market uncertainties are such that it will be very difficult to take major investment decisions in respect of this 20GW of plant. If most of this plant closes, the risks to security of supply in the mid-2020s could be severe. Generators will subsequently build unabated gas plant to replace coal capacity closed under the IED. Because the Electricity Market Reform (EMR) will not force CCS to be retrofitted through its grandfather proposals, the investment case is much clearer cut and we will see a further dash for gas.This will have a dramatic adverse affect on security of supply and at times of winter peak demand when we have a high pressure weather system sat over the UK, we could be reliant on 80% of our electricity dependent on imported gas from Russia and the Middle East. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

20. Electricity demand for transport and heat will place a greater demand on our electricity system. This will require massive investment in new low carbon generation capacity. The UK currently has a good mix of generating plant however going forward, because of the reasons stated above, this is likely more concentrated on unabated gas and wind.

21. At present investment decisions are being made to build unabated gas, renewables and

nuclear. Government policy on new coal requiring CCS for the outset creates huge market and technology risk so it is likely that only up to four coal demonstration schemes will be built, thus precluding coal from playing its part in the long term energy mix. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

22. Energy efficiency is the cheapest and easiest way to save energy and hence provide a contribution towards energy security. However, whilst energy efficiency programmes have been talked about for years, no real gain has been seen from their introduction.

23. It would be therefore unwise to place over reliance on energy efficiency schemes and it must be questioned if the energy efficiency scenarios within the Government’s pathway analysis will ever come to fruition.

What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

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24. Government forecast that wind generation will account for 29% of the UK’s electricity generation in 20203. This intermittent capacity will require large amounts of fossil fuel back up as cover.

25. However, UKC disagrees with DECC’s analysis4 that it requires a relatively small intervention the market with an estimated 5GW of capacity required to 2030 to maintain margins at 10%. UKC believes, it is necessary to consider three types of capacity shortfall:-

(i) At periods of peak demand, for a few hours and for a few GW. (ii) A shortfall that could exist between day and night in winter lasting for up to 12 hours

a day and amounting to 10-15 GW. (iii) The capacity shortfall that will undoubtedly occur from time to time when climatic

conditions result in minimal wind generation across the whole country. This problem will get greater and greater as the amount of wind generation capacity increases. Such conditions occur at least once every winter and in some winters last for several days, i.e. December 2010, which saw the lowest temperatures since national records began in 1910 and the lowest wind speeds since 2001.

26. Existing coal stations play an important part in ensuring that the lights stay on and

that we have a sufficient spare capacity. Care must be taken within the Government’s electricity market reform package that the existing coal fleet is not phased out too quickly hitting capacity margins and threatening the transition to a low carbon economy

What would be the implications for energy security for a second dash-for-gas?

27. The UK is currently headed for a second dash for gas as a result of the introduction of a carbon price floor and the Government requirement for new coal plant to be fitted with CCS at the outset through an emission performance standard (EPS); but not imposing any such requirement on new gas plant for the whole of their economic life.

28. Carbon price support will incentivise switching from coal to gas with all the security of

supply and price risks that will entail. Whilst this may result in earlier carbon reductions, it will lock in carbon emissions in the longer term because of the amount of unabated gas plant that will be constructed as a result. This will make it more difficult to meet longer-term carbon reduction ambitions. We should also be mindful of the potential for existing nuclear plant to attract windfall gains from this mechanism.

29. The EPS proposal will push generators to build unabated gas. As such no one is likely to build a new coal plant when they can build unabated gas and not have the obligation to retrofit CCS due to the Government’s grandfathering proposals. The proposed policy clearly discriminates against new coal fired plant in favour of unabated gas and will result in a fresh dash for gas, reducing security of supply and long term carbon lock in.

30. At present the position with new gas stations5 is as follows:

                                                            3 DECC – Updated Energy and Emissions Projections, June 2010 4 DECC – Electricity Market Reform Consultation, December 2010 5 DECC – Electricity Development Consents Branch

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Recent commissions

4.2 GW

Under construction

4.6 GW

Section 36 approvals

7.6 GW

Section 36 applications

5.5 GW

The above build will replace existing coal plant and will have a dramatic adverse effect on the diversity of supply and at times of winter peak demand when we have a high pressure weather system sat over the UK, where we could be reliant on 80% of our electricity dependent on imported gas from Russia and the Middle East.

How exposed is the UK’s energy security of supply to international events

31. Current events show that the UK is massively exposed to the volatility of international events. The troubles in Libya and the Middle East have fed through into higher oil and gas prices, whilst the nuclear problems in Japan have closed reactors across Europe and have fed back into higher electricity prices in the UK.

32. Successive UK governments have championed the ‘market’ in the energy sector and as energy markets become more global, therefore we will become more exposed to international events.

33. Utilising indigenous supplies of energy is therefore crucial in alleviating the effect of international events. The UK still has significant reserves of coal and believes that coal burnt in the existing coal powered fleet will play a vital role in keeping the country’s lights on until the mid-2020s. UKC accepts that for coal to contribute to the UK’s long term energy mix, it must be accompanied by CCS. Until CCS is proven and deployed, the existing coal power station fleet provides an essential low cost transition.

34. Therefore proposals contained within the EMR package must not be detrimental to

CCS development within the UK, or cause existing coal stations prematurely to close and encourage the ‘default’ option of building gas plant to replace it, thereby locking in carbon emissions beyond the life of the current coal fired plant.

35. It is also important to ensure that these proposals do not kill off the indigenous coal production industry in the short to medium term. When coal is required to fuel our fleet of CCS power stations in the future; the UK coal industry will have supplied the transitional market and continued to invest and demand is not met solely by imports.

Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

36. The policy of the UK Government is for the market to provide what is required and has placed obligations on suppliers to do so. It is likely that UK companies will compete in an international energy market to acquire what is necessary; however the downside of such a policy is that there is no control over price and UK consumers are likely to have to pay higher and higher prices as world demand increases.

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37. Rising energy prices will affect the UK’s industrial competiveness and force more households into fuel poverty.

38. The use of indigenous resources will provide some shelter to the vagaries of the international market and UKC urges the Committee to recognise the role that the UK coal industry can play in the UK’s energy mix.

39. In 2010 indigenous coal was used to generate around 12% of the UK’s electricity. Going forward UK coal producers can continue to contribute at this level, provided that coal generation remains within the energy mix. Proposals put forward by the Government in their Electricity Market Reform consultation are likely to prematurely close existing coal stations before CCS is proven and deployed.

Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

40. Coal production in the UK is a growth industry. Output has increased over the last

three years and exceeded 18m tonnes in 2010. UKC believes that, with on going investment in new and replacement mining capacity, the reserve base is sufficient to attain an output of 20m tonnes a year and to maintain that level for many years. Some 90% of UK coal output is supplied to the electricity generation industry.

41. Investment lead times in the industry are long. If there is a perceived risk that the

demand for coal in the mid 2020s may be less than that necessary to sustain an output of 20m tonnes a year, bearing in mind that the industry’s customers will not wish to completely forego the import option, then investment will be at risk.

42. The UK’s deep mines require periodic tranches of investment to access new areas of

reserves if output is to be maintained. The investment decision cannot be delayed. There is a point of no return beyond which investment to access new areas of reserves cannot be completed in time. If investment decisions are not taken in time, then closure is inevitable.

43. Decisions on new investment at all of the UK’s deep mines will need to be taken in

the next few years, in some cases imminently. Without some confidence that there will be an adequate market in the 2020s, the risks are such that the investment will not take place resulting in premature closures. Similar, but less acute considerations apply in respect of surface mining capacity.

44. There is a real risk, therefore, that the growth in UK coal output will be brought to a

halt, followed by a decline. Investment will be stifled and employment will fall. UK coal production will be replaced by imported gas or, if the market for coal proves to be higher than is feared, by imported coal. Overall security of energy supplies will be adversely affected and the influence of a significant indigenous source of energy in mitigating fossil fuel price increases will be lost. 

 

March 2011  

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Memorandum submitted by BP plc (UKES 18)

SUMMARY

• Gas is well placed to make a valuable and necessary contribution to Britain’s energy mix in the future.

• Gas is naturally the cleanest burning fossil fuel, producing 55% less CO2 emissions than unabated coal.

• Natural Gas has the advantage of being competitively priced, and as a mature technology requires no subsidies to guarantee future supply.

• Unconventional Gas creates additional supply and security in the market place.

• Evidence suggests that the Gas spot price is decoupling from the Oil price.

• Gas security can be further enhanced by increasing storage capacity and enhancing connectivity of Gas markets within the EU.

• The UK has a strong infrastructure base with capacity more than expected to outstrip demand.

Introduction 1. Rather than responding to the questions directly, BP is best equipped to offer a more general response in the area where our expertise lies, namely the role which gas can play in the United Kingdom’s future energy mix. For both security and environmental reasons, gas will continue to play a highly significant role in the UK’s energy mix, not least because it is the cleanest burning of all fossil fuels, as well as being extremely efficient, flexible, versatile and well placed to back-up the intermittency of renewable energy. We will also offer some general comments on Energy Security and the role of Renewables. Saving Energy through Efficiency 2. Gains in efficiency have the potential to reduce the overall amounts of energy used and hence the carbon that is emitted globally without inhibiting economic growth. Efficiency can be increased in many different ways such as through improvements in vehicle and appliance technology, and through programmes that encourage or require people to be more conscious of their energy use. Often these gains can be achieved at relatively low costs or even at a net saving over all. 3. In transport, efficiency efforts could have an especially big impact. BP believes that advanced biofuels combined with several vehicle combustion engine and power train technologies, including hybridization, offer the quickest and most effective pathway to a secure, lower carbon future, at least cost in the short to mid term. For passenger cars, the potential carbon savings from this combination of vehicle and fuel side technology options could equal those that are possible through widespread adoption of electric vehicles

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powered by a gas-fired electricity grid – and could be achieved more quickly, at less cost, lower technology risk and on a larger scale and using existing fuel distribution infrastructure and an appropriate legal and regulatory environment. Maintaining a Diverse Energy Mix 4. BP believes the energy challenge can only be met through a broad and diverse mix of fuels and technologies. That is why BP’s portfolio includes conventional oil and gas as well as oil sands, shale gas, deepwater production and alternative energies. At a fundamental level, we believe the most effective means of finding, producing and distributing diverse forms of energy is to foster the use of open, competitive markets. This should include secure access for exploration and development of resources with defined mutual benefits for resource owners and development partners. Renewables 5. BP estimates that emerging renewable resources like biofuels, wind and solar will meet around 6% of the total Global energy demand by 2030. Over the longer term, BP believes that they will play an essential role in addressing the challenge of climate change, as well as offering important energy security benefits. Generally, renewable low-carbon energy is not yet competitive with conventional power. With regard to transportation fuels, their technologies will need to be deployed at scale and some of the technologies will need to make significant progress down their cost-curves in order to become competitive with their conventional fossil fuel equivalents even with the current or expected carbon price. Significant research and technological advancement as well as industrial scaling up are required before they will be ready to fulfil a large portion of the worlds energy needs. The qualities of Gas 6. Gas is naturally the cleanest burning fossil fuel, producing 55% less CO2 emissions than coal when burned for power generation, whilst also producing relatively little nitrogen oxide, sulphur dioxide or particulates. It also has a higher conversion efficiency, which means it loses less energy than other fossil fuels when producing electricity or heat. The reliability and flexibility of gas also make it an essential backup to intermittent low carbon sources of generation such as wind and solar. 7. Natural Gas also has the advantage of being competitively priced, and as a mature technology requires no subsidies to guarantee its future availability. As well as its competitive market price, new gas CCGTs also benefit from having a low capital cost and take as little as three years to build. Unconventional Gas 8. In addition, and a more recent development, is the increasing role of Unconventional Gas which, at least in the United States, appears to be a

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‘game changer’. This is not just important for the US but has significant implications for the global market as well. 9. This ‘revolution’ in developing new supplies of gas in North America has occurred in relative obscurity, but is no less significant for that. As little as four or five years ago, the United States of America was expecting to become a major net gas importer merely to satisfy its own existing needs. But technological advances in hydraulic fracturing and horizontal drilling are now being used to access unconventional gas deposits in tight/shale gas formations, as well as coal bed methane. The result is that, while estimates vary, the United States can now confidently assume the existence of between 50 and 100 years’ worth of recoverable natural gas. Gas as a global commodity 10. This has one direct consequence for countries such as the UK – namely, that vastly increased US production of unconventional gas will in turn free-up LNG cargoes for the rest of the world. The expected increase in uncontracted LNG cargoes will be free to go to wherever the price mechanism signals the greatest need. This is especially important for Europe, because it addresses the misconception that increased use of natural gas involves greater dependence on a narrow range of gas suppliers. In fact, the opposite is becoming true. The UK is particularly well placed in this connection because the investment which has already been made in UK LNG infrastructure allows us to cope with increased LNG imports. 11. However, it is not just that US unconventional gas relieves the pressure on LNG supplies. The new technologies currently being applied in the United States have only just begun to be applied in the rest of the world. Worldwide and in total, unconventional gas has the potential to increase significantly Global Gas reserves. 12. Gas is increasingly becoming a global commodity – more flexible, more transportable and (given its diversity) more secure than ever in the past. There are now twenty two countries importing LNG, whereas a decade ago there were as few as nine. The movement and nature of the trade is also changing – from traditional point to point cargoes, to multi-basin, multi-point deliveries with increased trade between the Atlantic Basin and Asia-Pacific. Gas Prices 13. There is an increasing body of evidence that suggests that the price of spot Gas is rapidly decoupling from the price of Oil. There is also evidence that long term contracts which have been traditionally linked to oil have been negotiated down in the light of LNG displaced from the US market being made available to Europe and Asia. 14. This means that the UK need have little hesitation in accepting the significant role which gas is destined to play in the UK’s energy mix – and

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especially in paving the way to a low carbon future without risks to security of supply. The discovery and exploitation of Shale Gas should also sound a cautionary note for those who see no option other than reverting to heavily regulated and controlled markets. Nobody predicted its significance even six years ago. The role of Gas in reducing carbon emissions 15. The intermittent nature of renewables requires some complementary form of load management to match supply and demand when generation is not available. Over time, the roll out of smart grids, smart meters and smart appliances is expected to contribute via the demand side, but the lead times necessary to replace the appliance stock are likely to be extensive and the overall effects are as yet uncertain. Taken together all of this is likely to be insufficient to guarantee supply, requiring some additional load-following generation at scale within this time period to provide a balance. Correlation between peak demand and low wind generation at times of low temperatures will also mean that such generation must also be guaranteed to be able to run at peak. It is likely that a substantial proportion of this capacity will be provided by new CCGT facilities. Gas Storage 16. To bring the UK in line with other major EU markets, gas storage capacity should be increased from today’s 4.4bcm to about 15bcm. For this to happen, it is necessary to consider ways of incentivising additional storage projects. It is also important for HMG to prioritise greater transparency of ‘public service’ obligations imposed by EU member states on national energy champions to ensure piped gas responds to price signals, and to enhance connectivity within Europe, enabling current arrangements and agreements to work as planned. 17. The UK is in a relatively strong position with regard to import pipelines and LNG infrastructure. Planned investments are more than adequate for National Grid’s predicted level of future imports beyond 2020. Greater integration within Europe would help to further diversify supply, thus creating security. Conclusion 18. Natural Gas offers the UK an effective means to achieve energy security in the UK. Its competitive cost, and wide supply base, coupled with cheap capital costs and quick build times for Gas power stations – and an excellent infrastructure system – means that the use of Gas in our energy mix can only enhance our energy security. March 2011

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Memorandum submitted by Royal Society of Chemistry (UKES 19)

The Royal Society of Chemistry (RSC) welcomes the opportunity to respond to the House of Commons Energy and Climate Change Select Committee inquiry into “The UK’s Energy Supply: security or independence?” The RSC is the largest organisation in Europe for advancing the chemical sciences. Supported by a network of over 47,000 members worldwide and an internationally acclaimed publishing business, its activities span education and training, conferences and science policy, and the promotion of the chemical sciences to the public. This document represents the views of the RSC. The RSC has a duty under its Royal Charter "to serve the public interest" by acting in an independent advisory capacity, and it is in this spirit that this submission is made. Overview The UK has ambitions of changing its energy mix to one which includes more renewables and more low-carbon energy. In order to meet an EU target of 15% renewable energy by 2020, it is estimated that between 30–40% of electricity would need to come from renewables—in 2009 renewables accounted for 6.7% of electricity generation, up from 2.5% in 2000. The EU 15% target would still leave 85% of energy to come from non-renewables, including gas, coal, oil and nuclear power. Each of the fuels for these forms of energy supply has have a different provenances and geopolitical implications, both of which that will experience change in the coming decades. Beyond 2020, the Committee on Climate Change recommended that electricity generation should be largely decarbonised by 2030 if the UK is to meet its commitments under the Climate Change Act 2008 of an 80% reduction in greenhouse gas emissions by 2050.

Terms of Reference

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

The UK is vulnerable to increases in fossil fuel prices and supply issues, because increasingly fossil fuels are imported as North Sea reserves are gradually becoming depleted, and UK coal production declines. The situation is exacerbated as the penetration of renewable technology is low, and there is no clear strategy for the widespread adoption of renewable power.

By some estimates, global peak oil is predicted to occur within the next 20 years and the peak for natural gas production (excluding that from shale gas deposits) is projected to occur 20-30 years beyond peak oil. World coal reserves could last a few hundred years at current utilisation rates and as fossil fuels continue to increase in cost, more of these reserves will become economically recoverable so peak production is difficult to predict but is likely to be many years ahead.

Fossil fuel availability is not yet affecting price volatility, as actual reserves are not likely to run out over the next 20 years. However, price volatility is increasingly affected by external factors. These include political instability, such as that caused by current conflicts and civil unrest in the Middle East. As an importer, the UK is also sensitive to strategic decisions on exports from other economies and transport availability. Prior to the start of the present economic downturn, demand in the Asian steel and power sectors was placing significant restrictions on the availability of coal for export and on the availability of shipping. Similarly, the situation in Japan has raised gas prices due to the increased demand for LNG.

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There are no economically viable deposits of uranium in the UK, therefore supply is sourced from outside the UK. If the large number of planned new nuclear power stations around the world are indeed built, then this will place an additional strain on uranium supplies, leading to increased prices.

However if the recommendations from the Smith School of Enterprise and the Environment report ‘A low carbon nuclear future: Economic assessment of nuclear materials and spent nuclear fuel management in the UK’ to use reprocessed nuclear waste as fuel for reactors are adopted, then that would lead to a considerable improvement in the security of supply of energy from nuclear sources.

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

The initial focus for investment should be on the adoption of currently available technologies (photovoltaic’s, wind, etc), along with substantial investment into technologies that will deliver results in the medium to long term.

In order for electricity from renewable sources to be fully exploited significant investment in storage technologies, or clean peak generation capacity will be required to cover periods when the renewable sources are not online. Currently there is almost no provision for electricity storage in the UK and generation with the flexibility to balance intermittent renewables does not exist in the capacity required. In the short term this leads to the risk of older, less efficient plant being relied upon for peak generation. This is because the market is unlikely to be able support investment in state of the art technologies that operate for such short periods.

Research into novel storage technologies is urgently needed to identify novel, economically viable materials and methods to store energy generated by renewable sources, such as novel battery technologies like lithium air or high temperature thermal storage. Alternatively, there is an urgent need to identify lower cost approaches to ensuring high flexibility and acceptable environmental performance from peak generation plant. The chemical sciences can assist in developing many of the solutions required.

Smart grid technologies in conjunction with wide scale deployment of Smart appliances in homes for example, will have a significant role to play in smoothing out supply and demand in a scenario where a greater proportion of electricity is sourced from renewables.

The proportion of power coming from existing coal plant in the UK will diminish in the short term due to plant station closures. This trend may continue in the longer term as availability of gas decreases. This may lead to the need to reinforce the National Grid. The addition of renewables will compound this problem, since many areas where renewable energy will be generated do not have sufficiently strong grid connections, and connecting them to the grid backbone is likely to prove costly. It would be desirable to use the new materials to help in reducing grid losses but the requirement for extension of the grid could be so high that it will prohibit the use of the best available technologies. Research into this issue is urgently required and should seek to balance technology choices with the level of investment required.

3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

The effects of electrification of transport and heating are very different.

Until 2020 the distribution network is expected to handle the gradual rollout of electric vehicles. In the longer term technologies that use vehicle batteries to smooth out peaks in supply and demand may be implemented. There will be a need to manage supply and demand and introduce other peak storage or generation technologies

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Distribution is not the key issue affecting use of electric vehicles. The main concern is that if the current primary mix of power generation (coal, gas, and nuclear) stays the same, and there is no move to increase the proportion of electricity from low-carbon sources, then the electrification of transport will increase overall energy demand without having any significant impact on emissions of carbon dioxide, which is the main reason for implementing this technology.

An additional factor to take into account is the Department for Transport’s position regarding biofuels, which states that biofuels should be targeted on sectors where alternatives to biofuels are not available, such as aviation and road haulage. They state that cars should, where possible, be electric. If this situation comes about then the demand for electricity for cars will grow at a much faster rate than currently envisioned, and will require a larger generating capacity to compensate. This generating capacity will need to come from low carbon sources such as nuclear and renewables.

Conversely, the heating sector is very energy intensive and increasing the use of centrally generated power for heating is unlikely to be a viable option for many decades. In the short term electrification of heating would place a massive strain on generation demand and the distribution network. Alternative methods of supplying heat locally from low-carbon sources would be far more effective both practically and economically. Such measures could include maximising the use of solar thermal heating, local combined heat and power, and ground source heat pumps. These measures could be implemented without any adverse impact on the security of energy supply for the UK.

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

Reducing demand for electricity has a key role to play in managing security of supply. The main issues to be considered are efficiency of end use and efficiency losses in generation and distribution.

Improving end use has the biggest role to play and is affected by a mix of technology availability and choice and user behaviour. There is scope for significant improvements in each of these areas and ultimately policy and fiscal measures may prove the only way to influence them.

Inefficiencies in generation and distribution will become less significant as old generation capacity, already scheduled for closure, is phased out. The scope for efficiency improvements in state of the art technology is limited, so the focus must be on ensuring that the best available technology is employed, in line with current policy. However, investment in new technologies is still valuable, especially in central generation technologies, as small improvements can have a significant effect on energy consumption. However, when reserve capacity is limited there must always be a compromise between efficiency and reliability.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

It is technically feasible for the UK to produce a substantial proportion of its energy from renewable sources but it is not currently economically viable to achieve this and it is unlikely to be so for many tens of years. This is because of the high investment premium of these technologies and the sheer volume of plant and distribution infrastructure that would have to be added or replaced. It should remain a goal to progress to 100% renewable energy but this change can only be implemented over several generations.

The adoption of an energy mix with a larger proportion of the supply coming from renewable sources will lead to a reduction in greenhouse gas emissions as these are in general low carbon technologies. As these energy sources are not based on fossil fuels a move to an

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energy mix with a higher proportion of renewables will therefore also lead to greater energy security. However, if these renewable sources are intermittent, as in the case of wind and solar, then there are still risks of power shortages unless technology (such as energy storage devices and smart grids) is in place to meet peak demand.

Balancing technologies will need to be increasingly deployed to cater for periods when the availability of renewable power is less than the demand, both on a national and local (distribution restricted) basis. Technologies capable of meeting this requirement include:

• Pumped storage • Electrochemical storage • Hydrogen storage • Compressed Air and Flywheels • Peak generation technologies

During periods where there was a shortage of supply, a form of energy storage would be the preferred means of boosting supply to the grid in the longer term, when renewable capacity reaches signficant levels. In the short to medium term, low-cost but clean and efficient peaking plant will remain the most feasible option of smoothing the gaps in the supply of power from renewable sources.

Some of the above technologies are still at an early stage in their development and will require significant investment in order to take them from research to full deployment.

6. What would be the implications for energy security of a second dash-for-gas?

With the decline in North Sea gas, an increase in gas use (unless it is sourced from anaerobic digestion) would be met from outside the UK, so a second dash-for-gas is likely to have a negative impact on energy security due to the increased potential for interruptions in supply from other counties.

In the short term, significant use of low cost gas may reduce the incentive for investment in, and uptake of, renewable energy technologies,. In the longer term, energy security would be best served by more rapid investment in electricity from renewable sources, so continued measures are needed to encourage this.

7. How exposed is the UK’s energy security of supply to international events?

The UK’s energy supply is highly exposed to international events. The situations that have arisen recently as a result of instability in the Middle East and events in Japan have led to increased prices for oil and gas.

The only viable option to minimise the exposure of the UK’s energy security to international events is to move to an energy mix that is based on indigenous sources – the most feasible low-carbon options for the UK are solar, wind and tidal power. Nuclear and biomass energy sources will continue to depend on imports, though there is potential for significantly increasing biomass production in the UK.

The developing situation and debate concerning Japan’s Fukishima nuclear plant must not derail the UK’s strategy to build new nuclear power stations. The issues in Japan could not be repeated in the UK. The natural phenomena that gave rise to the situation could not occur to the same extent in the UK, or elsewhere in Europe for that matter. Moreover, lessons can be learned from the experience at the Fukishima plants to ensure that safe approaches to future operation in the event of similar but less severe events are incorporated into planning at the design stage.

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8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

There is the potential to work with our European neighbours and support their adoption of similar national strategies. In so doing we would be able to trade excess energy generated by renewable sources in the UK with our neighbours, via the proposed European Supergrid. Likewise if for some reason the UK was short of supply we would be able to purchase surplus power from our neighbours. A strategy of investment in renewable technologies is in line with other EU countries and will ensure a continuous supply of electricity is available while reducing our dependency on non-renewable, fossil resources.

Carbon capture and storage (CCS) has a significant role to play in ensuring security of supply. The UK has large reserves of coal and CCS could make it viable to exploit these reserves. The implementation of CCS technology is far more advanced than many proposed alternatives as a means of generating large amounts of power with minimal emissions of carbon dioxide. However, it has not been demonstrated at commercial scale and requires investment entailing some commercial risk. Certainty in the carbon price is needed to justify this investment. The Government’s commitment to subsidise costs if the price of carbon is below a threshold will pave the way for CCS installations to be constructed, once the technology has been shown to be technically feasible at commercial scale.

There is a close interrelationship between energy production, water, and food production. Instabilities in energy production will lead to problems with water supply, and food production. Conversely a shortage of water due to climate change for example will impact electricity generation. This was seen in recent summers in France where several power stations needed to be powered down as there was not sufficient water available to cool them. There is also a concern about land use for energy crops versus food production.

9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

The UK Government should ensure that the UK has sufficient workers skilled in Science, Technology, Engineering and Mathematics (STEM) to enable the move to a low-carbon and resource-efficient economy. In addition investment in supporting the teaching of and research in the area of nuclear sciences will be needed to support the resurgence of nuclear power that will be needed to meet the energy needs of the country while at the same time reducing carbon emissions.

UK science holds the key to delivering a 'green collar' workforce for the low-carbon industries of the future. A robust skills pipeline with strength in STEM will be able to react rapidly and flexibly to the specialist demands of emerging sectors.

Greater support for education in our schools and universities must be provided to generate a steady supply of talented, highly-skilled individuals who will become the next generation of scientists and engineers and members of a wider, scientifically literate workforce.

A strong two-way relationship between academia and industry is essential for ensuring that the low carbon skills pipeline is healthy and fulfilling its intents and purposes. This will put the UK in the best position to take advantage of the opportunities that will arise from the move to a low carbon and resource efficient economy.

It is vital that our universities continue to attract students of international calibre students and that our high technology industries continue to attract foreign investment, if we are to make the UK a global marketplace for the development of low carbon skills.

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Sources: zerocarbonbritain: an alternative energy strategy The ECOFYS Energy Scenario Sustainable Energy Without the Hot Air: Prof D MacKay Chemical Sciences and Society Summit Report, Royal Society of Chemistry March 2011

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Memorandum submitted by RWE Npower (UKES 20) 

1 RWE welcomes the opportunity to respond to this inquiry. We are responding on behalf of RWE companies operating in the UK: • RWE npower owns and operates one of the largest and most diverse portfolios of power

generating plant in the UK with over 9,000 megawatts (MW) of large gas, coal and oil-fired power stations and cogeneration plant. Our retail arm, npower, is one of the UK’s leading suppliers of electricity and gas with around six million customers.

• RWE npower renewables, the UK subsidiary of RWE Innogy, is one of the UK’s leading renewable energy developers with an operational portfolio in the UK of 535MW and a potential UK development portfolio of over 8,500MW, including wind farms, hydro plant and biomass generation to produce sustainable electricity.

• RWE Supply & Trading is one of the leading companies in European energy trading and is responsible for all of RWE’s activities on the international procurement and wholesale markets for energy.

• Our joint venture with E.ON UK, Horizon Nuclear Power, is developing up to 6GW of carbon free nuclear power.

2 We provide detailed answers to the questions, below but first have a number of high level points;

• Efficient markets are required to ensure that the consumer pays the least cost for the delivery of secure supplies of the energy they use.

• The scale of investment required to deliver the Government’s low carbon ambitions is indeed difficult, if not impossible, to fund from utility balance sheets alone. UK Government is keen to make investment in low carbon attractive to a wider range of investors to address this restriction.

• To ensure that energy security is not compromised will require that the electricity market produces efficient price signals. These provide the incentives for investment and also for parties to balance and feed into forwards markets allowing for the development of the demand response.

• The introduction of capacity mechanisms into the wholesale electricity market will dampen price signals which in turn will stifle the development of energy services and make the deployment of SMART meters a white elephant, severely compromising the goal of secure, affordable low carbon energy supplies.

• Energy efficiency measures represent not only an improved energy balance but a step towards a cultural and economic change that will engender demand flexibility (delivered both by behavioural change and smart meters and devices and potentially by storage of heat and power).

• The existing market arrangements have evolved to meet challenges along the way and there is a very strong case for a minimalist approach to reform which would address the issues relating to high capital cost, low carbon generation (i.e. offshore wind and nuclear), and leave the rest of the market arrangements as they are today. This will provide the signals that will in turn create the investment needed to deliver security of supply.

Question 1 How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

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2

3 Efficient markets are required to ensure that the consumer pays the least cost for the energy they use. In the UK we have access to world wide markets for gas, coal and oil which ensure that our energy is supplied at competitive prices. As we decarbonise our electricity industry the amount of energy produced by coal and oil will reduce and in the medium term we are likely to see the gas share of the market increase.

4 There is a global market in LNG and there are significant reserves of shale gas which are well

diversified. The European market is becoming more liberalised and the GB market has a well diversified infrastructure with a deep and liquid traded market making it well placed to supply the gas we need at competitive prices until the low carbon share of the market increases.

5 Uranium can be stockpiled and represents about 10 per cent of the overall plant running costs.

The UK is not a Uranium producer but deposits of Uranium are widely dispersed across a number of countries. The potential sources include those countries that we do not currently rely on for fossil fuels and there are considerable resources available in OECD countries.

Question 2 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

6 We recognise that the scale of the investment challenge facing the energy sector is huge.

Significant capital investment in new electricity generation capacity will be required over the next two decades to deliver the Government’s decarbonisation and renewable energy aspirations. The EMR estimates a capital requirement of £70-75 billion in low carbon generation by 2020 alone, and high rates of capital investment in generation infrastructure will need to be sustained into the 2020s

7 The scale of investment required to deliver the Government’s low carbon ambitions is indeed

difficult, if not impossible, to fund from utility balance sheets alone. UK Government is keen to make investment in low carbon attractive to a wider range of investors to address this restriction.

8 Ensuring the right market structure is the crucial first step in delivering future investment. To

make the investment more attractive to new investors, who are not used to taking electricity market price risk, there are two key issues:

• that the returns are stable and predictable and commensurate with the risks that are being

taken, and • that the investment can be compared to other opportunities investors have to deploy similar

amounts of capital in large infrastructure investments.

9 In the last decade there has been a 500% increase in the UK’s gas import capacity which is capable of importing around 125% of annual gross demand. Taking National Grid’s view of the likely storage construction the UK is expected to be able to store about 11% of its expected annual demand by 2020/21.

10 The most cost effective way to develop the transmission system such that it can accommodate

the move to low carbon, is to maintain the locational signals in the charges for both generation and demand. This will ensure that generation gets built in efficient effective locations and will save the consumer up to £21bn in extra energy costs, losses and transmission assets when compared to a system that socialises costs across the country.

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Question 3 What impact could increased levels of electrification of the transport and heat

sectors have on energy security?

11 These are not changes that will have an impact before the next decade and then there is uncertainty surrounding the impact of these new technologies.

12 To ensure that energy security is not compromised will require that the electricity market

produces efficient price signals. These provide the incentives for parties to balance and feed into forwards markets allowing for the development of the demand response.

13 The introduction of capacity mechanisms into the wholesale electricity market will dampen price

signals which in turn will stifle the development of energy services and make the deployment of SMART meters a white elephant severely compromising the goal of secure affordable low carbon energy supplies.

Question 4 To what extent does the UK’s Future energy security rely on the success of

energy efficiency schemes?

14 Efficiency measures reduce the gross demand for heat in homes and non domestic buildings, and thence reduce the demand for peak capacity in power generation, and gas and power infrastructure. This improves the overall long term adequacy of the energy system. The effect on the resilience of the electrical system depends on which plant is left at the margin.

15 Efficiency measures represent not only an improved energy balance but a step towards a

cultural and economic change that will engender microgeneration (which reduces the net demand for networked energy) and demand flexibility (delivered both by behavioural change and smart meters and devices and potentially by storage of heat and power). Regardless of the overall gross demand for energy, demand flexibility has a substantial effect in improving both the adequacy and resilience of the gas and power system. Therefore, even if efficiency benefits are taken as comfort rather than reduced energy use, the take up of efficiency measures serves in the long term to improve system adequacy and resilience.

16 Efficiency and demand response both require price signals, behavioural change, and

stimulation of consumers. The introduction of a capacity mechanism is likely to dampen price signals which could foreclose the energy efficiency option and make achieving government targets much more difficult.

Question 5 What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

17 It is worth noting that the present market arrangements have delivered on security of supply,

low prices and reducing emissions, it has;

• delivered the almost 30GW of gas generation currently in operation and maintained an adequate capacity margin;

• resulted in electricity prices which have been comparatively low and fairly responsive to movements in fuel costs;

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• supported the deployment of increasing amounts of renewables from 3.1GW in 2002 to 8GW in 2009; and

• reduced greenhouse gas emissions by more than 25% compared to 1990 levels.

18 The existing arrangements have already evolved to meet challenges along the way and there is a very strong case for a minimalist approach to reform which would address the issues relating to high capital cost, low carbon generation (i.e. offshore wind and nuclear), and leave the rest of the market arrangements as they are today.

19 For example, the current renewables support mechanism is fully compatible with the existing

trading arrangements. We believe a further evolution of the RO into a ’Low Carbon Obligation‘ could have helped to move the UK towards its decarbonisation objectives with minimum disruption to the delivery of investments and the market. The Government has decided against this approach seeing greater potential merit in a more targeted revenue support mechanism to attract new investors.

20 We recognise that the scale of the investment challenge facing the energy sector is huge.

Significant capital investment in new electricity generation capacity will be required over the next two decades to deliver the Government’s decarbonisation and renewable energy aspirations. The EMR estimates a capital requirement of £70-75 billion in low carbon generation by 2020 alone, and high rates of capital investment in generation infrastructure will need to be sustained into the 2020s.

21 The scale of investment required to deliver the Government’s low carbon ambitions is indeed

difficult, if not impossible, to fund from utility balance sheets alone. UK Government is keen to make investment in low carbon attractive to a wider range of investors to address this restriction.

22 Ensuring the right market structure is the crucial first step in delivering future investment. To

make the investment more attractive to new investors, who are not used to taking electricity market price risk, there are two key issues:

• that the returns are stable and predictable and commensurate with the risks that are being

taken, and • that the investment can be compared to other opportunities investors have to deploy similar

amounts of capital in large infrastructure investments.

23 The UK has pioneered competitive and open energy markets and these have served the UK well in terms of timely investment to deliver secure and affordable energy.

24 Maintaining market integrity and efficiency should be a primary goal of EMR, including ensuring

full consideration of interaction of supply with demand side, to ensure that Government objectives are met in the most economically efficient manner possible and at least cost to consumers.

25 One of the concerns expressed relates to that of the intermittency of wind and would there be

enough flexibility from the supply and demand side to manage this. This is not likely to be an issue that needs resolving for the next 10 to 15 years so we should not try to second guess the energy mix. Putting in place a mechanism now is likely to result in a poor solution that will need fixing again in the future. We believe that the market is best placed to meet this requirement, Generation currently on the system will invest to make it flexible as long as the market signals are allowed to come through, as will the demand side with the introduction of SMART meters.

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We note that there are proposals in the EMR consultation to introduce a capacity mechanism, we have concerns that a broad-based capacity mechanism, could dilute and distort significantly the price signals in the market by remunerating all plant that remains on the system regardless of its characteristics with respect to the flexibility required to balance intermittent low carbon generation. This could have an impact on the efficient operation of the market by reducing the signals required to ensure full participation in the market by both the supply and demand side. This could have implications for security of supply.

Question 6 What would be the implications for energy security if a second dash-for-gas?

26 As we have described in our answers to the other questions there will be an increasing role for

gas in our energy mix in the short to medium term. The GB market has demonstrated that it can produce the signals required to deliver not only the required infrastructure but also the molecules. As long as these signals are not dampened by energy policy, then there is no reason to believe that the market will not develop to deliver future requirements.

27 We should also not forget the potential of unconventional gas as a recent study by IHS Cera

has noted1. 28 Unconventional gas in Europe is likely to make significant contributions to supply in the next 10

to 15 years, the report says. IHS CERA estimates production levels ranging from a minimum of 60 billion cubic meters (Bcm)—less than half of current shale gas production in North America—to 200 Bcm around 2025.

Question 7 How exposed is the UK’s energy security of supply to international events?

29 The Government plans to decarbonise the energy industry will in the long term reduce our

dependency on imported fossil fuels. In the short to medium term there will still be an increasing role for fossil fuels, particularly gas, in our energy mix.

30 Import dependence does not of itself create energy insecurity; diversification of source, routes

and types of energy can support a robust energy system. 31 We have a track record of delivering gas infrastructure as demonstrated by recent

improvements; • The Interconnector and Bacton-Balgzand pipelines (BBL) • The Langeled pipeline • The Teesside, Isle of Grain, South Hook and Dragon LNG terminals

32 Based on National Grid’s current base case projections (which includes all storage facilities that

are currently under construction and those that they believe are well advanced in terms of securing planning, financial backing and have commitments from major players) the UK’s storage capability could more than double the UK’s storage space and increase deliverability nearly three fold over this decade.

33 This has and is being delivered as a response to market signals which demonstrate that

efficient markets are the best means of delivering security of supply at least cost to the consumer. In the GB we have a deep and liquid market with access to markets in Europe and around the world to source our gas requirements. Ensuring that these markets are as open and transparent as ours should be a priority for government.

1 The Study: Breaking with Convention 9th March 2011

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34 We share the views of Poyry Energy Consulting expressed in their exhaustive reports on all

aspects of security of gas demand2 when they say “It is our opinion that the GB gas market will be sufficiently resilient to security of supply risks and able to withstand most foreseeable problems, and that no major changes to current policies are required”.

Question 8 Is the UK’s energy security policy sufficiently robust to be able to deal with

uncertainties and risks inherent in all of the above areas? If not, how could it be improved?

35 As stated above the UK has pioneered competitive and open energy markets and these have

served the UK well in terms of timely investment to deliver secure and affordable energy.

36 Maintaining market integrity and efficiency should be a primary goal of EMR, including ensuring full consideration of interaction of supply with demand side, to ensure that Government objectives are met in the most economically efficient manner possible and at least cost to consumers.

37 The EMR should retain the exposure of all generation to the market to ensure the efficient

siting, operation and maintenance of plant. It is crucial that this is delivered in the detailed design. Low carbon generation should be fully exposed to the price signals in the traded electricity market to ensure that parties have the incentives to minimise imbalance cash out. However, we note that the proposals to introduce a capacity mechanism, particularly if a broad-based capacity mechanism, could dilute and distort significantly the price signals in the market by remunerating all plant that remains on the system regardless of its characteristics with respect to the flexibility required to balance intermittent low carbon generation.

38 The primary issue for the EMR to address is to see investment in Round 3 offshore wind

projects and the first wave of nuclear as soon as possible, as well as CCS retrofit to demonstration projects in due course. However we do not think it is sensible to try to second guess what the market will look like in 2025 and beyond. The new low carbon support mechanism (whether CfD or PFiT) should make these large scale low carbon investment projects attractive to new sources of finance by providing stable, predictable and transparent rates of return over appropriate payback periods and commensurate to the level of risk.

39 There is a need to ensure that whichever mechanism is implemented, it is flexible enough to

accommodate the needs of both large scale and smaller scale projects, with the design of the mechanism being proportionate to the scale and complexity of the project and the risks and costs associated with different types of projects.

40 The reforms should be defined so as to provide the minimum set of interventions to allow

investment in the first wave of investments to happen, rather than trying to encompass everything at once, which will inevitably result in unforeseen outcomes.

Question 9 Are there any other issues relating to the security of the UK’s energy supply that

you think the Committee should be aware of?

41 The UK currently has a more stringent gas specification than some other European countries. Whilst the European Commission is currently undertaking a project to harmonise gas quality

2 Three reports commissioned by DECC and published 12th July 2010 “GB gas security of supply & options for improvement”, Security of gas supply: European scenarios, policy drivers and impact on GB” and “Global gas and LNG markets % GB’s security of supply”

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across the EU, any resulting changes are likely to take considerable time to implement. In the interim period the differing gas qualities prevailing elsewhere in Europe may, on occasion, prevent the UK from fully utilising its pipeline import capacity. This could lead to supply shortfalls, which in periods of peak demand could be critical, and greater regulatory attention should be given to this issue.

42 We note the events that are unfolding at the Fukushima nuclear power plant in Japan. It will be

some time before we can fully understand the implications for the UK and energy diversity. There will be a need for a balanced perspective to ensure we don’t undermine security of supply and unduly push up costs for consumers etc.

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Memorandum submitted by John Mitchell, Chatham House (UKES 21)

1. This submission aims to assist the Select Committee by suggesting questions

to be addressed to government departments, and to energy industries with the resources to provide detailed answers.

2. The submission does not advocate a detailed energy policy for the UK Government, which needs to ensure the functioning of the UK energy market, security of supply to the UK, achieve the UK’s climate change objectives, within the framework of the UK’s market economy, and within the international obligations and political interests of the UK, including those arising from its membership of the EU.

3. Submission plan: a. The concepts of energy security and energy independence; b. The international energy outlook, identifying how critical uncertainties

are related through time; c. Summary and the committee’s questions.

Security and Energy Independence.

4. The concept of “Energy Independence” can be a misleading and costly guide, as the history of President Nixon’s 1974 policy shows. In reality, very few countries are “self-sufficient” in energy; the geography of resources does not correspond with the geography of consumption. International trade provides markets for producers and suppliers for consumers, to the economic benefit of both. The UK participates in this trade, but is less dependent in it than any other EU member (except Denmark). As the UK’s resources deplete its degree of energy independence will depend more on the development of renewable energy and reducing the oil fossil fuel intensity of the UK economy.

Global oil

5. Chart 1 shows the measure of “dependence” on international oil trade (percentage of consumption for importers, and of production for exporters) on the horizontal axis with the exporters towards the left of the chart and importing countries to the right. Most countries are either exporters or importers, with the few “near independent” countries (including the UK) clustered at the centre of the chart. The vertical axis shows (in the bottom left corner) the volume of exports from each country, and in the top right corner the volume of imports for each country.

Chart 1 Oil market interdependence 2009

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Source: US Energy Information Agency International Energy Outlook 2010

6. The UK, with 10% of its oil consumption supplied by net1 imports, was among

the least dependent countries. Less dependent are Brazil (1%), Peru (6%) Indonesia (8%) Papua New Guinea (1%). These “near oil-independent” countries account for only 6% of world oil consumption.

7. Globally, only about 40% of oil consumption was supplied by production in the consuming countries themselves or their close regional neighbours; the balance of 60% came from the surpluses of oil-producing countries.

8. Exporters that are the least dependent on international oil markets are Tunisia (3%), Surinam (8%), and Vietnam (10%). These countries accounted for less than 1% of world oil production. The global oil market took 60% of the exporters’ production.

9. Global oil trade is therefore inevitable. It is more or less free from tariffs and from import or export quotas. Commodity markets in New York, London, and Dubai provide the global oil prices to which the international oil trade is anchored. The global oil price is the opportunity cost against which oil-substituting or oil-saving policies can be measured.

10. Access to the global oil market is the fail-safe supplier for the UK as for other importers; its diversity is greater than can be provided by any one source of supply or small group of exporting countries.

11. UK oil security is served by policies promoting investment in the expansion and stability of global supply. These interests are shared by other importing

1 The UK imports and exports oil and products equivalent to its consumption, and exports about 90%, to take advantage of the higher value of UK crude in the international market, and of logistic and quality differences. These advantages are dependent on participation in the international market.

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countries, such as the US and China, and are beginning to be recognised in the EU’s external energy policy.

Global gas

12. The international gas trade is also an important source of diversity, but fewer countries are involved; the high transport costs of gas relative to energy content limit consumption mainly to countries with their own production or access to regional supplies. These together supplied 87% of global gas consumption in 2008.

13. Within the group of gas trading countries, the UK in 2008 was among the less dependent on imports (27% of 2008 consumption) though this figure is expected to rise for the UK and for other EU countries, and for China (Projections for 2020 suggest a 52% gas deficit for China).

14. Importing countries with lower dependency on imports than the UK accounted for only 5% of world gas consumption in 2008. Chart 2 shows the UK position relative to other gas consuming countries. In the chart, seven countries clustered at the centre of the chart neither depended on gas imports nor consumed gas.

Chart 2: Gas market interdependence 2008

Source: US Energy Information Agency: International Energy Outlook 2010

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15. Transportation costs divide gas trade into regional markets: the North Atlantic, continental Europe and Asia. Competition within each market is increasing as more suppliers are developed. In Europe competition will come mainly from LNG imported from North and West Africa and the Caribbean, as local production declines. In Asia, Qatar and Australia will supply most of the growth in demand for LNG, with marginal Asian surpluses and deficits put into, or taken from, the Atlantic.

16. In the US and Canada, prices are set competitively by short-term contracts at the Henry Hub distribution centre. The US capacity to import liquefied natural gas (LNG) means that its prices influence the Atlantic LNG market and, through it, UK prices, which are set by short-term contracts at the National Balancing Point (NBP).

17. There is a straightforward commercial contradiction between the short-term, gas-to-gas competition of the Atlantic market and the long-term, oil-related pricing system of much of continental Europe, dependent on Russia. EU policies for creating a single European gas market are aimed at opening the continental pipeline system to competition and will therefore strengthen the “Atlantic pricing” system.

18. Imports to Asian markets are currently mainly supplied by LNG, mainly under long-term contracts related by formulae to oil prices. This link is likely to weaken as gas-on-gas competition increases.

19. In the UK, unlike continental Europe, there is no shortage of gas import infrastructure. Four pipelines and six LNG plants (two under construction) give a capacity 40% greater than UK forecast total consumption to 2020. National Grid forecasts LNG supplying 25% of UK consumption, Norway 35%, leaving about 10% to be supplied through the EU pipeline system, ultimately from Russia and Central Asia2

Imports, efficiency, and security

20. Security and efficiency are addressed by policies which reduce the use of energy without reducing welfare and economic activity. The amount of energy used per unit of GDP is an indicator of this “energy efficiency”. Policies to promote efficiency differ for transport, building, industry etc. which face different import risks depending on which fuel the they mainly use.

21. Low levels of energy input to GDP mean low levels of impact from high energy prices and low levels of disruption to energy supplies. In an open economy like the UK, international prices will be transmitted to domestic prices. Domestic producers will gain or lose. The country’s net national income will be affected by the combination of price changes and the proportion of supply derived from imports. In the UK, broadly speaking a $10 increase in the price of crude oil will raise internal prices by $10, but reduce net national income by $1, because only 10% of UK oil is imported. This is an indicator of the net

2 National Grid: Gas Transportation 10-year statement 2009, Table 4.8A i

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exposure of the UK economy as a whole to the international price of oil, and provides a benchmark for the cost of policies to reduce exposure to oil prices.

22. The UK has a comparative advantage over other economies, both in its lower oil intensity and its lower use of imports, as Table 1 shows:

Table 1: Exposure to oil prices (2009 data)

Sources: BP Statistical review of World Energy 2010: World Bank Development Indicators Database 2010

23. For gas, the UK has a competitive advantage relative to its main continental competitors, but not in relation to the US or to China and India, which were small users of gas and small importers (2009) – a situation expected to change. Decline in UK gas production will increase the gas deficit to around 70% by 2020,(despite little or no growth in demand). The UK gas deficit will still be lower than Germany’s or Italy’s, but if the UK maintains its relatively high gas intensity the advantage will disappear. Table 2 shows the comparison. The net exposure calculation is a benchmark for policies to reduce the high gas intensity of UK GDP.

Table 2: Exposure to gas prices (2009 data)

Sources: BP Statistical review of World Energy 2010: World Bank Development Indicators Database 2010

The Outlook

24. Long-term projections and forecasts for energy consumption are currently particularly difficult, with uncertainty about the long-term sustainable rate of

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economic growth, the severity of climate change policies, the cost and availability of energy supplies, including renewables, the effect of Fukushima accident on global nuclear investment, and the timing and scale of investment in energy consumption to modify energy inputs to GDP. The range of forecasts is illustrated in Chart 3, showing recent projections of oil consumption by leading agencies:

Chart 3 projections of global oil consumption

Sources: OPEC : World Oil Outlook 2010, WEO: International Energy Agency: World Energy Outlook 2010; IEO: US Energy Information Agency International Energy Outlook 2010; Shell and Exxon publications

25. The important assumptions within all these forecasts are that Iraq will not develop its full production potential before 2020, that there will be little development of shale gas outside North America, and that energy efficiency, including oil efficiency, will improve at a faster rate than in the past, due to the higher prices.

Shift to Asia

26. All mainline projections show a shift in the international and gas markets as Asian consumption overtakes that of Europe and North America and is met by supply from the Middle East. Charts 4 and 5 show how oil and gas demand in the main consuming regions is expected to be met: “Global supplies” in the chart means supplies from surpluses in Russia, North and West Africa, Central Asia, and the Middle East.

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Chart 4 deficits for global oil markets

Source: US Energy Information Agency: International Energy Outlook 2010

Chart 5 Deficits for global gas markets

Source: US Energy Information Agency: International Energy Outlook 2010

27. Both oil and gas projections show that Asian dependence increases

massively. The oil market is at a “tipping point” where Europe and North America will no longer depend on Middle East oil supplies: these are not enough to cover the Asian deficit. The key balancing regions will be West Africa, Central Asia. Eastern Russia, and Iraq, roughly equally placed for Eastern and Western markets. Though prices will remain global, the main direct impact of any disruption of supplies will fall on Asia. Chart 6 shows that this reversal of past trends is occurring about now.

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Chart 6: Middle East oil surpluses compared to importers’ deficits

Sources: US Energy Information Agency: International Energy Outlook 2010; author’s adjustments ( see John V. Mitchell “More for Asia”, Chatham House 2010)

Disruptions

28. These scenarios do not include a temporary disruption of oil supply due to unforeseen natural or political events. For oil, the essential policies to cope with physical disruptions are in place, through the UK, IEA and EU obligations for compulsory stocks and emergency sharing of oil supplies. The Energy Bill 2010-11 will provide powers for OFGEM to strengthen incentives and obligations for UK operators to maintain and share gas supplies in emergencies.

Limitations of these projections

29. These projections, as usual, do not reflect the idea of a ”supply crunch” due to a failure to invest3 . All of these projections were made before the Japanese nuclear disaster, the “Arab spring” and the civil war in Libya.

3 Paul Stevens: The Coming Oil Supply Crunch” Chatham House 2008; International Energy Agency, World Energy Outlook 2009

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Step-by-step policy

30. The combination of these effects is difficult to estimate. With such uncertainty, policies will inevitably change as conditions change. Designs for energy supply and demand twenty or thirty years in the future are not credible.

31. Policy analysis should focus on key events or developments likely to occur in the next 5 to 10 years which will seriously affect the subsequent future and on appropriate responses for UK policy. Table 3 below is a rough sketch of circumstances whose outcomes are uncertain. The Committee may wish to ask whether policies have been prepared for these contingencies.

Table 3

Possible event in 2011-16

Impact after 2016 UK policy question if it happens

“Arab Spring”: Setback in oil and gas investment in Libya, Yemen, Syria

Oil prices persist >$100 More or less Government intervention for, renewables, efficiency, electric vehicles and North Sea production?

Fall in oil production and investment in Saudi Arabia, Iraq

Period of “very high” oil, UK oil and gas production supported by prices. But prices induce global and Asian recession

Prolonged and large scale leakage from Fukushima

Nuclear programmes reversed or on hold in Japan, Continental Europe and US delayed in China, India et al: higher demand for (& price of) gas: Greater demand for renewable energy leads initially to higher prices, but then economies of scale deliver cost reductions

UK nuclear decisions: delay threatens power supply. UK power grid: capacity to handle additional renewables.

Shale Gas: Resources and viability established outside North America

Commercial investment, higher gas production

If UK shale resource viable, regulatory and environmental protection.

Carbon capture and storage: no large scale demonstration projects completed

Identification of best process and viability remains uncertain

Permitting of coal generation in question.

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Executive summary

32. The exposure of the UK economy to global oil and gas prices is less than most of its competitors. Declining UK oil and gas output will reduce the advantage unless if the and gas intensity of the UK economy is not reduced more rapidly than that of its competitors.

33. Analysis should focus on what to do if various risks materialise in the medium term, rather than on long term design of the energy system. For example:

a. The response to high oil and/or gas prices in the medium term: will taxation policy allow them to stimulate domestic production, and will the level of support for renewables and energy efficiency continue to be necessary (apart from a floor price for carbon)?;

b. How to avoid power capacity falling short of demand in 2020-2030 because of uncertainty about how to reduce nuclear risks, and how to scale Combined Cycle Carbon Capture and Storage (CCS) technology.

The Committee’s questions

34. Brief responses to the committee’s questions are set out below (numbers as in terms of reference)

1) The UK economy is reasonably more resilient to changes in oil and gas prices than most major economies, due to its lower dependence on imported supplies (Paras. 22-23). Integration with the world oil market and to the Atlantic short-term gas market give the energy system access to flexibility and a range of diverse suppliers (Paras. 6 & 13). The question of future uranium prices is moot, given the uncertainties over global nuclear expansion since the Japanese nuclear disasters; 2) Because of its existing investment in gas imports and distribution, and UK energy security is not threatened by an increase in gas imports or to the variability in domestic gas demand due to renewable penetration into the power market. However, the gas intensity of UK GDP is relatively high and could be reduced. (Para. 23); 3) Increased electrification would increase the demand for imports of LNG as a mid-load fuel or as a variable back-up for renewables. The critical question for increased electrification is the level of investment in nuclear power and the matching of increased demand with increase capacity in the medium term (Para. 31, Table 3); 4) Energy efficiency is a major contributor to reducing the impact of global prices in the UK economy (Paras. 20-21). However, efficiency in the transport sector does not affect exposure to gas prices, and efficiency in the built environment (insulation etc) does not change exposure to oil prices, because only a small proportion of oil is used for heating in that sector; 5) Delays in building new nuclear stations and/or in accessing viable carbon capture and storage (CCS) technology on a commercial scale would lead to a higher increase in gas imports. If good prospects for shale gas materialise globally the price risks associated with this increased exposure would be reduced.(Para. 31, Table 3);

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6) International events undoubtedly contribute to the risk of disruptions of global oil supply and to the medium and long-term levels of oil prices. The UK’s exposure is less than that of its major competitors (Para. 5, Table 1). However, higher prices and variability would affect the need for government interventions to support (for climate change policy reasons) renewables and energy efficiency supply unless these are strictly based on greenhouse measures (Para.31, Table 3); 7) UK energy security policy appears to recognise the UK’s continuing dependence on a degree of access to global markets. More emphasis could be given in forums like the WTO, the International Energy Forum, and the EU to support the openness and competitiveness of these markets both for trade and investment; 8) The balancing points of the global energy system are shifting from the Middle East to intermediate regions such as West Africa, Iraq, and Central Asia, as a result of the shifting balance of demand to Asian markets. (Paras.26 – 27, Chart 6). More attention should be given to promoting the political and economic development of these countries as a basis for investment in stable supplies. 9) Because of the great uncertainties about the long term global and UK energy outlooks, attention should be given to policy responses to events which, in the near-term, might substantially affect the UK’s long term energy situation (Para. 31).

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Memorandum submitted by The Gas Forum (UKES 22) “The UK’s Energy Supply; security or independence?”

1. The Gas Forum was established in 1994, acting as a body that represents the views of Gas Shippers and Suppliers active in the GB Market. The Forum now counts among its membership virtually every significant GB gas shipper and gas supplier. Its members are Centrica, BP, Total, Shell, E.ON, npower, EDF Energy, BG Group, Scottish Power, Statoil, Corona Energy, ExxonMobil and GDFSuez.

2. The Gas Forum promotes policy developments that support the continued

development of the competitive energy market in the UK, building on the trading arrangements that exist today, in order to allow gas to take its rightful place as a fuel of choice in a low carbon economy.

3. Outlined below are the Forum’s views on the questions that the Committee

has asked in this inquiry. There are a number of areas where Forum members have not developed a specific position, but other parts of their individual business may respond to the Committee on those topics. If the Committee requires any further information the Forum would be happy to answer additional questions in writing or at any hearings.

4. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? In terms of gas supplies, the GB’s competitive market means that Forum believes that gas can be attracted to the UK at market prices if the market is left to work. The GB market has a variety of infrastructure to take a wide range of gas supplies. One of the benefits of the competitive market is that the market responds to global signals, e.g. if global prices rise, so will the UK price, but this should in turn attract future investment, which will then have a downward pressure on prices.

5. Over recent years Forum members, as well as other market participants, have responded to the change in the structure of the market. Where the UK was previously self-sufficient in gas, we are now a net gas importer and therefore have needed new ways to deliver gas to the market. As well as the existing gas interconnector to Belgium, the market now has new LNG facilities and is increasing the amount of gas storage. New infrastructure between Norway and the UK has also been built and the range of supplies that the UK can facilitate has improved accordingly.

6. If prices do go up in markets which compete with the GB market for gas

deliveries then our prices will raise as well. Recent events in Japan have seen prices for GB gas also increase as LNG cargos that could have landed in the UK may now go to Japan as their prices rise in line with increasing demand from their electricity generation sector. The Forum does not believe that the GB market can, or should, try to insulate itself from global pressure,

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but must facilitate the increasing levels of investment in facilities that will help ensure that the gas demand of UK plc can be met in an efficient and cost reflective manner, maintaining secure supplies.

7. How sensitive is the UK’s energy security to investment (or lack of

investment) in energy infrastructure, including transmission, distribution and storage? Delivering secure gas supplies at internationally competitive prices can only be done by ensuring that efficient and timely investment in the gas supply chain is facilitated. The Forum believes that the GB market has an extremely good track record on delivering investments as required. The market participants have responded to the economic signals that the market creates and coming forward with a range of investments, all of which have made a contribution to meeting the future demands of the country. These investment decisions have been helped by the open, competitive market with a relatively stable regulatory regime. If the Government remains committed to open markets the Forum believe that companies will go on investing in the market.

8. There have been a few problems in developing infrastructure in a timely

manner, such as the building of new compression equipment required to meet the full capacity of the LNG facilities in South Wales and some storage developments. The common factor with these projects has been the planning regime that has created project delays and Forum members have ongoing concerns about the changing nature of the planning regime. It is as yet too early to tell if the new regime will help or hinder progress, but the UK more generally does appear to have had numerous problems in getting timely permissions for major infrastructure in a variety of sectors. The Forum very much hopes that these problems will be resolved.

9. In terms of the investment decisions made by the monopolies (gas

transmission and distribution owners), the Forum believes that new investment may be may need to facilitate the delivery the Government’s EMR proposals. The Forum has suggested in its response to the DECC EMR consultation, that they should consider the impacts of the policy proposals on the gas market. In particular our members believe that increasing the flexibility of gas fired power stations may require additional reinforcements to the gas networks. In order to affect timely delivery, the monopolies would need to agree with Ofgem that any required investments should proceed sooner rather than later.

10. More generally, the Forum would rather see Ofgem allowing the monopolies

to build a degree of flexibility into their networks to ensure that the networks can more easily take delivery of the cheapest gas at any given time. There is always a balance between “gold plating”, at the expenses of the customers, and building flexibility that provides the market with more competition in delivering supplies. If the system has no flexibility then the options for delivery will be reduced.

11. What impact could increased levels of electrification of the transport and heat

sectors have on energy security?

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Electrification of the transport network will have very limited direct impacts on the gas market. What is more relevant is the way that the electricity market demand for gas could alter as a result of the more to lower carbon forms of generation, notably the changing role of gas from base load generation to more flexible output. The Gas Forum has responded to the Government’s consultation on the Electricity Market Reform and we are enclosing a copy of that paper for information.

12. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? The Gas Forum members support the efficient use of energy in all sectors, including in our own delivery of energy to customers. We note the many initiatives the current and previous Governments have developed to promote energy efficiency and some, like the role of smart meters, will impact the operation of the gas market. Generally improved efficiency of energy use should slow the rate of growth in energy demand.

13. Given the widespread use of gas fired heating and cooking, which is very

efficient, it seems likely gas demand will still increase, but possibly at a slower rate as usage becomes more efficient. We are aware that improving the insulation on houses often leads people to live in warmer homes, rather than always reduce energy consumption. The Forum members believe that developments, such as the time based tariffs which may be possible with smart meters, are unlikely to have a significant impact of the shape of demand as people will still want to heat their home when it is cold. However, our members believe that the UK gas market will adapt to changes in usage as they arise in the meantime we support the Government’s drives to encouraged increased efficiency in energy use.

14. What will be the impact on energy security of trying to meet the UK’s targets

for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? The focus of Government policy, in terms of lowering the UK’s greenhouse gas emissions, is currently concentrating on decarbonisation of the electricity generation sector. As with other changes to the UK electricity market the impact on the gas market is of a secondary order. As noted above, the Forum has included its response to the Electricity Market Reform document with this response.

15. There is also a role for bio gasses in helping to cut the UK’s carbon

emissions. The Forum members are committed to working with those who are developing bio gas that can be added to the gas network, reducing the carbon intensity of the gas delivered across the UK. As projects are developed changes will be need to be made to the Uniform Network Code that governs the way that gas is transported across the networks. The Forum members will work with other market participants to try and ensure that the market rules treat all forms of gas equitably and any central contractual issues are resolved. Gas is a relatively low carbon, clean fuel. It has a role to play in meeting the energy needs to the country while carbon emissions are reduced.

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16. What would be the implications for energy security of a second dash-for-gas? As already noted, the Forum believes that gas will play an important role in meeting the UK’s future energy needs. Gas is efficient, reliable, relatively green and secure. It will be part of a lower carbon future and investment in the sector must therefore be encouraged. The Forum believes that the UK gas market is well placed to respond if there is another dash for gas. However, the Government will need to make sure that it remains committed to competitive markets if it is not to undermine the future investments that the market will need.

17. How exposed is the UK’s energy security of supply to international events? As an open, competitive market that competes for gas supplies from a number of regions of the world. The market is therefore impacted by the global market for gas, which is likely to increase if interconnectivity and greater reliance on imported LNG grows over time. However, the market impact will be in terms of the link with global gas prices as the deliveries of gas from other markets will be dependent on the prices in the relative markets. As noted above, recent events in Japan have increased global gas prices and UK gas prices have also risen in line.

18. The Government should not be overly worried about the global gas price link

though as gas comes to the UK from a wide variety of sources, making gas deliveries, assuming the market prices respond, come to the UK. The Forum does recognise that not all Governments will have the same free market approach and it is therefore vital that the UK continues to promote competitive markets, notably in the EU, so that the UK can competitive on a level playing field with other nations to receive gas. The Forum members will also be working through a variety of EU bodies to encourage the European regulator to remove arrangements that create a barrier to cross border flows and artificial restraints to competition, thereby increasing the diversity of supplies that can come to the UK.

19. It is vital that the market is allowed to remain competitive though if the prices

are to reflect the supply demand balance. If a Government tried to cap prices or place obligations on gas shippers or suppliers, for example to book gas storage, these measures will distort the market and lead to unintended consequences. The Forum has recently responded to Ofgem’s review of security in the gas market and have continued to urge the regulator and Government to balance the roles of the market and the need for intervention under different supply scenarios.

20. The UK does have gas storage that can also be used in ensure secure

supplies. The market uses storage for seasonal and daily gas management. There are a number of new gas storage projects proposed in the UK. These investments are likely to be undermined if the Government were to start putting obligations on players to use the facilities. The economics behind such investments are based on the operator being able to use the facilities in a commercially flexible manner as demanded by the market. It is vital to the longer term health of the market that the economics of such investments are not undermined by increasing regulatory burdens and obligations.

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21. Is the UK’s energy security policy sufficiently robust to be able to deal with

uncertainties and risks inherent in all of the above areas? If not, how could this be improved? The Forum believes that the competitive gas market is well placed to respond to global risks and wider uncertainty

22. Are there any other issues relating to the security of the UK’s energy supply

that you think the Committee should be aware of? The Forum members have had concerns about the potential for gas quality to stop gas flowing into the GB market via the existing interconnector. The pipeline was built when gas quality was not a significant issue and the UK was a net exporter of gas. Even if shippers book the right specification of gas on the continent there is no guarantee that the flows on the day (over which the shipper has not control) will mean that gas flows east or west, or is comingled. The shared nature of transportation means the gas a shipper “puts in” may not be the same gas they “take out”. The competitive nature of the interconnector capacity holdings, where a shipper may only hold some capacity for relatively short periods of time also means the shipper cannot force the interconnector to invest in gas quality controls. We therefore believe that were Ofgem to require National Grid to provide a gas quality service at the entry point, where shippers could be charged when the service was sued, this would enhance security of supply.

23. The Forum is aware of the work being undertaken in Europe on gas quality. It may be the case that the specification moves closer to the UK gas specifications and the issue will be reduced if not removed. However, it would be worthwhile Ofgem reviewing the case for such investment.

24. Planning permissions remain a major hurdle to the ongoing investments in the

gas infrastructure. The difficulties seen by storage developers, National Grid and the energy industries more widely do make timely investments more difficult and more costly to deliver. As noted above, the Forum hopes that the planning regime will improve, but the Government must keep this under review if the UK is going to achieve its policy goals.

25. In looking at any changes to the regime to improve security of supply, all

policy makers must be mindful of the impact of changes not only during an incident where security may be jeopardised, but also after any security issue has been resolved. For example, the use of market incentives are of little benefit if they put parties out of business. Take a gas emergency with market prices rising rapidly, a shipper with gas in storage, but the terminal that is cut off is the storage terminal. The shipper will have to go on buying high priced gas, hitting credit limits and ultimately possibly going out of business. When the terminal is restored, the market has reduced liquidity because the emergency arrangements simply put companies out of business. In security emergencies there is a balance between letting markets work and protecting the longer term health of the market.

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26. Finally, the Forum believes that there may be some benefit in ensuring that all energy policies are developed in a more “joined up” way, i.e. where any electricity policy specifically take account of secondary impacts on the gas market.

March 2011

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Memorandum submitted by Statoil (UK) Limited (UKES 23)

The UK’s Energy Supply: security or independence?

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

The degree to which UK energy systems are resilient to changes in fossil fuel and uranium price varies between product, supplier, and the nature of pricing between wholesale and retail markets. If the energy markets are well functioning then the prices should determine the relative competitiveness of different energy carriers. For example if coal prices rise relative to gas then more gas can be delivered to use in power generation. As global energy demand increases the UK should seek to ensure that it can compete for these resources by having an easily accessible and transparent market. 2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? There are at least two dimensions to energy security, one physical and one economic. There is a significant investment challenge in the UK electricity sector going forward. Both old coal and nuclear power stations will need to be replaced over the next decade. It is therefore essential that new power generation capacity is brought on line in a timely fashion. Yet there is a great deal of uncertainty in the policy frameworks which are designed to encourage the delivery of this investment. By contrast the gas market, up until the recent changes generated by the Electricity Market Reform, has seen a period of relative stability in energy policy. This was set in the 1990’s and subsequent changes have focused on amending market structure to meet the realities of physical production and supply rather than undermine the basic concept of market based competition. As a consequence there has been significant investment in UK infrastructure in the natural gas market, with 3 new LNG regasification terminals capable of supplying an additional 25% of current UK gas demand, new interconnection from Norway which is now supplying about 30% of UK gas demand, planned new interconnection to the Netherlands which is going to provide 17-20bcm/yr additional capacity by 2012, with the ability to deliver significant new volumes to the market from continental Europe and further beyond. The issue that presents itself for the gas market now is not if there is capacity to deliver but if government policy will allow for gas to maintain its role in the energy mix and provide a cost effective solution to reducing carbon dioxide emissions by 80% in 2050. This will require additional upstream investments in production on the UKCS, the Norwegian Continental Shelf and around the world. It will also require the UK maintain an attractive and well functioning market for the delivery of gas. Statoil are concerned that changes to the the electricity market under the Electricity market reform process could have consequences for the gas market by changing the way gas fired generation would operate in the UK. 3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? As regards the heat sector, the fuel that provides the best security of supply is certainly natural gas; electrification of the heat sector may have several other benefits, but not that of improving supply security, as the risks of disruption of electricity supply are higher than that of gas supply.

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In a study recently developed by the European Gas Advocacy Forum1, which Statoil is a member of, a gas-based pathway to achieve the European 2050 GHG reduction targets has been developed. This pathway would safeguard the robustness of the power system and security of supply. Through a lower reliance on intermittent technologies, a 25-40% lower build-up of transmission capacity would be required. Security of gas supply can be ensured: proven reserves are abundant, and as a result of current and planned construction of new LNG capacity and pipelines, there is ample supply capacity and diversification of the supplier base. 5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? Statoil believes that it is possible to deliver the governments ambitious targets and increase the penetration of renewable energy in the generation mix. However, the impact on energy security of trying to meet the UK’s targets for GHG reductions will very much depend on the pathway that is chosen in order to achieve such reductions. As part of the Government’s exercise “2050 Pathways” we have highlighted that all the initially proposed pathways had an important drawback, in that they made it much more expensive to satisfy the forecast levels of demand – hence putting energy prices and affordability (i.e. economic energy security) at risk – and at the same time none of those pathways addressed in a satisfactory way the “indigenous” energy security risks that will be faced by a future energy mix dominated by intermittent generation sources and very inflexible base load, with no significant amount of generation that would be able to provide flexible response. The new pathways proposed by DECC recognise these issues and include examples (Pathway 15) of how the presence of natural gas in the energy mix for 2030 and 2050 could dramatically improve the energy security of the system. This solution would at the same time halve the infrastructure costs, a fact that we still wait to see confirmed in DECC’s expected cost analysis that should be conducted as part of the next step of the pathways exercise. The increased penetration of renewables in the energy sector is aimed at diversifying the portfolio of sources and therefore improving the physical energy security on its “indigenous” dimension. At the same time, and on the same dimension, it is very important to note that penetration of intermittent renewables will require flexible balancing tools. This can be successfully offset by a parallel investment in flexible response resources such as natural gas. 6. What would be the implications for energy security of a second dash-for-gas? Statoil believe that utilisation of gas as an electricity generation fuel will have a number of positive implications for the UK. Natural gas is a subsidy-free economically viable, abundantly available fuel. It is also the fuel which offers the best balance between affordability and a low carbon future. Therefore, the main implication of a “dash for gas” would be an unambiguous improvement in terms of the economic dimension of energy security, and one which would also keep the UK well within its trajectory to reduce GHG emissions by 20% in 2020, 55% in 2030 and 80% by 2050 (with CCS). On the physical side, natural gas would require much less investment in infrastructure, compared to all other sources, in order to maintain the “inherent” element of energy security. It would most successfully address the problems related to the increased inflexibility/intermittency of the electricity system going forward, thereby addressing the “indigenous” element too. Finally, on the “external” component of energy security, compared to all other imported fuels (coal, uranium), natural gas

1 European Gas Advocacy Forum, “Making the Green Journey Work”, February 2011. http://www.statoil.com/en/NewsAndMedia/News/2011/Pages/24Feb_EGAF.aspx 

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provides undoubtedly a secure solution for the UK’s import dependency: Norwegian gas is readily available, abundant, close to the UK’s shores and infrastructure is already in place that can cater for the long term needs of the UK energy market. 80% of the worlds gas reserves are located within 5000 km of Europe and there are sufficient reserves globally to maintain current gas demand levels for 250 years2. 7. How exposed is the UK’s energy security of supply to international events? The UK imports uranium, gas, coal and oil and all of these commodities are subject to international events impacting price and availability. Key to managing this risk it to have diversification of routes and supplies. As such the UK has comparable energy security as other EU nations. 8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? The UK’s energy security policy is robust, which was also the conclusion of Poyry’s 2010 report commissioned by DECC on this subject3: “the GB gas market is becoming more resilient to security of supply risks and able to withstand most foreseeable problems, and that no major changes to current policies are required”. However, it must be added that the most recent developments lack one important element of perspective, in that natural gas is not yet considered as the most important strategic investment towards 2030 and 2050, while there is no other alternative to maintain the current levels of UK energy security in the future when the UK moves on to implement its own climate targets, which are as shareable as they are ambitious (see question 5). 9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? Statoil sees the UK as one its most important gas markets both due to its proximity and the effectiveness of liberalisation. If the right signals are sent via UK policy to the Norwegian, UK and global gas developers, we feel that security of gas supply to the UK (in terms of volume and price stability) is likely to remain highly favourable. Significant gas reserves remain to be developed in UK and Norwegian waters with infrastructure already in place. The UK gas market is currently a well functioning and liquid trading point, there has been considerable investment in capacity and it has maintain relative security through a period of significant change. The UK needs to give unambiguous signals that gas is a key fuel in the energy mix. Such recognition would improve market confidence in the longer term which will improve prospects for supply security.

March 2011

2 IEA ‘World Energy Outlook’ 2010 3 Poyry, “GB Gas Security of Supply and Options for Improvement”, March 2010, http://www.decc.gov.uk/assets/decc/what%20we%20do/uk%20energy%20supply/energy%20markets/gas_markets/114-poyry-gb.pdf

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Memorandum submitted by EEF (UKES 24) 1.1 EEF is an employers’ organisation and the representative voice of manufacturing

businesses with a growing membership of over 6,000 companies employing some 900,000 people. All our members are energy consumers. For some, like those in energy-intensive industries such as steel, a secure and affordable supply of energy is crucial to the competitiveness of their business.

1.2 We have limited our submission to the three questions where we feel we have the

knowledge to contribute. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 1.3 Using energy more efficiently is important; it makes homes more affordable to heat

and businesses more productive. Continuous re-investment in energy efficiency has been a core business strategy in many manufacturing industries for decades. This is reflected in the fact that the energy-intensity of UK industry has fallen by two-thirds over the past 40 years.

1.4 Looking ahead, the combination of depleting fossil fuel resources, ever-growing

environmental awareness and increasingly aggressive climate policy will mean that focusing on energy efficiency remains more important than ever.

1.5 However, whilst the economic and social importance of energy efficiency is clear, we

are sceptical that it can be a significant factor in future energy security and would be extremely concerned if policy was developed on that basis.

1.6 There is little or no historical evidence to suggest that increasing energy efficiency will

significantly reduce energy consumption1. Arguably, the reverse, that improvements in efficiency will stimulate demand for energy, is more likely. Improving efficiency makes using energy less expensive and encourages economic growth, both of which stimulate energy consumption. Increasing energy efficiency is a valuable and an important policy objective in its own right, but not the basis for an energy security strategy.

1.7 The recent economic history of the UK illustrates the point. Between 1970 and 2007,

UK energy consumption rose 9% despite the overall energy intensity of the economy, the amount of energy used per unit of output, dropping by more than 50%. This covers a period when the UK economy underwent significant change. The share of energy-intensive industries shrank and energy efficiency increased across all sectors of the economy2. Yet despite these trends, energy consumption continued to rise.

1 A substantial literature documenting the evidence on the relationship between efficiency and consumption exists, for example: (1990), Electricity in the American Economy: Agent of Technological Change, Schurr, Greenwood Press and (1998), Does Energy Efficiency Save Energy: The Implications of Accepting the Khazzoom-Brookes Postulate, Herring, EERU Report No. 074. 

2 See (2008), UK Energy Sector Indicators, BERR

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What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 1.8 Cutting carbon dioxide emissions is vital to limit the impact of climate change and also

represents a major business opportunity. However, we need a balanced approach to ‘decarbonising’ our economy. We need to cut emissions without placing unnecessary burdens on hard-pressed households, undermining the competiveness of our businesses or compromising energy security.

1.9 A secure and reliable supply of low-carbon electricity needs a balanced mix of different

generation technologies. Nuclear power is a vital component of that mix - it is safe, proven and reliable. For the foreseeable future, the UK has no alternative to nuclear power with which to generate significant volumes of baseload low-carbon electricity.

1.10 However, EEF is concerned that two central elements of current government policy –

the UK’s 2020 renewable energy target and the recently introduced carbon price floor - could actively undermine rather than enhance energy security.

The 2020 Renewable Energy Target

1.11 The UK has committed to sourcing 15% of energy from renewable sources by 2020, despite the fact that the target has never been subject to robust cost-benefit or feasibility analysis. EEF is not convinced that an arbitrary and technology-specific target is the right approach to decarbonising the UK economy. It could have a number of unintended and unwelcome consequences. For example, it risks imposing unnecessarily high and volatile energy prices on consumers for little or no environmental benefit if large volumes of expensive, intermittent and unpredictable wind power are relied on to achieve it.

1.12 For manufacturers, energy security is a function of price as well as physical availability.

Stable and affordable energy prices allow businesses to plan and compete in global markets. High-levels of wind power, due to the inherent intermittency and unpredictability of its output, are likely to make wholesale electricity prices more volatile. This in turn will make wholesale gas prices more volatile. Gas demand is likely to fluctuate with the wind because gas-fired power stations are likely to be amongst the most important sources of backup power to wind farms.

The Carbon Price Floor

1.13 The recently introduced carbon price floor is another policy with a highly questionable economic rationale that, based on current plans, will undermine not only the competitiveness of industry but also potentially energy security.

1.14 For example, by unilaterally raising the cost of fossil fuel based power generation in

the UK, it could encourage higher carbon electricity generation to be sited elsewhere in Europe to supply our market via interconnectors. This would make the UK increasingly dependent on limited interconnection capacity and other EU electricity markets that often operate according to very different rules – e.g. regulations that prioritise domestic consumers in the event of disruption or shortfall.

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What would be the implications for energy security of a second dash-for-gas? 1.15 EEF shares energy regulator Ofgem’s concern that current gas market arrangements

will not deliver long-term security as the nature of UK supply continues to undergo significant change.

1.16 Growing dependence on imported gas is exposing the UK to an increasing range of

potential supply shocks. These include the failure of import infrastructure (e.g. pipelines and LNG terminals) and reliance on overseas gas markets in which political considerations override economic ones (e.g. regulations that prioritise domestic consumers over exports in the event of a disruption). Such events can, and have already, led to localised disconnections of manufacturers and sustained price spikes causing significant damage to energy intensive industries.

1.17 The market needs to provide better insurance against this range of emerging issues

threatening future UK gas supply. For example, compared to many continental European gas markets, the UK market has significantly lower levels of storage capacity relative to demand and fewer long-term supply contracts. A ‘second dash-for-gas’ would exacerbate this issue by accelerating the UK’s already rapidly increasing dependence on imported gas.

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Memorandum submitted by EDF (UKES 25)

“The UK’s Energy Supply: security or independence?”

Preface 1. It would be inescapable to talk about energy security and independence issues without

referring to and taking due cognisance of the recent events in Japan. It is right that the impacts of the earthquake and tsunami on the Fukushima nuclear plant should trigger close attention and concern. The situation continues to evolve each day and we need to continue to monitor the events carefully and objectively.

2. Events of such magnitude demand leadership and that leadership has been in evidence

in many quarters here in the UK - from the Secretary of State for Energy, the Prime Minister, and the Leader of the Opposition and in comments made by many MPs in front of this Committee. All have shown clear-headedness in their response, avoiding knee-jerk reactions.

3. EDF Energy welcomes the mandate given to the Chief Nuclear Inspector, Mike

Weightman, who represents a credible, independent and strong safety authority, to report on the facts, to analyse them and to draw lessons from them. We are determined to support Mike Weightman and play an active role in the lessons learnt exercise. We continue to operate our nuclear fleet to the highest standard but have also set in place an immediate action plan which includes establishing formal arrangements to ensure that any learning from Japan is fed into our safety processes. ‘Safety-First’ remains an integral part of our culture as we seek to achieve continuous improvements and refuse to be complacent

4. We do not believe that recent events in Japan change the need for new nuclear

generation capacity in the UK as set out in the draft National Policy Statements (NPSs). The critical task in front of us today is to deliver a secure, clean and affordable energy mix. EDF Energy will not prejudge the outcome of the Weightman Report and we recognise the need to accommodate the findings of this report in due course.

Introduction 5. EDF Energy plans, with its partner Centrica, to build up to four nuclear reactors, with the

first unit, at Hinkley Point, being commissioned by 2018. We are also actively developing our portfolio of renewable generation assets and completing construction of a 1300MW Combined Cycle Gas Turbine (CCGT) and a gas storage facility in Cheshire. Our final investment decisions for new nuclear generation are reliant on receiving the necessary consents and on a robust investment framework being in place.

6. It is important that the transition to a low carbon economy is progressed efficiently and

without undue delay, to ensure that the competitiveness of UK energy supplies is maintained. It is also crucial that the three overarching objectives of energy policy, namely the decarbonisation of the economy, security of supply and affordability, are considered in a holistic manner in order to maintain consistency of reform.

7. Recent events, from political tension in the Middle East and North Africa, through to the

unprecedented earthquake and tsunami in Japan, have had a big impact on energy commodity prices, and have highlighted the interdependent nature of the global energy system. The events have reinforced the need for a diverse low carbon energy mix that should include nuclear, renewables, and, if they can be proven at a commercial scale, Carbon Capture and Storage (CCS) technologies.

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8. The events in Japan are an extraordinary human tragedy and our thoughts are with those who have endured and suffered much as a result of the earthquake and the tsunami which followed. EDF Energy welcomes the mandate given to the UK Chief Nuclear Inspector, Dr Mike Weightman, to report on the lessons that may be learned by the UK nuclear industry.

9. All of EDF Energy's nuclear power stations are protected against natural hazards, including storms, earthquakes or tsunami, that have a frequency of less than 1 in 10,000 years. These measures are detailed in approved safety cases which are tested and agreed with the Nuclear Installations Inspectorate (NII), and Periodic Safety Reviews enable us to include the most recent data against which these risks can be assessed. For example, at Sizewell B, in Suffolk, the plant is designed to withstand a wave of 7.5m – which is more than 5m higher than the worst case scenario even if a storm surge and tsunami combined.

10. The same principles apply to our new nuclear build developments at Hinkley Point, in

Somerset, and Sizewell, which are designed to cope with a very wide range of external hazards. The safety case for the European Pressurised Reactor (EPR) plant, which is based on our worldwide experience from current construction projects in both France and China, will also be scrutinised in detail by the NII.

Response to specific questions 1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 11. The “resilience” of the UK’s energy system to changes in fossil fuel / uranium prices can

be considered from the perspective of price stability and the consequent impact on economic activity.

12. Price stability depends on the duration of the price change experienced. Shorter-term fossil fuel price increases may be mitigated by the UK’s fossil fuel storage capacity. Gas storage capacity is only sufficient to supply around 5% of the UK’s annual demand1, and much of this capacity is used to manage seasonality. Hence these facilities can only be used to mitigate short-term price spikes and not long-term changes. Gas fired generation represents around 45%2 of the UK generation capacity, and is often the price-setting technology, and in the heating sector gas is the most important fuel source. Therefore the resulting impact of movements in fossil fuel prices on UK energy prices would be relatively direct.

13. Major electricity producers’ stocking facilities at coal fired power stations provide larger

storage capacity as a proportion of fuel consumed at each individual station (in excess of 50%), and are therefore better able to mitigate within-year price changes. However, coal fired generators would still be exposed to year-on-year fluctuations in input costs.

14. Faced with longer-term fossil fuel price shocks, the UK could benefit from its indigenous

coal and gas reserves. However, these are in decline or becoming difficult to access, leading to a greater level of import dependency, and prices are becoming increasingly linked to global markets. All things being equal, the UK will become more exposed to global commodity prices as reserves decline.

15. An important factor in improving resilience will be diversification of supply away from

fossil fuels. The drive to decarbonise will assist diversification and improve stability as:

1 Based on total gas consumption in 2009 and total UK gas storage capacity at 31 March 2010, as reported in Digest of United Kingdom Energy Statistics (DUKES) 2010 2 DECC, Digest of United Kingdom Energy Statistics (DUKES) 2010

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• Nuclear fuel costs account for about 8% of the total cost of low-carbon electricity from nuclear3, with uranium itself only 3%, in contrast with electricity from gas fired CCGTs where the cost of gas accounts for two thirds or more of the cost of generating electricity. In the case of nuclear, even if we see very large movements in the uranium price, the relative impact on the unit cost of electricity from nuclear would be relatively small.

• Renewable generation such as wind and marine power draws on the UK’s natural resources – and is therefore not linked to global markets for fuel. However while these sources can help mitigate economic security of supply risks by reducing exposure to the volatility of fossil fuel prices, they do increase the physical security of supply risks due to the intermittent nature of the energy output.

Uranium Supplies 16. Nuclear power stations require supplies of uranium to make the fuel to be used. It is also

possible to use a mixture of plutonium and uranium in the manufacture of what is known as ‘mixed oxide fuel’ but none of the UK’s existing fleet uses this type of fuel, and there are no plans as yet to do so in any new plants.

17. Uranium is a heavy metallic element widely distributed in the earth’s crust, and is about as abundant as more familiar metals such as tin. The largest known reserves of uranium are in Australia, Canada and Kazakhstan. Economically recoverable reserves are also found in many other countries including South Africa, Niger, Namibia, Brazil, Russia and USA.

18. The history of exploration for uranium is relatively short. There are substantial areas

worldwide which have good prospects for uranium reserve identification and have yet to be fully explored. As a result it is almost certain that if further prospecting were carried out, then more reserves would be found. This is borne out by history.

19. The International Atomic Energy Agency (IAEA) and the OECD Nuclear Energy Agency

publish a regular review of uranium resources, production and demand. The most recent review, published in July 2010, estimated that uranium resources worldwide amount to around 5.4 million tonnes, which are economically recoverable at prices up to $130kg. At 2008 rates of use, this is sufficient for around 80 years of supply. It is important to stress that mining companies will only carry out prospecting and exploration for new reserves if the market conditions favour such actions.

20. There is an open and competitive market for uranium oxide (‘yellowcake’), the raw

material for fuel manufacture. The spot price for yellowcake has been volatile recently, and over the last six months has traded in the range $105-190/kgU.

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 21. We believe that the optimal UK low carbon electricity mix, which will play a key role in

ensuring that the UK can meet its carbon reduction commitments, should be both geographically and technologically diverse. Maintaining adequate investment in electricity transmission infrastructure is therefore critical to continue to ensure that low carbon generation can reach the major centres of UK demand.

22. Strategic electricity transmission investment for renewable and other low carbon generation was identified by the Energy Network Strategy Group in their report of 2008-09. The report has been taken forward by Ofgem to provide funding for work where the identified investment will deliver value for money for the UK consumer.

3 Mott MacDonald, UK Electricity Generation Costs Update, June 2010.

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23. The existing gas transmission network similarly plays a critical role in delivering secure energy to the UK consumer. It is anticipated that, as the power generation and heat sectors move towards other lower carbon energy sources, the nature of the gas transmission network may need to be reviewed.

24. Furthermore an efficient gas transmission network is essential to ensure that flexible gas-

fired power stations can provide electricity to balance the intermittency of other low carbon generators. An appropriate balance of investment in generating capacity and development of the network might be required to deliver these secure supplies to a changing customer base.

25. Smart Grids and distribution networks are likely to have an important role to play in

optimising future investments and ensuring that the system is run as efficiently as possible. The suite of solutions that comprise smart grids and demand side management will involve both passive and interactive measures. Some will be based on low impact automated responses, others will include consumers actively responding to price signals and some may even require significant behavioural or lifestyle change. We believe that a number of reasonably well established concepts for improving the performance of distribution networks and facilitating demand side response merit further consideration. This is an area of rapid technological change and further investigations are needed to understand and quantify the contribution that smart grids and smart demand can make. This will in turn inform important decisions on the optimal future mix of generating plant.

3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

26. It is widely recognised by a number of stakeholders that in order to meet the UK’s climate

change targets, the UK must significantly decarbonise its power sector by 2030. Depending on the choices of the low carbon energy mix, a decarbonised energy supply will have additional benefits in terms of affordability and security of supply: reducing dependence on volatile fossil fuel prices and energy imports.

27. Low carbon electricity will in turn provide solutions to decarbonise the heat and transport sectors, both of which are currently heavily reliant on fossil fuels. It is estimated that electricity demand could double from today’s levels by 2050 as a result of additional demand for the increased electrification of heat and transport4. It is therefore important that adequate consideration is given to the development of the electricity transmission and distribution systems over the next two decades.

28. Building networks that are more reliable and responsive to demand can help reduce

potential system peaks, and the need for grid reinforcements. A study by Imperial College and the Energy Networks Association suggests that there could be considerable potential to reduce both the electricity system peak demand and the need for system reinforcement by optimising responsive demand5 .

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 29. Currently, the UK’s homes are responsible for approximately 14%6 of our greenhouse

gas emissions, with a large proportion of consumption being used for heat (81%) derived mainly from fossil fuels. Therefore, there is significant scope to reduce energy use and emissions by both improving the fabric efficiency of buildings and by decarbonising the heat that they use, in conjunction with wider policy efforts to decarbonise energy supplies.

4 HM Government, 2050 Pathways Analysis, July 2010 5 Benefits of Advanced Smart Metering for Demand Response based Control of Distribution Networks, Summary Report, April 2010, Imperial College, ENA 6 HM Government, Carbon Plan, March 2011

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30. It is important that energy efficiency of buildings is also considered alongside policies to

decarbonise heat. We support the Government’s aims to reduce energy and carbon emissions in homes, through key policies such as the Green Deal, and the Renewable Heat Incentive, to encourage the uptake of renewable heat.

31. One of the key success factors for the Green Deal will be creating strong demand for energy efficiency measures to drive wide scale uptake. The policy should provide a commercial solution to providing energy efficiency measures that is attractive to all consumers, whatever their property type or demographics. We are working with Government on the design of the programme and are committed to making it a success.

32. Energy efficiency will also be important in future proofing the housing stock, through

robust standards for the buildings regulations in terms of fabric efficiency and heat use through policies such as zero carbon homes. However, there should be a balanced approach between energy efficiency, low carbon heating solutions and decarbonised energy supplies.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 33. EDF Energy believes it is important to distinguish between the different renewable

technologies because not all of the renewable technologies raise security of supply risks or cause additional costs elsewhere in the system. Electricity generation from landfill gas, the production of bio-gas from anaerobic digestion and heat pumps represent technologies that do not create additional security of supply risks. However a very deep penetration of wind farms exceeding 25% of total electricity demand would in our view create significant challenges and incur additional costs in balancing electricity supply and demand.

6. What would be the implications for energy security of a second dash-for-gas? 34. Towards the end of this decade the UK is facing a shortfall in its generation capacity as a

result of plant closures and running constraints linked to age and environmental policies such as the Large Combustion Plants Directive and Industrial Emissions Directive. Furthermore, as intermittent renewable generation capacity increases, there will be an increase in the requirement for supporting reserve capacity. There is a risk that this gap could be filled by the lowest-cost new-entrant technology, which is currently gas CCGT (at higher load factors7). This second ‘dash for gas’ is likely to increase the percentage of gas generation in the UK, as it will replace ageing coal plant as well as gas, and fill the supply gap as demand continues to grow. In turn, this will increase the UK’s overall exposure to gas supply and price risk.

35. We believe that further investment in CCGT plant, beyond the minimum that is required to bridge the gap to transition to low carbon technologies, will reduce the medium term potential for decarbonising the electricity sector and increase the risk that the UK’s long term emissions reduction targets will not be met, as the carbon emissions from these new assets will be ‘locked in’.

36. The first ‘dash-for-gas’ saw a build rate of approximately 2.5GW per year for gas CCGT in

the 1990s. This was predicated on replacing existing coal-fired generation with new gas-fired generation, rather than through significant increases in low carbon capacity. Such fuel-switching now is insufficient on its own if the UK is to meet its climate change targets and steps must be taken to encourage the latter. We therefore welcome the Government’s proposals for electricity market reform, which we believe can be developed

7 We note that at high gas prices, nuclear plant becomes the most competitive new entrant.

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into a robust market framework that is capable of delivering the low carbon investment the country requires.

37. The Committee on Climate Change (CCC) has stated that delivering the 2050 target is

likely to require the power sector to be almost, if not completely, decarbonised by 2030, suggesting a carbon intensity of around 50g CO2/kWh by this date. Given that modern CCGT plants have emissions of around 350g CO2/kWh, the CCC’s analysis concludes that investing in gas-fired plant rather than low carbon technologies ‘will result in a deviation from the path towards meeting long-term targets’8.

38. We also note that the UK is now much more heavily reliant on imported gas than at the time of the first dash-for-gas in the 1990s, and this reliance is only forecast to increase as domestic reserves decline. Hence there is a greater potential risk to the UK’s energy security than in the original case. While the UK has recently benefited from a global oversupply of gas, which has curbed the recent increases in gas prices, the lack of sufficient indigenous resources creates a net risk for the UK economy. In addition to the risks presented by volatile fossil fuel prices, the UK should also recognise the potential risks that could arise from carbon price shocks if the UK fails to decarbonise its energy supplies.

7. How exposed is the UK’s energy security of supply to international events? 39. Geopolitics and international events are currently key drivers behind the price of oil, and

this is a phenomenon that has existed since world oil markets began. In fact, the UK’s energy security of supply is highly interdependent with respect to both global wholesale markets and in terms of its reliance on other producers of primary fuels. Using gas as an example of both a primary fuel used for domestic heating and a secondary fuel for electricity generation, we find that world production has been concentrated outside of the OECD countries from 2008 onwards (table 1). These countries are often viewed to be politically more volatile and hence more likely to be the focus of an international event.

Table 1 Non OECD Countries Projected and Actual World Natural Gas Production 1980- 2035

1980 2008 2020 2035 % of world gas production 42% 63% 69% 71 – 75%

Source: IEA World Energy Outlook 2011, p189 40. At the same time as non-OECD world production has increased, UK gas production has

significantly declined over the last four years to around half the production at the beginning of the decade.

41. Focusing on Europe as a region, we find a high degree of reliance on imported gas from

Eastern Europe and Eurasia in 2008, and this is forecast to increase by the International Energy Agency (Table 2). Imports from the North Africa are set to rival Russia in terms of volumes imported into Europe. We have also seen the rapid political realignment of these gas exporting countries and so we face very different forms of risk. Events such as those in Libya have demonstrated their propensity to create volatility in the oil futures markets, with prices moving by an average $3/bbl daily. By mid-March 2011 benchmark crude oils were trading at $10-15/bbl above average February levels, with Brent oil trading at around $114/bbl and West Texas Intermediate trading at around $100/bbl.

8 Committee on Climate Change, Meeting Carbon Budgets – the need for a step change Progress report to Parliament, p24, October 2009.

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Table 2 Gas flows into Europe from non OECD Countries Projected and Actual 2008- 2035 (in bcm)

2008 2020 2035

Eastern Europe Eurasia 154 174 215

Africa 83 98 138

Middle East 11 50 62

Latin America 5 N/A 8

Source: IEA World Energy Outlook 2011, p94

42. It is important to make the point that not all events are the same in terms of their impact

on wholesale market prices or on the UK’s economy. In a financial market, where traders do not expect to take delivery of the commodity, prices can often reflect sentiment or trading positions and not a fundamental threat to supply. As we increasingly diversify our sources of gas, we may expose ourselves to a wider range of political risks but may also be able to hedge this to an extent by sourcing gas supplies through existing relationships with producing countries.

43. With the development of European involvement in international energy policy (as

endorsed by the European Council9), it may make sense to maximise Europe’s negotiating positions on the world stage. Given our interdependent environment, this may be the most favourable outcome.

44. We conclude that we will be importing gas from all major continents and that any international event could potentially have an impact on the UK’s security of supply and the UK is also exposed to a number of other commodity markets.

8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? 45. Much of the UK’s energy infrastructure assets are in private ownership and security of

supply risks ultimately translate into investment risks. This is appropriate as long as the market frameworks are robust, and provide the right incentives for investment in long term capital assets such as power stations, network infrastructure and storage capacity.

46. The Government has recognised that the electricity market is in need of reform, and we

look forward to the forthcoming White Paper and to contributing to the development of an appropriate framework to ensure that the future market frameworks continue to command the confidence of investors It is imperative that the Government moves quickly in establishing the new market arrangements which will support the transition to a low carbon electricity system and help maintain security of energy supplies.

9, Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? 47. We consider that there is a need for the UK to be aware of the ongoing scope of work

being led by the EC and ACER. We specifically note the ECCC inquiry into a European supergrid in this respect and the expectation that ACER and ENTSO-e will deliver, by June 2011, a baseline overview of policy considerations and constraints for the development of possible future technical grid configurations (as required by the North Seas Grid Initiative Memorandum of Understanding).

9 European Council, ‘Conclusions on Energy’, 4 February 2011

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8

48. We consider that optimal investment in transmission and interconnection capacity could contribute to security of supply but that this may not be the primary objective of any such investments, and the UK needs to be fully engaged in this work to ensure that the objectives are clear and efficient investment choices are made.

March 2011

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Memorandum submitted by InterGen (UKES 26) 

 Executive Summary 

 1. InterGen  welcomes  the  opportunity  to  respond  to  the  Energy  and  Climate  Change  Select 

Committee’s enquiry. 2. InterGen believes that: 

• The increasing penetration of highly subsidised renewables is increasing the need for flexible generation to a level above that presently available; 

• However  rising  renewable penetration  is  reducing  the  amount of  electricity needed  from flexible generators.  This is reducing the revenues of existing flexible generation, for which the economics are already marginal. 

• Flexible generation retirements and no replacement new build therefore appear  inevitable under the present market arrangements. 

• If no action is taken this will lead to significant security of supply problems when renewables are not producing electricity or when nuclear plants are unavailable. 

• Assuming  that present subsidies  to  renewables and proposed subsidies  to nuclear  remain, the only way that security of supply can be maintained is through some long term financial support to flexible generation. 

• The only practicable solution  is a capacity payment targeted on  flexibility, payable to both existing and new flexible generation. 

• Introducing  a  capacity  payment  targeted  on  new  "peaking"  generation will  not  solve  the problem:  rather  it will  exacerbate  it  through  accelerated  retirements  of  existing  flexible plants. 

• The Government needs to be unafraid to commit to flexible gas fired generation as a crucial complement to wind and nuclear, providing flexibility with the  lowest carbon emissions of any available flexible technology – otherwise the lights could go out. 

3. We would like the opportunity to present our view in person to the Select Committee.  

About InterGen   

4. InterGen  is  the UK's  largest  and most  successful  new  entrant  independent  generator,  having invested £1.4 billion in the UK since 1995.  InterGen owns and operates three highly efficient gas fired power stations in the UK totalling 2,490MW and actively trades in the prompt and forward wholesale  power  and  gas markets.  InterGen  is  currently  pursuing  a  number  of  development opportunities in the UK including two further 900MW CCGTs, representing a further £1.2 billion of  investment.    These  developments  have  to  compete  with  our  international  portfolio  of opportunities, for which funding comes from our shareholders who are based outside the UK.  

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 Question 1: How resilient is the UK energy system to future changes in fossil fuel and uranium prices?  Resilience to fossil fuel and uranium prices  5. Exposure  to  international  fuel  prices  is  inevitable  –  whether  directly  though  international 

purchase or through domestic fuel being sold at the international price.  InterGen's view is that the UK's present and anticipated portfolio of generation to 2050  is not resilient to the credible range of fuel price scenarios.  This reflects the lack of baseload and flexible power generation to support  the  likes  of  closure  of  nuclear  plant  (for  example  owing  to  fleet  technical  issues  / uranium price rises).    

6. InterGen’s  view  is  that  beyond  2015,  compared  to  historical  norms,  there will  be  a  lack  of "capacity margin" to cope with unforeseen events.  In recent years we have enjoyed the benefit of old flexible coal and oil plants providing back up margin such as during the coal strikes of the early 1980s and, more recently, when  the UK has experienced very  low wind conditions.   This luxurious situation will not continue as  this plant  is decommissioned: many older  flexible high emission coal plants will close by December 2015 (LCPD) and then, in all likelihood, most of the remaining old flexible coal plants by 2023 (IED).  Present Government written policy focuses on renewables  and  new  nuclear,  despite  public  oral  acknowledgement  that  existing  and  new flexible gas fired generation is critical to the UK’s transition to a low carbon economy. 

 7. Flexible gas  fired generation  is the only technology which assists with carbon reduction that  is 

proposed to receive no subsidy.  The impact of subsidised low carbon generation is that existing gas fired generation economics are marginal and new gas fired generation is no longer economic to build, giving rise to insufficient forecast flexible generation and a significant threat to security of supply.   Consequently, while there will be resilience to extremely high gas prices on the basis that  the  Government  continues with  nuclear  support,  there will  be  insufficient  gas  plant  to support  a high uranium price or nuclear  fleet  issue  scenario.   Only  two mitigants  to  this  risk present themselves: either (1) a capacity mechanism; or (2) removal or reduction of subsidies to other technologies, though this second seems politically inconceivable.  Hence InterGen strongly urges  the  implementation  of  a  capacity mechanism  for  existing  and  new  flexible  generation, otherwise there is a very high risk of a UK security of supply issue.  

Additional critical security of supply questions  

8. Two further critical security of supply questions are: 

• How resilient is the UK energy system on days of low renewable production (with wind load factors of approximately 30%, this represents 70% of days)? 

• Are there diverse gas sources available such that global political issues do not interrupt fuel supply? 

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Resilience to low wind production  

9. InterGen  is  very  concerned  that  resilience  to  low wind  production  is  a major UK  security  of supply risk.  The targeted, new "peaking plant" only direction on capacity payments put forward by  the  Secretary of  State  to  the  Select Committee on 15 March 2011  fails  to  address  critical existing fleet issues (with unsubsidised income reducing as wind penetration increases, resulting in flexible generation becoming uneconomic) and  is  likely to  lead to substantial risk of material generation  shortfalls.    For  example, with  the  closure  of  old  coal  and  oil  plants  by December 2015, existing and new  flexible CCGTs are unlikely  to be able  to produce  sufficient electricity during periods of  low wind, unless encouraged with a market‐wide capacity payment targeted on flexibility.  This is further addressed under Question 5 below.  

10. Increased  interconnection  to  the  wider  European  grid  is  a  component  of  the  solution  but systematic reliance on imported electricity would clearly not be a solution on which the UK could place  full  reliance:  rather  it  is necessary  to  resolve  the majority of  the problem with domestic generation. 

Diversity of gas sources  

11. InterGen believes  that  the  increased availability and use of  LNG  import  facilities,  LNG  coming from a wide variety of countries and continents, gas interconnectors to the UK from Europe (e.g. from Norway), potential for coal bed methane and shale gas, and the potential for new gas finds in deep water (within UK territorial waters) have given the UK more than ample resilient gas fuel supply.    In this view,  InterGen agrees with DECC and Ofgem's analysis  in their November 2010 Statutory Security of Supply Report, section 4.6.2 

"While production from the UKCS is projected to continue to decline, GB has an increasingly large and diverse range of import sources on which to draw.  New import and storage capacity is identified at various stages of development and delivery.  Should this come forward, the UK would continue to be well‐served."  We note the continuing scaremongering by some to develop a fear of a second "dash for gas", which we consider based on the above to be ill‐founded. 

 Question 2: How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?  12. InterGen's focus is on power generation infrastructure.  This is covered in detail our response to 

question 5. 

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Question 3: What impact could increased levels of electrification of the transport and heat sectors have on energy security?  13. Over  the  medium  term  to  2020,  InterGen  foresees  minimal  impact  from  electrification  of 

transport and heat sectors.  Over the long term to 2050, material market penetration of electric cars  and  time  shifting  of  charging  of  these  cars  to  periods  of  low  electricity  demand  (e.g. overnight) should increase rather than decrease energy security and also reduce reliance on oil.  

14. DECC's  2050  pathways  analysis  considers  scenarios  for  the  long  term.    InterGen  backs  the conclusion of that document – that a balanced strategy in which all technologies play a part will lead  to  acceptable  security  of  supply  and minimum  cost  for  decarbonisation.   As  above,  our current significant concern  is that there  is too much focus on renewables and nuclear and that essential flexible gas fired generation  is being  ignored  in written policy documents and support mechanisms, despite public oral acknowledgement of  its  importance  in our transition to a  low carbon economy. 

Question 4: To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?  15. Energy efficiency schemes need to be economical and effective to reduce our carbon footprint, 

ensure the public  is prepared for energy rationalisation (e.g. given the security of supply  issues arising from the current policy direction) and keep consumer’s bills manageable.  

Question 5: What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?  16. InterGen supports the government's and the EU's low carbon agenda. 

 17. InterGen's present  focus  is on  flexible, high efficiency Combined Cycle Gas Turbine generation 

which is the lowest carbon form of available flexible generation.  

18. InterGen  is  very  concerned  that  flexible  generation  is  an  essential  complement  to  renewable generation  (and  in  particular wind)  but  that  there will  be  insufficient  flexible  generation  to maintain supplies when renewables are not generating. 

 

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19. This  is  shortfall  is  illustrated  in  the  chart  below  from  the  Oxera  analysis1  supporting  our Electricity Market Reform submission.   The chart shows that forecast capacity will be sufficient but flexibility will not.  The required level of flexibility is illustrated by the light grey line and the forecast  level by  the black  line:  these become  too close  for comfort after 2015 and cross  to a clear shortfall after 2020. 

 

20. Existing flexible fossil fired generation such as InterGen's high efficiency CCGT fleet is needed to maintain flexibility and yet is only marginally economic at present market prices.  

21. A  key  factor  causing  reduced  revenues  for  fossil  fired  plants  is  highly  subsidised  renewable generation.    In  its  simplest  form,  this  is  best  understood  by  considering  the  situations when there is full and when there is zero renewable generation: 

• When renewable generators deliver electricity, there is no need for flexible plant and hence flexible plant load factors are significantly reduced; 

• During periods of no  renewable generation,  the  supply‐demand balance  is  the  same as  if renewable generators did not exist and hence there is no natural uplift to market prices. 

Hence to the simplest approximation and with the existing level of flexible generation, revenues would fall proportionately with load factor (proportion of time for which generation runs), given there  is  no  compensating mechanism  in  the market  to  support  fossil  generation's  continued economic viability. 

                                                            1 Oxera report "GB capacity mechanism design: Meeting future flexibility requirements to secure a low‐carbon transition" prepared for members of the Independent Generators Group March 9th 2011  

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22. The  chart below  shows Oxera's  forecast declining  load  factors  for  flexible plants, highlighting (through  the  connection of  load  factor  to  revenues)  the  cliff‐edge  in  flexible plant economics under the present market arrangements.  

   

23. Accordingly there is a need for long‐term support for all types of flexible generation, not just traditional "peaking plant".  That support should apply equally to existing and new plants.  

24. The capacity mechanism should: 

• Address the  issue of the  intermittency of renewable generation by rewarding the provision of flexible capacity, rather than simply capacity; 

• Provide  long‐term support for all types of flexible plant, not just traditional ‘peaking’ plant. That support should apply equally to existing and new plant; and  

• Give clear  long‐term price signals  in order to support the financing needed by  independent generators  to  construct  new  flexible  capacity  (via  the  likes  of  the  EC’s  proposed  Project Bond or project financing).  

25. The introduction of a capacity mechanism supporting only peaking plant rather than the existing fleet  gas  fired  fleet  as discussed by  the  Secretary of  State  at  the Energy  and Climate Change Committee  of  15 March  2011 would  not  only  be  ineffective  but would  actually worsen  the problem by reducing the level of flexible generation.  As the economics of the existing fossil fleet decline, existing assets will be incentivised to retire early and be replaced by peaking plants with more attractive returns.  This is not an economically efficient use of assets nor will such plants in 

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many cases produce less carbon dioxide – in fact, traditional peaking plant produces around 30% more carbon dioxide than an existing efficient and flexible CCGT plant.  

26. InterGen believes it to be crucial to security of supply that a capacity mechanism targeting new and existing flexible generation is introduced.  Introducing any different type of mechanism will exacerbate the problem rather than solving it. 

 Question 6: What would be the implications for energy security of a second dash‐for‐gas?  27. As of today there is no risk of a "dash for gas" due to its poor forecast economics.  The issue is 

quite the reverse: there is more of a "dash for lack of security of supply". The threat to security of supply in the coming decade is very significant.  InterGen believes that existing and new gas‐fired generation will play an increasingly important role by: 

• Continuing  to  contribute  to  carbon emissions  reduction  targets by  replacing more  carbon intensive fossil‐fired generation such as coal; and 

• Providing  clean,  reliable  and  flexible  generation  capacity  to  support  the  increasing penetration of  inflexible and  intermittent  low‐carbon technologies  in the UK, such as wind generation and new nuclear.   

28. The transition to a decarbonised energy sector will require a change in the current arrangements to allow for the continued economic operation of flexible gas fired generation capacity in order to alleviate security of supply concerns.  

29. Given  nuclear  baseload  generation  and  intermittent wind,  gas  fired  generation  is  the  lowest carbon flexible technology available.  

30. InterGen understands  that present Carbon Capture  and  Storage  technology does not  support flexible plant operation.  InterGen considers that for CCS to be truly useful, it must be developed to operate flexibly.  Once this is the case, it can be retro‐fitted to either CCGT or coal plants pre or post combustion.  Up to that time, present generation CCGTs continue to provide a low cost way to save 50%‐60% of the carbon emissions of an equivalent coal power station – as well as giving flexibility.   

31. The UK needs a balanced generating portfolio.  Existing CCGT economics are presently marginal even  for the most efficient plants and older plants are currently uneconomic  (as evidenced by Centrica and GdF mothballing and recent comments from SSE about one third of existing CCGTs being  loss making).   New CCGTs will not be built owing to suppressed market prices and there being no  long  term  (~25  year) bankable  support mechanism  to  compensate  for  reduced  load factors from renewable generation.  

32. The  current  real  and present  risk  is  not of  a  second  "dash  for  gas" but  rather of  insufficient flexible  generation  to  complement  intermittent  wind  generation,  with  material  security  of supply issues. 

 

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33. In addition, consumers need to be aware that fuel price rises are not necessarily the key driver to their household energy budget increases.  Significant subsidies to renewables and nuclear are likely to have a much greater  impact.    InterGen  is not suggesting that subsidies to renewables are  inappropriate –  rather  that  the public's awareness of electricity price  rises  is growing and that renewable (and in future nuclear) subsidies have a very large impact on energy affordability for households. 

Question 7: How exposed is the UK’s energy security of supply to international events?  34. This is considered in our answer to question 1.  

 Question 8: Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?  35. Overall, InterGen believes that UK energy security  is reasonably robust to the credible range of 

scenarios  with  the  single  exception  of  the  declining  economics  of  unsubsidised  flexible generation, without which there will be significant power outages when wind generation is low.  The  only  solution  which  InterGen  can  see  within  the  constraints  of  the  BETTA  market arrangements  is  to  introduce  a  capacity  payment  targeted  at  existing  and  new  flexible generation.  

 Question 9: Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?  36. Rather  than  the overall  long  term  level of gas  storage,  InterGen believes  that  the Committee 

should consider the short term fluctuations in gas demand as CCGTs meet the increasing swing from wind generation.  It  is  InterGen's view that significant  localised short term storage will be needed to facilitate such swings.  

37. The UK uses a significant amount of gas  for domestic heating and cooking.   To  lower  the UK’s carbon  footprint  and  further  improve  gas  supply  resilience,  consideration  should  be  given  to accelerating the electrification of domestic heating and cooking (e.g. all new houses to use non‐gas heating and cooking fuel).  This would also improve domestic carbon efficiency.  

 

Conclusion  38. InterGen believes that UK energy security is reasonably robust to the credible range of scenarios 

with the single exception of the declining economics of unsubsidised flexible generation, without which there will be significant power outages when wind generation is low.  

39. InterGen believes it to be crucial to security of supply that a capacity mechanism targeting new and existing flexible generation is introduced.  Introducing any different type of mechanism will exacerbate the problem rather than solving it. 

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Memorandum submitted by ExxonMobil (UKES 27) We welcome the opportunity to provide this written response to the Committee’s review of UK Energy Security. ExxonMobil International Limited (ExxonMobil) is responding on behalf of its various UK affiliates: those involved in exploration and production of UKCS oil and gas assets; the owner and operator of Fawley refinery and CHP plant; and ExxonMobil Gas Marketing Europe Limited whose gas marketing activities involve the supply of up to 30% of physical gas sold through the UK wholesale hub. Our response may also reflect views gained through ExxonMobil’s global operations and our experience in exploring, developing, producing and delivering new supplies of natural gas to existing and new demand centres. In the background section we address some perspectives on a range of topics that have a bearing on UK energy security and subsequently augment this with comments made in response to the specific questions that the Committee will be deliberating. Background The Committee’s review of energy security is timely given the Government’s consultation on its Electricity Market Reform proposals, the Committee’s recent review of unconventional gas and its proposed review of a North Sea super grid. 1. Importance of Fiscal Stability It also comes at a time when HM Treasury announced, to the surprise of the oil and gas industry, a 12% increase in the Supplementary Tax applicable to UKCS production, bringing the overall marginal rate of tax on some of our more mature North Sea producing assets to around 81%.

• Fiscal changes such as this seriously undermine investment confidence at any time and the further investments scheduled to both mature, and more technically challenging small fields have been brought back under review; earlier decommissioning of offshore infrastructure may add to the quantities of oil and gas that remain in the ground.

• The UK Government already enjoys the majority of the value of oil produced

under the current fiscal regime. Whilst there is no guarantee prices will remain high the investments involved require many years before value can be returned to shareholders.

2. Refined Oil Product Security There is a question of refined oil product security. Refining continues to be a challenged business in the UK as evidenced with seven of the eight major UK refineries either sold or up for sale, Fawley refinery being the only exception. UK refiners face cost pressures that global competitors do not and we estimate the combined impact of EU and UK legislation/proposed legislation would add about £35M per annum to our downstream operating costs by 2015. In the same way that fiscal instability risks sending investment

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capital elsewhere in the world, the growing downstream regulatory burdens are now forcing refiners to consider relocation of operations outside of the UK. 3. UK Gas and Power Markets The cessation of self-sufficiency in gas should not be viewed as a prompt for dramatic changes to energy policy and the main challenges to any importing nation are to diversify its sources of energy, strengthen its relationships with energy exporting nations, and develop and use its indigenous resources more efficiently. Meeting these challenges effectively will enhance its energy security for many years to come.

• The UK enjoys a gas market framework that has attracted significant investment in the development of a diverse gas import infrastructure, both in the form of pipelines and liquefied natural gas (LNG) terminals. This infrastructure has increased connectivity to supply regions such as Norway and the Netherlands and, with three major LNG import terminals, access to the global LNG market.

Government has an ongoing role to encourage and facilitate major privately funded projects but presently we believe it has to regain investor confidence by providing a stable and predictable fiscal, legislative and regulatory framework.

• The Electricity Market Reform proposals are promoted as the platform for securing the confidence of the investment community to provide very substantial investments required in the power sector. As a package of significant market interventions, we believe it will have a small effect and possibly even a negative impact on the investment decisions that need to be taken today to meet long term future energy demands.

• o Power and gas markets are inter-related through a 30% dependence of

power on gas as a generation fuel and we are urging Government to consider the consequences of EMR on the gas market (as well as the power market) so that its actions can be judged against all of the potential impacts on energy security

• We are urging Government to do all that it can to ensure its energy policy and

measures are non-discriminatory, allowing all fuels to compete on a level playing field, free of the market distortions that arise when subsidies are granted to any particular energy supply type or source.

4. Gas - Global Interdependence; Gas and Power in Europe European and global gas markets are growing in their interdependence and suppliers have an increasing choice of markets in which to invest and deliver their product. Price signals remain an essential aid to assist in this choice. Policy decisions which effectively place constraints on the operation of these market mechanisms or provide trigger points at which intervention may take place are open to a broad range of interpretations by market players risking an inefficient outcome including a reduction in security of supply.

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Consistent implementation of the Gas and Power Directives and Regulations across Europe will facilitate energy security in the UK through timely and efficient redistribution of supplies to demand centres according to unconstrained price signals. 5. UK Import Dependence

Co-dependence of importers and exporters and the nature of international markets are not reasons to fear import dependency. Many of the major interruptions of the UK energy system in the past three decades have arisen from miners’ strikes, domestic fuel blockades, fires in gas storage facilities and occasional power cuts rather than from foreign supply dependence.

6. Diversity and Flexibility ExxonMobil holds the view that the world’s energy needs are such that all potential sources of energy should be pursued and will be needed in the long term, as it is impossible to predict with confidence the specific sources of insecurity in energy systems. Natural gas can improve diversity in the power generation mix and allow Government to maintain a pathway to long term CO2 emissions reduction targets. Whether or not natural gas will make a larger contribution to power output than the approximately 30% it currently contributes depends very much on the success or otherwise of alternative investments that the Government is promoting. This winter (December 2010) the UK experienced an extended period of high pressure with little wind across the UK, widespread snowfall and very low temperatures. We understand that national wind power load factors were well below average for extended periods of time. If this indeed was the case this should be a signal for further work to ensure that energy security can be maintained in the dash to the 34% renewable capacity target.

• Renewable intermittency currently has to be supported by gas generation flexibility and it is important that Government and industry understand if and how this is achievable.

Any circumstances of growth in gas fired generation may be more a case of dash for energy security rather than simply a dash for gas. 7. ExxonMobil Responses to Specific Questions of the Committee Q1 How resilient is the UK energy system to future changes in fossil fuel and uranium prices? • The UK’s energy system can continue to be resilient to future price changes as long

as the UK wholesale energy markets are allowed to provide clear price signals for supply and investment requirements.

• In its EMR consultation Government describes as “vital the work started by Ofgem and National Grid to improve arrangements for the balancing of the system and to

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increase levels of liquidity in the wholesale (power) market. These will provide important benefits to the wider operation of the GB electricity market, including improving signals for investment in new capacity, and therefore security of supply”. We agree that this work is vital but it would be somewhat undermined if the multiple interventions proposed under EMR were to be implemented.

• The UK wholesale gas market is by contrast a liquid, fully functioning market that commands confidence amongst those buying and selling through it and has provided reliable price signals to attract gas supplies and major new investment in gas infrastructure to ensure that the UK’s gas demand continues to be matched.

• January 2010 and December 2010 posted several of the highest gas demand days on record for the UK and despite import dependence of some 50% the UK remained well supplied. The UK gas system could become less resilient to future changes in prices if confidence in the market falls, liquidity levels deteriorate and the reliability of the UK price signal is questioned. The EMR consultation did not consider the extent to which interventions in the power market might have negative consequences for the effective operation of the gas wholesale market; this should be of concern to the Committee as the power generation sector will continue to rely on base load, and increasingly, peak gas supplies for the foreseeable future.

• Ofgem is engaged in a 12 month program with industry participants, exploring the extent to which gas shippers and suppliers might be more efficiently incentivised to provide reliable future supplies of gas and avoid supply emergencies. This is an important program with many interconnected considerations including the safety of network gas operations, but we are encouraged that so far the options are being tested in terms of whether they work with the grain of the market.

Q2 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? • Patterns of energy supply to the UK gas and power networks are shifting and the

uncertainty in future demand for gas and power is probably as high or higher now than it has ever been. These features may well contribute additional risk to UK energy security from either a lack of or delay to investment in infrastructure that turns out to have been required or misdirected investment in areas not required.

• The challenges for network operators and regulators are significant in these circumstances – to minimise risks of inefficient investment or premature abandonment of existing infrastructure.

• The Government’s EMR proposals and Green Deal initiative are programs designed to manage the UK’s energy mix to meet binding CO2 emissions and renewables targets or pathways whilst also making a step change in energy efficiency. The pace of new investment required to achieve these targets is picking up as deadlines approach; dependence on new technology to provide alternate electricity or heat sources, and to reduce usage, is also increasing; significant new transmission investments are required to support the future planned power generation mix. In our view the risk to energy security increases as the pace of change in supply patterns and new technology content increases.

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• Some companies exporting gas to the UK are expressing concern about the deterioration in UK gas demand certainty. To the external investor UK energy demand uncertainty may slow or hamper decisions to invest in increased production for export to the UK although this may be a less significant factor when new supplies are organised to meet global market requirements. Liquidity and the effective functioning of the UK wholesale energy markets will be the significant driver for supplies and investment.

Q3 What impact could increased levels of electrification of the transport and heat sectors have on energy security?

• Electrification of the transport and heat sectors increases demand for power and reduces demand for fossil fuels including natural gas. There may be an overall lowering of fuel and technology diversity involved in this but the real risk to energy security is likely to emerge from delays encountered in transmission and distribution infrastructure upgrades that would be core to the success of such programs.

Q4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

• Government energy efficiency initiatives are to be welcomed and of course these will contribute to improved energy security once the efficiencies are delivered.

o It is important however that Government considers carefully the consequences of producing forward gas demand forecasts that reflect an overly optimistic view of energy efficiency contributions or an unrealistic pace of investment in non fossil fuel power generation.

• ExxonMobil is continually assessing the opportunities for improved energy efficiency in its own operations.

Q5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

• The Government is bound to do everything it reasonably can to comply with its legally binding environmental obligations, but we anticipate that it will continue to address the reasonableness of its plans in terms of the prejudice to energy security and affordability objectives. It may be necessary to make compromises if all three objectives are to be reasonably fulfilled.

• Medium-term GHG emissions and renewables targets are set for achievement by a specific year, 2020. Beyond 2020 carbon budgets continue with average emissions targets to be achieved over five year periods forming a pathway to the 2050 CO2 emissions reduction target of 80%. Whilst we accept that we live in a world of targets, we do believe there is greater risk to achievement of targets for delivery within a tight timescale – the five year approach of the carbon budgets seems to us a rather more practical one.

• As a gas marketer we are concerned on a practical level about whether gas transmission flexibility and flexible gas generation will be available and sufficient to

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deal with gas demand variations of up to 60 mcmd that National Grid1 have indicated will be required should renewables content in power generation approach the target set for 2020.

o Assuming gas will be the flexible generation fuel, we believe Government needs to be sure that sufficient new flexible gas fired generation can be built fast enough to be ready to cope with demand changes of this magnitude.

o From an external supplier relations perspective Government may also need to be ready to acknowledge the day to day volatility in gas prices that may be caused by wind intermittency.

Q6. What would be the implications for energy security of a second dash-for-gas?

• As long as the investments in lower carbon generation are subject to delays and uncertainty it seems Government has little alternative but to consent additional gas fired power in order to plug the gap and keep the lights on. In that sense we believe any dash for gas must actually be viewed as a dash for energy security.

Q7. How exposed is the UK’s energy security of supply to international events?

• A shortage of or export limitation on precious metals imported from China for use in UK wind turbines may be as important an event for the UK power industry as a disruption in gas supply for power generation. Importers and exporters do have a co-dependence and threats to energy security are more nuanced than portrayed in the simple expression of concerns about import dependence.

• Exposure to international events can be mitigated by promoting effective liquid wholesale markets that provide clear price signals to attract supplies, and building strong political dialogue between importing and exporting countries.

Q8 Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

• Difficulties in quantifying energy security are no easier today than they have ever been. But, in our view there are now internally induced threats to the UK’s energy security, exemplified by the proposed multiple market interventions of the EMR consultation.

• We hope Government will proceed cautiously embracing an evolutionary approach to stimulation of low carbon investment in the sector, constantly measuring its actions against potential negative impacts in both gas and power wholesale markets

We trust that this written evidence will be of help to the Committee in its deliberations.

March 2011

1 National Grid Gas 2010 Ten Year Statement

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Memorandum submitted by the Association of Electricity Producers (UKES 28)

About the Association 1. The Association of Electricity Producers (AEP) represents the many different companies, both large and small, that make the electricity upon which the UK depends. Between them, AEP members account for more than 95 per cent of the country’s electricity generation capacity and embrace all generating technologies used commercially in the UK – coal, oil, gas, nuclear power and a range of renewable energy technologies. A list of our members can be found online at www.aepuk.com

2. At the time of receipt of this inquiry members were heavily involved in developing a number of extremely detailed consultation responses including Electricity Market Reform and the Ofgem Significant Code Review of Gas Security of Supply. It is rather difficult to understand the urgency and timing of this inquiry, together with the one launched on the European Supergrid. In debating this inquiry’s terms of reference members came to the conclusion that almost all questions could potentially merit an individual thought piece to capture all of the relevant issues required to provide the fullest response, however, we trust our responses below go some way towards covering the issues highlighted within the terms of reference.

Question 1 How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 3. There is evidence that the market has worked to date to encourage new investment and commodity trading, for example there has been around £10bn infrastructure investment over the last five years. We agree it is reasonable to review where we are, however we feel that this most probably sits with the Electricity Market Reform work being undertaken at this time.

4. The question itself requires some clarification in that the term ‘energy system’ here could mean one of two things. Either the System’s physical security or the insulation of GB customers against global price spikes? In order to provide answers to both of these scenarios it would be prudent to undertake an economic modelling exercise. This is something we would look to Government, individual members or academic institutions to carry out. 5. We know that the UK’s planned and existing fleet of nuclear power stations require supplies of uranium to make the fuel used. We also know that Uranium is widely distributed in the earth’s crust, with plentiful reserves in Australia, Canada and Kazakhstan with other recoverable reserves also found in many other countries. There are other areas worldwide which have good prospects for uranium reserves. This is evident from reference to the reviews published by the International Atomic Energy Agency (IAEA) and the OECD Nuclear Energy Agency, the most recent of which estimated that uranium resources worldwide amount to around 5.4 million

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tonnes, which are economically recoverable at prices up to $130kg. This is sufficient for around 80 years of supply, if estimates are based upon the 2008 rate of usage. 6. There is evidence of an open, competitive and volatile market for uranium oxide (‘yellowcake’) which is the raw material for fuel manufacture with the spot price for yellowcake trading between $105-190/kgU over the last 6 months. However the raw uranium price makes up a very small proportion of the total cost of nuclear generation and this level of volatility will only have a relatively small impact on the cost of nuclear generation. 7. In our view the gas market works well and there is no fundamental need to change it; this is also the view of Poyry in its report to the Gas Forum in October 20101. In recent years there has been substantial investment in gas infrastructure to secure supplies in anticipation of increasing import dependence. We now have around 150 bcm of import capacity2, by pipeline or LNG tanker, against an annual gas demand of 100bcm, although annual demand is projected to fall in the medium term. Whilst having import capability is no guarantee that gas will arrive, it does provide a route to market and the GB market is generally considered to be one of, if not the, most liquid markets in the world. This provides assurance that at times of supply / demand tightness the market can signal its willingness to pay, attract imports and secure supplies for GB customers. Most recently Centrica has announced a longer term LNG contract with Qatar3.

Question 2 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 8. Investment in transmission infrastructure, whether that be wires or pipes, is crucial for security of supply. For generators, wires provide a route to market for their product whilst for gas fired generation, pipes deliver the fuel required. Timely connections and system reinforcement for both electricity and gas are therefore important to our members, whilst recognising the changing generation mix as we move to a low carbon economy. Generators too are progressing investments in new plant with a number of wind farms and CCGTs recently commissioned and a further 5.5 GW gaining consent since the Statutory security of supply report was published in November 20104 which reported that there was 10.8 GW with consent. This demonstrates generator’s timely response to the tightening capacity margin as plant closures under LCPD and IED are anticipated. Again whilst consent does not

                                                            1 http://www.ilexenergy.com/pages/Documents/Reports/Gas/528_GB_Gas_Security_&_Market_Arrangements_v1_0.pdf  2 http://www.nationalgrid.com/NR/rdonlyres/E60C7955‐5495‐4A8A‐8E80‐8BB4002F602F/44779/TenYearStatement2010.pdf  3 http://www.centrica.com/index.asp?pageid=39&newsid=2163  4 http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/resilience/803‐security‐of‐supply‐report.pdf  

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guarantee that these plant will be built, it is a required step along the development process toward a final investment decision. We note however that the current generation-led approach to transmission investment presents a real risk to energy security through introducing additional delay in deployment of resources especially renewables located in the north of the country. This should be viewed as unnecessarily risky given the relatively low cost of transmission capacity relative to the value of lost load.

9. The Association welcomes the Government’s recognition of the issues surrounding investment decisions in the electricity industry and its efforts to address them. Whatever the outcome of the current electricity market reform we would wish to see encouragement of a robust, competitive and liquid wholesale electricity market, which should provide a reliable and credible wholesale price where the investments required to meet the Government’s energy policy objectives are fully rewarded. The transition to the new arrangements must be carefully managed so as to retain investor confidence in the UK, with the transition path being set out in the forthcoming White Paper. Existing investments must be protected and the Government should consider carefully the potential unintended consequences of the proposed reforms on these projects and on all types of participant in the market. We urge HMG to seek early engagement with EU legislators to identify and resolve any conflicts between each element of the EMR proposals and EU legislation or policy. Regulatory certainty is paramount.

10. Clearly the baseline investment plans and uncertainty mechanisms that form part of National Grid’s electricity and gas transmission price control will have a key role in enabling these plants to connect to the networks.

Question 3 What impact could increased levels of electrification of the transport and heat sectors have on energy security?

11. Increased levels of electrification in areas not previously electrified will impact demand patterns and may put pressure on energy security and capacity. However, such a move could be good for UK energy security by increasing overall energy diversity given that the primary energy used to generate electricity comes from a substantially greater variety of fuels and sources than primary energy currently supplying the energy needs of the transport and heat sectors. However the signal to invest in generation capacity, both to replace older generation capacity that is forecast to decommission and to meet new demand is weak at present. If there is an expectation that increased levels of electricity usage can help manage energy security it is essential that the risks associated with this should be borne by society rather than the generation industry.

12. It is also important that current disincentives for electrification, such as the lack of a carbon price signal on use of gas for heating, are resolved as soon as possible. At present these differences between the treatment of electricity and gas will cause significant lock-in of non-electric heat.

13. The Government’s 2050 Pathways Analysis forecasts that electricity demand could double from today’s levels by 2050 to provide additional demand for the

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increased electrification of heat and transport[2]. We note that it is expected that much needed decarbonisation of the heat and transport sectors which are currently extremely reliant on fossil fuels, will be achieved by utilising low carbon electricity. Early consideration must be undertaken regarding the appropriate electricity infrastructure systems over the next two decades together with continued investigation into the impacts of increased levels of electrification of the transport and heat sectors on energy security should be undertaken within the ongoing 2050 Pathways exercise. This work also needs to critically examine the concept and application of Demand Side Management, the role of Distributed Generation and increasingly the move towards a Smart Grid, so that any infrastructure investment is properly optimised when these additional significant new large domestic electrical loads are increasingly supplied by intermittent or must run generation sources.

Question 4 to what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

14. Members acknowledge much activity surrounding the delivery of efficiency programs however would be concerned if Government were to rely on headroom created by energy efficiency to assist with long term UK security of supply. Again it is important that the risk posed by energy security is not borne by the generation industry.

Question 5 What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

15. The intermittency of certain types of renewable generation will be an issue, in particular contractual arrangements or physical assets will be required to provide back-up generation. Both gas and electricity networks will need to be managed more dynamically to ensure continuity of supplies. However the increased penetration of intermittent renewables in the generation mix will not happen in one step rather it will evolve over time and potentially in parallel with other developments including smart grids, increased interconnection with Europe and further demand side response. This will allow time for developing a greater understanding and experience of system operation with a growing percentage of intermittent generation and allow for a full evaluation of any system investment needs to help manage the changing dynamics of supply and demand on both the electricity and gas networks. We would expect the uncertainty mechanisms that form part of the price control to have a role here in supporting any such investment should it become necessary during the price control period.

16. Demand side response is not limited to the electricity market it may have an important role to play in gas too. The current significant code review looking at gas security of supply is considering the role of demand side response in averting an emergency. The gas fired generation fleet and large industrial customers could provide significant demand side response once an emergency was imminent and may be a cost effective option.

                                                            [2] HM Government, 2050 Pathways Analysis, July 2010

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17. Several types of electricity generation assets, such as pumped-storage hydro, can assist with energy security. These assets, which have long lead times and high commercial risks, could not be constructed quickly without some form of underwriting from society. Question 6 what would be the implications for energy security of a second dash-for-gas? 18. A second dash for gas could result in growing annual gas demand if increases were not offset by efficiency measures or increased renewable generation. Subject to biomethane and shale gas developments this may lead to increased import dependency but as stated above the UK already has substantial import capability via pipeline or LNG tanker and further LNG import facilities may be built. LNG may be sourced from the Middle East, Africa, the Caribbean, North America, Norway etc and this diversity of supply sources provides a range of options for bringing LNG to the UK. Whilst relying heavily on a single commodity (within the fuel market) would expose the UK to extreme price shocks and security of supply uncertainty, encouraging diversified investment in cost effective flexible renewable and low-carbon options, such as co-fired biomass, dedicated biomass, and CCS, would help to mitigate the fuel demand price risk. When coupled with pipeline supplies from Norway, which has substantial reserves, in addition to indigenous supplies, our own storage capability and interconnectors to European markets, the UK has a well diversified supply mix which provides assurances over security of supply. However this does also underline the importance of liberalisation of European markets and full implementation of the 3rd package. 19. In planning power station developments companies will make a judgement about being able to obtain fuel, without which their investment would fail. For its part, the Government would have to judge the impact of that production on its target for carbon emissions.

Question 7 How exposed is the UK’s energy security of supply to international events?

20. The UK is exposed to international events whilst importing fuels, as the recent crisis in Japan has demonstrated, with gas and coal prices rising to pre-recession levels. However this is an inevitable consequence of global trade in these commodities and a sign of these markets working effectively. Japan is reliant on imports for virtually all its primary energy needs but has a diverse generation mix with nuclear and gas each accounting for about 25% of its generation with coal and oil together about 40%5. Whilst the loss of nuclear capability is clearly very significant its impact in Japan will be less than if it had been a larger fraction of electricity generating capacity. The impact on the UK will be higher gas and coal prices and consequently electricity prices too, for a period of time. Japan has a gas market of a similar size to that of the UK and is the worlds largest importer of LNG accounting for around a third of all trade and this will give it the capability to increase

                                                            5 http://www.fepc.or.jp/english/energy_electricity/optimal_combination/sw_index_02/index.html  

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LNG imports, to help meet the nuclear generation shortfall, clearly supporting diversified generation mix.

21. The UK should not be afraid of being dependent on imports, but will have to recognise prices will be driven by international events rather than only domestic supply and demand.

Question 8 Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

22. We can never achieve 100% security irrespective of money spent. The big question is around what an acceptable level of supply security is and how we ensure that we have all relevant enablers in place to deliver the required appropriate level. Government and industry needs to be sure that the arrangements around planning and consenting are robust, certain and efficient. Whilst regulatory certainty must be a given. It takes a long time and lot of money to get a project from the drawing board to production, if we can minimise some of the uncertainties along the way this should help. The delivery of System resilience should assist in protecting consumers.

23. Government could undertake some form of multi client study to ascertain individual company responses, however must be aware of the commercially sensitive nature of some of the questions it would need to ask. Work could also be linked to Project Discovery modelling.

Question 9 Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

24. Security of Supply enhancements can only be delivered at cost to consumers. However the more secure a system design then the higher the cost. We note that we have never had a gas or electricity emergency under the present arrangements.

25. If you have any enquiries regarding this response please feel free to contact Barbara Vest, Head of Electricity Trading on 07736 107 020. March 2011 

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Memorandum submitted by ESTA (UKES 29) ESTA Energy Services and Technology Association ESTA is the UK Industry Body representing suppliers of products, systems and services for Energy Management. The 120 members cover Energy Consultants, meter, AMR and controls manufacturers through to full Energy Services/Contract Energy Management. ESTA is engaged with UK Government policies on Energy and Climate Change, The Green Deal, Energy Performance of Building Directive, Part L Building Regulations, Display Energy Certificates, Carbon Reduction Commitment, Energy Services Directive and the roll-out of smart and advanced meters. It also provides UK input to developing international energy management standards and Chairs several BSI committees. ESTA members are key to the realisation of a low carbon, secure and affordable energy future. Our members provide equipment, systems and services for energy management to reduce energy demand at source and including renewables. Our response is a majority consensus of the members involved. Where ESTA members respond directly, they may offer differing opinions on some issues which we respect as expressing their own definitive view. Key points:-

♦ ESTA welcomes the inquiry into the UK’s Energy Supply and the opportunity to respond to a call for written evidence.

♦ ESTA encourages Government to include demand-side organisations/participants on a continual basis to provide input into market inquiries.

♦ It is ESTA’s view that demand-side energy efficiency and management measures impacts significantly on energy security. Reduced consumption through efficiency measures reduces the need for generation to provide the same, and more securely. In addition to the benefits of less consumption, there are no associated outage issues as there is no plant needed for that saved capacity, there is no network reinforcement investment required and there is no impact of global events for that capacity which has been reduced.

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The UK’s Energy Supply: security or independence? How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 1.1 The UK has a diverse supply mix and so is better placed than most countries to weather the affects of a particular fuel spike or shortage. The UK's gas system has several delivery options and going forward should provide the underlying security required until successful CCS has been delivered. How sensitive is the UK's energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 2.1 Infrastructure investment to allow for micro, macro and community generation projects is a must to assist with localised capacity constraints with current estimated demand increases. Demand-side projects require adequate investment channels and drivers to provide a more fragmented generation source which will reduce security of supply concerns. 2.2 Localised projects negate to some degree geographic weather patterns that would affect larger single installations. Although large projects are still a requirement to meet the targets set out, the need for a smart grid to cope with this new wave of thinking will provide additional resilience and must not be underestimated in future energy policy when considering returns on investment and capacity from grid infrastructure investment. 2.3 Electricity storage is an area that requires significant investment in R&D. With increased renewable generation, pumped water storage is not a 21st Century solution to 21st Century technology. Storage, particularly capacitative storage is required if smart grids are going to realise their potential and so we would recommend a greater political interest is taken in funding and investment for storage technologies from a security of supply point of view. 2.4 Demand side projects and storage will provide a more secure and robust electricity supply as an estimated increase in consumption, specifically in electric transport will add to localisation capacity issues. What impact could increased levels of electrification of the transport system and heat sectors have on energy security? 3.1 Electrification of the transport system could over the next decade impact on localised capacity; how capacity is controlled at a domestic level therefore is an important issue. Smart meters and revised tariff structures will help in alleviating capacity constraints. In tight areas overnight charging of cars for example could see a

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premium tariff being sought with a postcode lottery in terms of grid infrastructure. Otherwise, reduced capacity similar to broadband could be an option to reduce localised blackouts should an area exceed the capacity it was designed for. 3.2 This situation highlights the need for localised capacity grid reinforcement to cope with the currently expected doubling of demand anticipated up to 2050. Lessons should be learned from the roll out of broadband in the telecoms industry so that best practice procedures should be undertaken. To what extent does the UK's future energy security rely on the success of energy efficiency schemes? 4.1 Demand side energy efficiency schemes must be taken ever more seriously when talking about energy security and the UK's future energy scenario. Currently, there is not enough clarity as to how all the demand side initiatives will be taken up by participants and the estimated role that will play in our future energy outlook. 4.2 Particular concern surrounds the transition from reputational drivers to reduce carbon to the pure economics of energy efficiency measures as the grid continues on its path to decarbonisation. 4.3 Energy efficiency measures even with the forecast for consumption increasing will assist in prolonging grid infrastructure reinforcements and equate to several generating plant. Similar investment in efficiency measures on the demand side as opposed to supply side reforms would effectively add to and support renewables targets. 4.4 In pure security of supply terms, robust demand side energy efficiency measures in both domestic and the commercial sector could reduce current consumption by up to 30%. This reduction which would be fragmented across the grid would equate to a number of 'waiting to be built' power stations. The measures would not be prone to outages for maintenance or incident, would increase localised capacity and reduce stress on the system. In short, demand side energy efficiency measures although not a silver bullet, increases security of supply. 4.5 It is also important for energy management to be seen as a key contributing factor and one which is not encouraged on a wide enough scale across either commercial or domestic properties. Behavioural change is at the far end of the energy security chain but impacts in its own unique way. Without this education at grass roots level, no amount of efficiency measures can compensate for poor use. Expected of course at a domestic level but also is evident throughout both public and private sector organisations. 4.6 Energy security policy must not place demand side efficiency measures as the poor relation and should encourage adequate support to demand side initiatives as it does to supply side initiatives.

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What will be the impact on energy security of trying to meet the UK's targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 5.1 The decommissioning of fossil fuel plant without the necessary renewables and demand side measures in place to support it will have an impact on energy security in the short term. The generation gap envisaged mid-decade is still a possibility. And with full legislation for energy initiatives taking another 18 months to completely roll out, demand side participants are holding off on investment until government legislation is finalised. Taking the CRC as an example which has changed from its initial Carbon Reduction Commitment to CRC Energy Efficiency Scheme with no recycling payment shows the issues being faced. 5.2 Energy prices are currently at a level where efficiency measures make financial sense, however the price of carbon needs to be at a more realistic figure to encourage similar investment in renewable technologies which maybe the Electricity Market Reform alongside the HM Treasury consultation into the carbon price can put in place. Again however the lion's share of the work involved will need to take place in the second half of this decade, putting pressure on the industry to deliver end of decade emissions targets. However a higher carbon price puts pressure on gas fired generation as well as coal which needs to be carefully balanced. Gas plays an important role in the UK's energy security and shouldn't be sidelined in order to reach targets which can be obtained with its inclusion. What would be the implications for energy security of a second dash-for-gas? 6.1 The UK is perhaps better placed than most countries in terms of gas supply. Apart from our own reserves, stable supplies are brought in from Norway and LNG from Qatar provides a further supply avenue. Further supplies can also be considered from biomethane resources and other renewable projects. 6.2 In addition, the UK has perhaps one of the best implemented networks with the majority of homeowners having access to gas. 6.3 To increase security in this area demand side efficiency measures again could impact significantly, to the degree that if a second dash for gas was to take place it would be unlikely to have significant effect. The 3rd energy package is reinforcing cross-border cooperation of member states and so gas security in terms of supply can only increase in that regard. How exposed is the UK's energy security of supply to international events? 7.1 With the UK being a net importer of gas, concern is raised over price particularly with LNG. However, efficiency measures would help to reduce the UK's exposure.

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Is the UK's energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all the above areas? If not, how could this be improved? 8.1 A greater understanding of the role demand side measures and efficiency schemes will have in future security needs is recommended. How demand side measures can relieve pressure on supply side objectives can assist in lengthening investment programmes. March 2011

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Memorandum submitted by the UK Petroleum Industry Association (UKES 30)

 The UK Petroleum Industry Association (UKPIA) represents the oil refining and marketing interests of the nine main downstream oil companies in the UK. Our member companies operate all the major crude oil refineries, supply one‐third of primary UK energy demand and ~85% of the transport fuels and other oil related products used in the UK.   As such, we have a major interest in the topic of security of energy supply and welcome the opportunity to respond to the Committee’s consultation on this important issue.  Our responses to the Committee’s Inquiry are confined mainly to those questions or areas where we have specific knowledge or expertise, namely the wide range of fuels and feedstocks derived from the refining of petroleum.  Background context UK operating refinery capacity is ~1.7million barrels of crude oil per day ( ~12% of the EU). Oil currently accounts for ~37% of all the UK‘s energy needs and UKPIA member companies  supply around 85% of transport fuels used in the UK.  One UK refinery closed in 2009 and currently 4 of the 8 operational refineries are for sale, with announcements in the last weeks of agreed terms, subject to completion, for two of them.   The main markets in the UK are: Retail (forecourt service stations): ~ 29 million tonnes per year of petrol and diesel Aviation: ~12 million tonnes per year jet kerosene Commercial: ~18 million tonnes per year (Commercial vehicles, Heating fuels & Marine) Speciality (Bitumen, Lubricants, LPG, Solvents and Coke etc): ~5 million tonnes per year Petrochemicals: ~2 million tonnes per year  UKPIA members also:  

• Invested £3bn in fixed assets over the last 5 years, much of it to meet tighter fuel and environmental standards and to enhance process safety.  

• Operate 36 distribution terminals & 1500 miles of pipeline • Own 2,230 out of the 8,921 filling stations in the UK • and support the employment of ~150,000 people across the UK either directly or 

indirectly.   The value of refining to the UK economy is estimated at £200bn+ and each large refinery is estimated to inject ~£60m+ into the local economy where it is located.   The downstream oil sector collected ~£33bn in duty and VAT on fuels in the last financial year.    Summary  UKPIA’s views can be summarised as follows:  

1. Oil products will continue to be an important part of the future fuel mix. The oil industry believes that due to their low cost, on‐going availability, and ease of use 

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petrol and diesel will remain the dominant road transport fuels globally to 2035 and beyond, a view that is shared by the International Energy Agency (New Policies Scenario) and others in their forecasts of future energy use. However, a range of alternative fuels, including initially first generation biofuels, will have an increasing role to play in what is likely to become a more diverse energy mix aimed at meeting carbon reduction and other environmental targets. The oil refining industry will also play an important role in facilitating the introduction of these alternatives as part of the oil industry’s investment in low carbon infrastructure to complement fossil fuels. However, some of these alternatives, especially advanced biofuels, are likely to take time to develop fully for commercial scale production so are unlikely to make a significant contribution until at least 2020. 

   It is important that policymakers bear in mind the importance of oil in making this   transition to a lower carbon future. In some transport sectors, due to technical and   other reasons, this change is not going to happen overnight. For some industrial   sectors oil feedstocks may be impossible to substitute. Even under the most   promising scenarios, it will take decades for alternatives to reach the affordability,   reliability and scale of fossil fuels. The thrust of recent policy and indications of   future direction largely ignores the important role oil will continue to play beyond   2020. 

 2. Energy security and diversity of supply should be part of overall policy, consistently 

applied .Meeting the UK’s future energy needs in a secure, diverse and sustainable way that also meets environmental and air quality objectives, is a huge challenge. It requires policy that is closely aligned in these key areas. UKPIA believes that energy and environmental policy should continue to be based on maintaining a reliable UK energy system meeting all three pillars of sustainability ‐ economic, environmental and social – with clear targets underpinned by a framework for their achievement. Policy objectives should not be dominated by any one of these pillars, should also avoid ‘picking winners’ and be applied in the UK on a basis that is consistent with the relevant EU Directives and avoids ‘gold plating’. Sound science should also be a cornerstone of this policy to ensure goals are met cost effectively and with sufficient flexibility to take account of developments in technology/scientific knowledge so that unintended consequences are avoided.  

   UK refining and the associated storage/distribution infrastructure will need   investment in order to meet the UK’s changing energy needs in the coming decades.   Competition for investment funds is global and the oil industry works to long‐term   time scales, given the size and complexity of major projects. Confidence in future   policy direction and stability in the way it is applied is essential to attract future   investment.    In shaping its energy policy, the Government must recognise the crucial importance   of a healthy UK refining sector and define its policies to help deliver the desired   outcome. Clearly market and commercial considerations are important influences   but if Government wants a strong domestic refining industry in the UK, then   energy and other policies must not place it at a commercial disadvantage  compared to its overseas competitors. 

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  The right policy conditions will assist UK refining in continuing to be an important   element contributing to the UK’s energy supply security and resilience. 

 3. Oil refining sector and its contribution to security of supply. The UK derives   

significant benefits from having a competitive domestic refining industry that substantially enhances supply security and resilience. However, although greater reliance upon imports is a feasible solution to meeting the UK’ s changing fuel needs, the international crude oil market is far larger than that for refined products so a domestic industry potentially enables a rapid domestic response in an emergency. However, refinery closures in Europe may in future reduce the fluidity in the NW Europe refined products market as the supply chain lengthens with greater reliance upon middle distillate (diesel, gas oil, jet fuel) supply from outside Europe.  

     The number of UK refineries has declined from eighteen in the late 1970s to eight   currently, in response to changing market conditions and demand. The UK has the   fourth highest refining capacity in the EU and until 2009 had nine  major operational   oil refineries. One closed at the end of 2009 and has become an import terminal.   Four of the remaining eight refineries are for sale, with buyers recently announced   for two of them‐ Valero for Pembroke refinery and Essar Energy for Stanlow. 

196,650INEOSGrangemouth

317,000ExxonMobilFawley

190,000ConocoPhillipsKillingholme (Humber)

Capacity (bpcd)OwnerMain Fuel Refineries

163,400PetroplusCoryton

218,000TotalLindsey

111,000PetroplusTeesside1

267,000ShellStanlow

209,000ChevronTexacoPembroke

102,600MurcoMilford Haven

Ineos

Petroplus1

ConocoPhillipsTotal

Shell

Petroplus

ExxonMobil

Murco

Chevron8 refineries ~ 1.8 mb/d, ~ 12.5% of EU

Note 1: Teesside closed end 2009

     The UK refining industry recognises the inevitable challenges associated with the   transition to a lower carbon economy. However, this coincides with a period when   the sector is also experiencing difficult commercial conditions and many other   challenges, as outlined in 4 below.  

  A combination of all these factors may result in further closures; once a refinery   closes it is rare for it to re‐open.  

 4. UK refining faces challenging conditions. UK refining faces many challenges. These 

partly stem from difficult market conditions (weak demand, low return on capital employed), competition from new export orientated refineries in Asia and a 

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depressed outlook for refining margins to 2020 (energy analysts Wood Mackenzie report).However, there are also mounting costs associated with meeting tougher EU/UK legislative requirements (EU Emissions Trading Scheme, EU Renewable Energy and Fuels Quality Directives, EU Industrial Emissions Directive which together will impose a £1 billion plus burden on the UK refining industry) that do not apply to non‐EU refineries, and UK only policies on climate change (e.g. CRC Energy Efficiency Scheme, Carbon Floor Price etc) that may penalise UK refining versus its EU and global competitors.  

  The refining sector also faces a growing imbalance in petrol and diesel   supply/demand. The effect of fiscal policy and the better fuel efficiency of diesel   vehicles have increased diesel demand in the UK by ~38% since 1998. Petrol   demand has been in steady decline since the peak reached in 1990 and the surplus   is exported, much of it to the USA. The same trend is apparent in the rest of the   EU.   Addressing this imbalance is a growing challenge for UK refineries; solutions   include substantial investment (£500 million+ per refinery) to equip refineries with   upgrading units to produce more diesel or alternatively greater reliance upon   imports. There are also consequences for air quality and for refinery emissions in   meeting this additional diesel demand ‐ more energy intensive refining processes   to upgrade heavier residues into diesel with associated increases in CO2 and   other emissions.     Increasingly, EU/UK refineries are facing competition from new large –scale   refineries in Asia designed to maximise the output of diesel, aviation fuel and   kerosene with a low proportion of heavier residue products such as fuel oil for   marine use. These refineries in the shorter term have a significant export  capability and crucially do not face the same burden of legislative cost as UK   refineries.     Responses to Questions posed by the Committee:  

1.  How resilient is the UK energy system to future changes in fossil fuel and uranium   prices? 

  1.1   Provided UK government policy recognises the value of UK refining, the ability of the   industry to process crude oil from over 120 global sources will ensure the nation’s   ability to mitigate against energy supply tensions – without indigenous refining   capacity the nation is at ‘the end of the chain’ in terms of finished fuel products. In   common with most developed economies, the UK is heavily dependent upon oil‐   30% of UK primary energy demand and ~95% of road transport demand comes   from oil. Oil derived feedstocks are also vital for many industrial processes   such as manufacture of petrochemicals.   1.2   The era of comparatively cheap energy is over and the challenge of meeting future   energy demand is well illustrated in the International Energy Agency’s World   Economic Outlook 2010. By 2035, the IEA’s ‘New Policies Scenario’ estimates that   global primary energy demand is likely to be about  36% per cent higher than in   2008. Most of this additional demand will be driven by population growth,  

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  higher living standards and expanding non‐OECD economies, particularly those of   China,  India, the Middle East, Asia and Latin America.   1.3   Measures to improve energy efficiency and diversify the UK’s energy mix may   reduce the UK’s exposure to fossil fuel price increases but the alternatives are not   necessarily cheaper or less volatile. Indeed, with the EU and many OECD countries   pursuing similar alternative fuel policies, similar demand driven cost pressures affect   these feedstocks.   1.4   The UK economy has in the past had to face several oil price shocks, starting in the   early 1970’s. Generally the impact has been to suppress economic activity but over   time industry and consumers have adjusted. The impact of these events   has varied   across sectors but at the macro level, the UK benefited during the period  when it   was a net exporter of crude oil from the North Sea.  However, oil is a significant   element of transport costs, so in the short term this also feeds into domestic   inflation.       1.5   In recent years the UK economy has become less energy intense due to a shift   away from heavy industry, overall energy consumption having increased by 7%   between 1990 and 2009 (Source: DECC, DUKES data). Since 2004, oil prices   have been on an upward trend, despite the post 2008 peak adjustments and   recessionary impact, which was reflected in overall energy consumption in 2009   falling by 10% in comparison with 2004.   1.6   Within the transport sector, road fuel demand has increased by close to 50% since   1973 with much of this increase pre 1990. Since 1990, road fuel demand has   increased by 7% but registered a decline in 2008 vs. 2009 in response to a   combination of recession, higher oil prices and duty increases.   1.7 

  The path to greater resilience will lie in the UK having a robust and diverse mix of   energy sources, in which oil is likely to play an important part, allied to increased   efforts to improve energy efficiency across all sectors. This will most likely entail a   mixture of domestic as well as imported sources. 

  1.8   The challenge is to ensure that in the coming decades the UK continues to have   access to affordable, secure supplies of the required oil products as both sources of   crude oil and consumer demand change. In this respect UK refining can have an   important role. If investment is not made in UK refineries to keep up with changing   consumer demand, the UK can import products in deficit and export products in   surplus. However, a growing dependence on imports/exports could result in: 

• reduced security of supply as imported products may be less immediately available in times of emergency or crisis 

• pressure on the profitability of UK refineries which in future periods of poor refining margins may lead to further UK refinery closures 

• the added value of UK refining being captured in part by overseas  • refineries the UK balance of payments being adversely affected  

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2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 

     2.1   The UK’s energy security is extremely sensitive to attracting inward investment   into its refining sector. As stated in 1.1 above, a healthy indigenous refining sector   has the reach and versatility to provide finished fuel products, provided   government policy recognises the importance this vital industry. Currently the   domestic UK oil refining industry, with its good links to other European refiners,   access to North Sea crude oil (from both the UK and Norwegian sectors) and   other crude oil sources, provides the UK with a secure, reliable and economic   source of transport fuels and other petroleum products. As supplies of crude oil   from the North Sea decline, the UK’s security of supply for oil products can be   maintained by a strong and healthy refining sector, able to process a range of   crude oils from diverse sources, domestic or overseas.   

     2.2   The market for refined petroleum products is global by nature, and although   domestic production of key fuels gives added flexibility in the event of external   disruptions or emergencies, in recent years the growing deficit in middle distillate   products‐ diesel and aviation fuel‐ has resulted in an increased level of imports. By   2020, the import requirements for diesel and jet fuel are likely to double (increasing   to 7 million tonnes per year from the current 3.5million for diesel and from 5 million   tonnes to 9 million tonnes for jet fuel. Source: Wood Mackenzie study for DECC). If   the UK were to lose 25% of its capacity because of refinery closures, it is likely   that imports of each of these products could increase to ~ 11 million tonnes   per   year. 

2.3   The capacity and efficiency of the country’s refining and distribution infrastructure   has been a significant factor in helping to deliver the benefits of a secure and   flexible system responsive to the needs of consumers. The industry has made   significant investment to develop and maintain this infrastructure but in the last  two   decades much of it has been geared to meeting tighter operational, safety and   environmental standards as well as production of cleaner fuels.    2.4   This investment has not increased refinery output significantly or improved the   profitability of UK oil refineries. Major refinery projects take five years or more to   plan, build and commission which exposes companies to the risk that future return   on capital may not cover the investment costs.  Combined with uncertainty over  the   future policy framework and the cost of meeting legislation, this may lead to   investment being delayed or permanently shelved, as importing products rather   than building new processing equipment may be a more attractive option.    The investment strategies of integrated oil companies may also mean that internal   competition for investment funds globally is strong, with investment being   channelled to those projects in exploration and production or overseas   downstream projects that produce higher returns than those in UK refining.   2.5 

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  These structural changes and challenges, and the likely increase to 90 days in the   UK’s Compulsory Oil Stocking Obligation under IEA/EU rules in the coming decade as   UK North Sea oil declines, will require further investment in refining and storage   infrastructure.   This will involve increasing UK strategic storage capacity by over 50% in the next 10   years or more, at a cost of £3 ‐ £4 billion. Our government is fairly unique amongst   its EU partners in placing the nation’s strategic oil stocks burden on the UK refining   and importing companies. Most other Member States have recognised the ‘national’   aspect of these stocks and manage the issue through an agency.    UKPIA  and its members urge the Government to take the opportunity to reform   the current stockholding system to establish an independent stockholding entity   to address now the long‐term challenges of security of supply that will be faced in   the coming years as North Sea oil decline increases the UK’s stocking   requirements.    

3.  What impact could increased levels of electrification of the transport and heat   sectors have on energy security?   The main area of interest for UKPIA is electric vehicles for road transport. 

   

 

  3.1 

Electric vehicles fall broadly into two main categories; full electric (BEV) and plug‐in   hybrid  (BHEV) that work in conjunction with an internal combustion engine. The   advantage of a battery electric vehicle is that it has zero tailpipe emissions   compared with a vehicle powered by an internal combustion engine using fossil   fuel. This brings benefits for local air quality as well as reducing noise pollution. For   these reasons and to reduce fossil fuel dependence, government   policy in the UK   is aimed at fostering the uptake of electric vehicles.  

  3.2   The zero emissions, however, are only at the point of use; in order to charge the   battery, electric power is required that in turn will have generated CO2 emissions   at a power station unless the source is wholly renewable or zero carbon. The use   of well to wheels studies is therefore essential to give a fair comparison between   options with different patterns of emissions from use and production.   3.3   The main technical challenges with current battery technology are performance,   payload, range, cost and battery life, linked to the trade off between the battery   energy density (driving range) and power density (charging/discharge rate).   BHEVs are an   interim step to overcoming some of the performance/range   problems until such time as a step‐change from current leading lithium‐ion battery   technology to the next generation advanced lithium‐ion batteries is achieved.   3.4   For these reasons, and barring a major breakthrough in energy storage, it seems   unlikely that BEVs will form a significant part of the road vehicle fleet within the next   15 years but in the meantime on‐going research and wider availability of  BHEVs will   move technology forward. In the interim, there is a real danger that policymakers   will look optimistically towards a BEV future and enact policies harmful to fossil fuel 

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  production. Refineries do not reopen once closed – when they’re gone, they’re   gone.   3.5    However, there are major implications for power generation and grid   distribution to facilitate the move to more electric vehicles. The Climate Change   Committee’s recommendation to largely decarbonise electricity power generation   by 2030 is central to this but achieving it presents major challenges technically and   environmentally, as well as gaining consumer acceptance. Power generation from a   low carbon or CCS source will be crucial to meeting carbon emission targets so the    proportion of  renewable, nuclear, gas or coal fired will influence the security of   energy supply of each energy source. Aside from raw materials used in the primary   energy source, there are also security of supply issues affecting many of the raw   materials that go into components used in these generation processes. 

 4.   To what extent does the UK’s future energy security rely on the success of energy   efficiency schemes? 

  4.1 

  In this context we refer to schemes aimed at cutting energy consumption rather   than encouraging energy from renewable sources. Improved energy efficiency in the   short to medium term is one area where there should be added focus, as  energy saved   immediately has a major impact upon both carbon emissions and  security of supply. However, this appears to be an area where comparatively slow   progress is being made, although DECC estimate that domestic energy   consumption might be twice   the current level vs. 1970 if efficiency improvements   had not been made. For the industrial sector consumption has fallen 31% 2009 vs.   1990 (DECC, DUKES data) but much of this may be attributable to structural  changes in the UK economy relating   to domestic manufacturing being substituted   by imported goods/components.   4.2   For domestic consumers there are numerous measures to incentivise   householders to save energy – for example Warm Front and the Carbon Emission   Reduction Target requiring energy providers to take action to help consumers   reduce consumption. Generally, the UK still lags many other EU countries in the level   of energy efficiency of our dwellings. High cost of energy is a major influence   upon behaviour and an incentive to reduce consumption but has major   implications for fuel poverty. For industries exposed to carbon leakage, it has   significant implications for competitiveness.   4.3   The oil refining sector has improved energy efficiency in recent years through the   adoption of Combined Heat & Power systems for refinery process operations. It is   also subject to the EU Emissions Trading Scheme and the CRC Energy Efficiency   Scheme (CRC).   4.4   CRC is a mandatory UK scheme designed to encourage energy efficiency by large   non‐industrial public & private sector energy users through a system of a CO2   emissions cap and allowances with auctioning. The scheme is complex and   administratively burdensome.   4.5 

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  The cost of the Scheme to UKPIA member companies increases by over £12m+/year   and there are concerns about consistency of treatment of refinery CHP plant.  The   impact varies by company, but is dominated by cost increases incurred by refineries,   due to  the need to purchase allowances for self‐supplied electricity.   4.6 

  Following the Comprehensive Spending Review, auctioning revenues go to HM   Treasury; the scheme is now looking like a burdensome additional tax that does   little to encourage energy efficiency beyond what prudent businesses do already   and indeed potentially penalises CHP which is designed to use energy more   efficiently with benefits for security of energy supply. 

5.   What will be the impact on energy security of trying to meet the UK’s targets for   greenhouse gas emissions reductions as well as increased penetration of   renewables in the energy sector? 

  5.1      The use of renewables can have unintended consequences. The Renewable Heat   Incentive levy as originally planned would have been applied to fossil fuel derived    co‐process heat used in refinery production, the effect of which would have been to   potentially wipe out the gross margin made by refineries. Although the RHI is now to   be funded from general taxation, for much of 2010 there was complete uncertainty   about the impact upon refining for a scheme that was due to commence in April   2011.    5.2   The use of biofuels in road fuels is one of the measures to reduce  carbon emissions.   It should be noted that UKPIA members have a wide spectrum of views on the   extent to which biofuels will contribute to diversity in the supply of UK liquid fuels.   Some members believe that biofuels have a positive role in diversifying the UK’s   liquid fuel mix and thus contributing positively to security of supply. Others take the   view that their use tends to complicate the supply chain both in terms of the   reliable supply of quality assured biofuels and operational requirements:  segregated   blending of ethanol at road tanker loading   points (not at refinery); extra   housekeeping associated with storing biodiesel blends; careful batching of   biodiesel blends in pipelines; risk of FAME in jet fuel. With EU countries pursuing the   same biofuel targets there is a shortage of vegetable oil even before non‐ transport sector requirements come into effect. Most of the biofuel   components are imported from non‐EU sources and in the shorter term until issues   of sustainability and indirect land use change are resolved, the benefit to security of   supply diversity is unclear.   5.3   The Renewable Energy Directive and Fuel Quality Directive currently being   transposed in to UK law require refiners to reach 10% by energy biofuel content in   transport fuels (RED) and reduce carbon content by 6% by 2020 (FQD).   5.4 The targets for both the RED & FQD trajectories towards 2020 must be set at   levels that are both practicable and achievable in the market. They should be   consistent with the capabilities of vehicles, forecourts and existing distribution   infrastructure. Also full trading of Carbon and Energy certificates should be allowed   with buyout options and also the flexibility to carry over certificates from one 

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  obligation year to the next. The Directives also need to take serious note of the   sustainability issues around biofuels and UKPIA’s longstanding position that the   most effective use of biomass is in replacing inefficient power and heat generation.   5.5.    An impracticable target will restrict supply of fuel to the UK market (refiners unable   to meet the target so cannot supply) with the potential for supply shortages.   Targets should be no higher than other EU states to allow fuels to be   transported across member states and therefore increasing availabilities of fuels   suitable for the UK market.   5.6   Achieving the 2020 targets may require 4 grades of fuel on larger forecourts (from   2015>) with 2 high bio blends of a least for petrol E10+ and diesel B10+. Smaller   filling stations may be disadvantaged as they can only accommodate ‘protection   grades’ E5 and B7. It is vital therefore that there is flexibility in the way in which the   Renewable Energy Directive is transposed into UK law in order not to increase the    risk of further closures of rural/small filling stations unable to meet these   requirements. This will affect supply resilience particularly in those rural areas   where sites already face considerable commercial pressures.  

6.   What would be the implications for energy security of a second dash‐for‐gas? 

  We have no comment on this question as it is outside UKPIA’s remit. 

7.   How exposed is the UK’s energy security of supply to international events? 

  This question is largely addressed in response to 1 & 2 above but also see 9 below.      

8.   Is the UK’s energy security policy sufficiently robust to be able to deal with   uncertainties and risks inherent in all of the above areas? If not, how could this be   improved? 

  As stated previously, UKPIA’s firm view is that a strong and healthy indigenous   refining sector ensures the nation’s ‘base load’ of transport fuels, chemical   feedstocks and other vital products is maintained whilst the transition to a lower   carbon economy takes place. Policies that take careful note of this fact will also   secure the significant energy requirement that only oil can provide for decades to   come. 

9.   Are there any other issues relating to the security of the UK’s energy supply that   you think the Committee should be aware of? 

    In  2.5  UKPIA  pointed  to  the  key  importance  an  Agency  to manage  the  nation’s   strategic  oil  stocks  has  on  the  future  of  UK  refining.  The  significant  investment   needed to meet the UK’s obligation under EU/IEA rules are best met from a central   entity, rather than by imposition on commercial undertakings. 

    In  a  similar  vein,  the  cost of permits  for UK  refineries under  the EU ETS Phase  III   scheme is likely to be around 150 million Euros in 2013 in one hit with no transition   arrangements.  

    The  first  issue  is  totally  within  the  gift  of  UK  government.  The  second  requires   recognition by UK policymakers  that  industry  cannot easily withstand  costs of  this 

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11

  nature. UKPIA  assume  government would prefer UK  refining  and energy  intensive   industry generally to survive climate change policy and provide their vital products   for the nation’s future wellbeing. 

    We thank you for the opportunity to contribute to this important debate and would be pleased to elaborate on our views should the Committee so wish .  March 2011 

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Memorandum submitted by Professor Alan Riley (UKES 31) Professor Alan Riley, City Law School, City University, London, & Associate 

esearch Fellow, Centre for European Policy Studies, Brussels. R

 

Executive Summary 

• Policymakers  have  not  yet  caught  up  with  the  impact  of  the 

unconventional  gas  revolution‐they  are  still  developing  energy  security 

and climate change policy on the basis that gas is a scarce, premium fuel 

with significant energy security problems. This is no longer the case 

 

• Unconventional  Gas  resources  have  strong  energy  security  values  in 

terms  of  both  the  enormous  scale  of  the  resource  base  and  variety  of 

locations ie the numerous locations where unconventional gas is found. 

 

• The energy security implications of unconventional gas are underpinned 

for Britain and Europe by the realisation that there is according to energy 

analysts CERA up to 173tcm of unconventional gas in place in Europe (the 

total Russian conventional reserve is only 47tcm). 

 

• Unconventional  gas  is  reinforcing  our  energy  security  by  reinforcing 

energy  liberalisation:  There  are  now  alternative  sources  of  gas  and 

alternative suppliers that can take advantage of gas liberalisation rules. A 

more complete single market in gas increases our energy security. 

 

• Europe’s  principal  importer:  Russia  is  being  forced  to  ensure  greater 

security  of  supply  through  liberalisation  and  support  the  rule  of  law  in 

energy markets again enhancing our energy security. 

 

• A  world  of  radical  gas  liquidity  will  also  remodel  the  climate  change 

agenda with a greater focus on radical C02 cuts and efficiency rather than 

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renewables. The real environmental danger here is for ‘gas complacency’ 

to set in.  

 

1.0. Introduction 

The received energy policy view is that gas is a fuel that raises significant energy 

security  concerns.  This  view  has  gained  considerable  traction  as  a  result  of 

declining  gas  reserves  within  the  European  Union  and  the  impact  of  the 

Gazprom‐Ukraine  gas  disputes.  However,  this  received  view  does  not  take 

account  of  the  impact  of  the  unconventional  gas  revolution.  That  energy 

revolution has transformed the energy security status of gas. Gas has gone from 

being a fuel with significant security liabilities to a fuel that provides the United 

Kingdom and the rest of the European Union with a security of supply guarantee. 

In  part  this  is  the  sheer  scale  of  the  resource  base  of  unconventional  gas with 

Algeria alone  reporting up  to 30tcm ,  India  reporting at  least 8tcm (300  times 

greater than previous conventional resources) and perhaps as much as 59tcm , 

the United States, up to 90tcm , China at  least 76tcm  and Russia 150tcm  (by 

contrast  the  total  Russian  gas  reserve,  supposedly  the  world’s  largest  gas 

reserve, is ‘only’ 47tcm) . This scale of resource base also leaves the existing LNG 

global supply  largely  to Europe and  Japan and shale will also add to a growing 

NG supply. 

1

2

3 4 5

6

L

                                                         1 Algeria Eyes Huge Domestic Shale Gas Reserves, Report of Speech by Mr Yousef Yousfi, Algerian Minister of Energy & Mines at CERA Week, Houston, Reuters, March 9, 2011. 2 This is based on an analysis by Schlumberger who are undertaking an assessment of the Indian u source base for the Indian national energy company ONGC. Shale Prospects nconventional gas reEncouraging for India, Natural Gas for Europe, www.naturalgasforeurope.com 3 Verrastro & Branch, Developing America’s Unconventional Gas Resources: Benefits & Challenges, CSIS (Washington, 2010). This paper gives several figures. The Potential Gas Committee gives a figure of 1800tcf of technically recoverable gas and a research paper of CERA in 2010 estimates 2000tcf but estimates that the further development of the resource plays will reveal a resource base of 3000tcf, that is approximately 90tcm. See http://csis.org/files/publication/101209_Verrastro_UncontentionalGas_Web.pdf 4 The Chinese figures are based on full assessment of coal bed methane resources but only a partial assessment or assessment by analogy. Hence the figures given are probably very c spects of China’s Unconventional Gas Exploration onservative. Xinhua, Status and Development Proa

2

nd Exploitation, Ninth Sino‐US Oil and Gas Forum, (Quingdao, 2009) 5 World Energy Outlook 2009, IEA, (Paris, 2009) 6 The non‐Russian figures are also gas in place resource figures and not recoverable figures. Howver, if we take an extremely conservative view of what is recoverable, say 10% we still arrive at recoverable reserves which add enormously to the global resource base. The Russian figure of 47tcm is for recoverable gas, although a significant proportion of Russian gas may be technically but not commercially recoverable. 

224

This  enormous  diversity  of  supply which will  ensure  the  high  energy  security 

value  of  gas  is  underpinned  by  a  number  of  other  factors.  First,  Europe’s  own 

resource  base.  A  recent  major  report  from  Cambridge  Energy  Research 

Associates examining the scale of the gas resource base in Europe estimates that 

the  unconventional  gas  in  place  is  up  to  173tcm7.  This  is  an  enormous  figure 

which if even if only 10% is recoverable provides Europe with a gas reserve that 

amounts  to  one‐third  of  the  total  Russian  gas  reserve  of  47tcm.  Second,  a 

diversity  of  new  gas  suppliers  makes  rapid  completion  of  the  European  gas 

market  much  more  tenable  again  further  underpinning  European  energy 

security. A third factor is that the only credible commercial Russian response to 

radically  liquid gas markets  is  to adopt  its own liberalisation model and access 

its  own  unconventional  gas  resources.  To  effectively  open  up  those  resources 

Russia  will  need  access  to  foreign  capital  and  knowhow  forcing  the  Russian 

government to reconsider its attitude to transit regimes and investor protection. 

A more positive Russian approach to both liberalisation and investor protection 

ill further enhance European and British energy security. w

3

Europe decarbonises the eco

 

This  abundance  and  variety  of  gas  supplies  to  and  within  Europe  is  going  to 

substantially  enhance  European  supply  security  over  the  next  few  years.  That 

abundance  is  also  going  to  generate  additional  positive  supply  security  effects 

both  on  the  gas  market  liberalisation  process  and  on  our  most  significant 

external  gas  supplier,  the  Russian  Federation.  The  reality  of  this  security  of 

supply will in addition have a powerful knock on effect on British and European 

energy  policy  encouraging  a  major  switch  to  gas  from  coal.  It  will  also  affect 

climate change policy by delivering radical cuts in C02 via the gas/coal switch at 

far  less  financial cost  than  initially estimated than via renewables replacement. 

Radical  gas  liquidity  is  also  likely  to  more  broadly  reshape  how  Britain  and 

nomy between now and 20508. 

                                                        7 Breaking with Convention: Prospects for European Unconventional Gas , CERA (March 2011). 8 The Tyndall Centre have recently produced a paper arguing that replacement of coal by gas and consequent radical C02 cuts is not likely as additional gas production will just add to capacity and not result in any switch. The Tyndall paper does not however recognise two extremely powerful switching factors. First, the direct pollutions and poisons generated by coal are extremely unpleasant and damaging to human health. That fact alone provides a major incentive to switch from coal to gas. In particular, most of the global growth in coal consumption comes from China 

225

 

This  memorandum  is  divided  into  five  parts.  Part  two  considers  the  received 

view  of  gas  as  an  insecure  fuel  source;  part  three  looks  at  the  impact  on 

European energy security of the global unconventional gas revolution; part four 

examines  the  factors  underpinning  European  energy  security;  part  six  offers  a 

onclusion c

 

2.0. The Received View: Gas as a Security Liability 

The received view of gas is that it is a fuel with significant security liabilities. This 

view  gained  hold  for  three  principal  reasons.  First,  domestic  European 

production  from  principally  the  United  Kingdom  and  the  Netherlands  was 

viewed  as  a  declining  resource  which  would  increase  imports  of  pipeline  gas 

rom Russia, Norway and the Middle East.  f

 

Second while global production of Liquid Natural Gas (LNG) would expand it was 

unlikely  that  it would be able  to add significantly  to European supply diversity 

due  to  the  growing demand  for  LNG  in  the United  States,  China,  India  and  the 

rest of South‐East Asia. In particular, Europeans expected significant competition 

for  LNG  sourced  from  Trinidad &  Tobago,  Algeria,  Nigeria  and  Qatar with  the 

nited States.  U

 

Third,  the Gazprom‐Ukraine disputes  in 2006 and 20099 where Europe, caught 

in  the  middle,  had  suffered  supply  cut  offs  raised  serious  energy  security 

concerns in respect of Russian gas supplies. These concerns were reinforced by 

research undertaken by the Swedish Defence Research Agency which identified 

                                                                                                                                                               which has been grappling with immense public concern over the public health consequences of coal burning. It is therefore very attractive for the Chinese authorities to switch rapidly from coal to gas improving air quality and reducing public concern over this issue. Second, a significant number of the states  import coal. Domestic gas production from unconventional gas is much more attractive than importing coal. Such domestic production increases  tax revenue and employment and is either neutral or adds to the balance of payments. Coal imports do not generate additional taxes or employment and carry with it for many nations significant import costs on the national accounts. For the contrary Tyndall view see: Wood & others, Shale Gas: A P ent of Climate Change and Environmental Impact, Tyndall Centre, 

4

rovisional Assessm(Manchester, 2011). 9 Stern and others, The Russo­Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment, OIES, (Oxford, 2009) 

226

40  politically  motivated  cut  offs  between  1991‐2004  undertaken  by  Russian 

tate owned or controlled energy companiess 10. 

 

This concern regarding Russian energy security was reinforced by evidence that 

the  far  greater  Russian  supply  security  question  centred  around  Gazprom’s 

ability  to maintain  gas  exports  to  Europe  at  all.  The  issue  here  concerned  the 

depletion  of  the  existing  Nadym  Pur  Taz  supergiant  fields  and  the  lack  of 

investment in new fields which raised the prospect of a significant supply crunch 

id‐decadem 11. 

 

In this context with the prospect of 84% of European gas coming from external 

sources  by  2030  there were  serious  concerns  for  European  energy  security12. 

Gas  as  a  major  fuel  source  raised  hard  energy  security  concerns;  scarcity 

concerns and consequent price concerns. Indeed Ungerer referred to gas as the 

‘Achilles heel of European energy security’13.  It  is not surprising  therefore  that 

policymakers  began  to  seek  to minimise  the  role  of  gas  in  the development  of 

uropean and British energy and climate change policy.    E

 

5

the  American  unconvention

3.0. The Global Impact of the Unconventional Gas Revolution 

The story of the sudden arrival of unconventional gas onto the US market is now 

well known and does not need to be repeated here. It is sufficient to say that in 

2009  the  United  States  replaced  Russia  as  the  world’s  largest  gas  producer; 

unconventional gas reserves are of the order of 90tcm14 and causing a significant 

LNG supply diversion to Europe resulting in falling gas prices on European spot 

arkets. m

 

From a European and British energy security perspective the greatest impact of 

al  gas  revolution  is  the  transfer  of  unconventional 

                                                        10 n, Russia’s Energy Policy: Security Dimensions and R nergy 

edish Defence Research Agency (Stockholm, 20 Larsso ussia’s Reliability as an E

Su 06) 06). 

pplier, Sw11 Riley, The Russian Gas Deficit:Consequences and Solutions, CEPS, (Brussels, 2012 Ung Some Comments on the Relationship Between Competition Policy and European Energy curi y arkets Vol 2, Issue 2,  (Brussels, 2007).    erer, 

Se tibid 

, European Review of Energy M13 14 op cit 

227

gas  technology  and  know  how  worldwide.  The  United  States  government 

particularly has encouraged rapid global development of unconventional gas by 

entering into technology transfer agreements with a number of states including 

hina, India and Ukraine.  C

 

The incentives to develop this unconventional gas worldwide are very powerful. 

First,  there  is  the  hard  energy  security  issues  surrounding  fossil  fuels  and  the 

prospect  of  energy  cut  offs.  Take  for  instance  China.  One major  issue  national 

security issue for China is that most Chinese oil and some gas and coal is shipped 

in across the Pacific. The US Navy controls the Pacific. From a Chinese national 

security perspective being able to source substantial sources of gas domestically 

is very attractive as it reduces its energy dependence on American power. This is 

reinforced by the recognition that in extremis gas can be converted to oil using 

as to liquid technology.  g

 

Second, there is the impact on balance of payments. Domestic gas production can 

replace  gas  imports.  In  addition,  it  can  also  replace  coal  imports  by  switching 

from coal to gas15  fired turbines. This brings a triple benefit. Significant cuts  in 

C02 emissions; significant cuts in a range of poisons caused by burning coal and 

a better trade balance as coal imports are replaced by domestic gas production. 

This is in addition to the simple economic plus factor of increased tax revenues 

nd employment that unconventional gas development brings to an economya 16. 

6

security  perspective.  As  th

 

These  security  and  economic  factors  provide  compelling  incentives  to  ensure 

relatively rapid scaling up of unconventional gas production worldwide over the 

ext decade and a half. n

 

This  scaling  up  has  major  consequences  from  a  British  and  European  energy 

is  scaling  up  gets  underway  it  causes  continuing 

                                                        15 The United Kingdom estimate is approximately a one‐third cut in C02 emissions by direct replacement of coal for gas. 16 In Pennsylvania unconventional gas development was estimated to generate $13.5 billion in economic value each year in addition to $1.4 billion in local and state tax revenues and almost 175,000 jobs by 2020. See CSIS, op cit 4, for a discussion of a Penn State University report on the economic impact of the Marcellus Shale. 

228

demand destruction for LNG. This leaves the European Union and Japan17 as the 

wo principal remaining LNG customers worldwide.  t

 

This  LNG  effect  is  reinforced  by  the  capital  already  committed  to  LNG 

liquefaction production which will take global production from 240bcm in 2008 

o 410bcm in 2014t 18. 

 

Liquefaction  production  is  likely  to  be  further  increased  by  the  economic 

incentives to sell LNG into the high priced European market from the US. Already 

two shipments of shale gas LNG have been made into the UK market19. The US 

authorities  have  recently  given  national  security  clearance  for  shale  gas  to  be 

exported as LNG. Given the economic incentives between low priced US gas and 

much higher priced EU gas  there  is a compelling economic argument export of 

hale gas sold as LNG into the European market between 2015 and 2020.  s

 

Due to the United Kingdom having significant LNG gasification capacity it is likely 

to become the principal destination point for US sourced shale gas as LNG20. This 

will both enhance British energy security and increase revenues resulting from 

ispatch and transit into continental Europe. d

 

                                                        17 It is worth raising the question here of the impact of the recent earthquake and nuclear power problems in Japan on the gas liquidity argument. The short answer is as this point it is difficult to say. On the one hand we know that a significant amount of power capacity has been permanently eliminated:  That  is  the  four  nuclear  reactors  at  Fukushima. On  the  other  hand  there  has  been significant destruction of industrial plant which may or may not be replaced, which will reduce overall demand. Japan has a significant amount of installed LNG gasification capacity in reserve which  would  allow  it  to  relatively  easily  increase  LNG  imports.  A  significant  upward  tick  in Japanese demand would probably cause some tightening in supply and upward price pressure on spot markets (over and above the  immediate price  increases  triggered by market speculation). Over and above  the short  run any medium to  longer  term  Japanese demand will be able  to be accommodated by the s nal gas development now underway; the ramping up conventional global L the development of u

cale of unconventioof NG production and 

d Energy Outlook, EIA (Paris, 2009).   nconventional gas as LNG. 

18 Worl19

7

 First LNG Cargo from US to UK in 50 Years arrives at Grain LNG, Platts, (London, November 2010) 20 Total UK LNG gasification capacity is currently 53bcm providing already significant additional capacity for regasification for onward dispatch to continental Europe the BBL and UK interconnectors. 

229

In  addition,  Russia  itself  has  enormous  unconventional  gas  resources  a 

considerable proportion of which is near its existing infrastructure21. Ultimately 

the  compelling  economic  logic  of  developing  those  resources  than  the  more 

expensive and problematic conventional resources of Yamal and Shtokman will 

in out. w

 

As  a  consequence  even without  any development of  unconventional  gas  in  the 

United  Kingdom  or  any  other  part  of  the  European  Union  unconventional  gas 

will have a significant impact on our energy security. The worst case scenario is 

an increasing competition for the European market between LNG and LNG shale; 

existing  conventional  pipeline  deliveries  and  new  pipeline  deliveries  from 

Russian unconventional resources. Britain and all Europe therefore will be faced 

with significant gas market  liquidity derived from a variety of sources  fulfilling 

e Churchill standard for energy securityth

  

22. 

4.0. Impact on European Energy Security of Unconventional Gas 

What will further underpin British and European energy security is the reality of 

substantial quantities of unconventional gas available domestically. According to 

a  recent  extensive  study  by  Cambridge  Energy  Research  Associates  (CERA) 

unconventional gas in place in Europe is up to 173tcm. The CERA report goes on 

o predict gas production of between 60 and 200bcm in Europe by 202523.  t

 

Substantial domestic quantities of gas production combined with supplies from a 

variety of  foreign  importers will  provide Britain  and  the  rest of Europe with  a 

ery high level of supply security. v

 

This  supply  security  is  reinforced  by  two  other  factors.  First,  a  variety  of 

suppliers of LNG from new and traditional supply sources, together with access 

to domestic unconventional  gas  supplies will  reinforce  the  liberalisation of  the 

                                                        21 IEA, op cit  22 ‘Safety and certainty in oil lie in variety and variety alone’. Hansard, July 17th 1913. For a fu iscussion of the development of  Churchill’s views on energy security see Yergin, The 

e Epic Quest for Oil, Money & Power, Simon & Schuster (1992, New York) p134‐146 rther d

Prize: Th  23 CERA, op cit. 

8230

European gas market. One of the difficulties of ensuring market liberalisation in 

Europe and a single European gas market is that gas supplies have been scarce. 

Either  gas  was  produced  by  the  domestic  incumbent  or  it  came  from  the 

domestic  incumbent’s  foreign partner on a  long  term supply contract.  In either 

case the market was largely foreclosed and very little gas would be sold across 

national borders. In addition, none of the incumbents had any incentive to build 

ross‐border infrastructure. c

 

The third energy package and the Commission’s antitrust prosecution of energy 

companies has begun to reduce the power of incumbents and force unbundling 

in  some  cases24.  The  difficulty  however  remained  that  gas  was  scarce.  If 

Gazprom  provided most  of  a  state’s  gas  supply  liberalisation would  not make 

that much  difference,  there would  be  still  one  gas  supplier  and  no  alternative 

physical  infrastructures  to  carry  a  non‐existent  alternative  source  of  supply. 

Furthermore,  technical  liberalisation,  even  ownership  unbundling,  would  not 

physically open up the energy markets. It is true that with ownership unbundling 

the economic  incentives of  the unbundled network owner are much greater  to 

increase  capacity  where  there  is  economic  need  rather  than  just  increasing 

prices and minimising capacity. However, where there is no alternative source of 

gas  supply  and  no  expectation  of  any  additional  supply  even  an  unbundled 

etwork owner will not invest in new capacity. n

9

deliver  gas  into  the  German

 

The arrival of growing quantities of LNG and the prospect of significant supplies 

of  domestic  unconventional  gas  transforms  that  market  dynamic.  Large 

quantities of LNG and unconventional gas at often lower prices than pipeline gas 

create  real  economic  incentives  to  increase  capacity.  As  a  result  of  domestic 

unconventional gas production additional capacity may well be built in Poland to 

 market.  Equally,  LNG  shipments  into  the  UK may 

                                                        24 Both E.ON and RWE have been forced under threat of competition law prosecution by DG Competition to unbundle and sell of their electricity and gas networks. The Commission has now launched over a dozen antitrust proscutions against major energy incumbents following the 2005 Sectoral Inquiry into the electricity and gas sectors. It is this prosecution drive that has really begun to open up the European gas market. However, the third package contained in Directive 2009/73/EC will allow DG Comp and DG Energy to pile further pressure on the energy companies by forcing unbundling or a very high degree of surveillance over network operators. 

231

well see an increase in the laying of new supply pipelines across the Channel and 

nward west‐east pipelines into the European market. o

 

The interaction between EU liberalisation and antitrust rules and the entrance of 

LNG  suppliers  and  unconventional  gas  producers  into  the  European  market 

bodes well for European energy security. These suppliers are likely to incentivise 

network  owners  to  physically  reinforce  the  single  market  in  gas  with  new 

pipeline  connections  across  national  borders.  In  addition,  LNG  suppliers  and 

unconventional gas producers will be able to rely on EU rules to ensure market 

access. Incumbents faced with well funded corporate actors who can rely on EU 

liberalisation rules and can call on the full force of the Commission’s Marines, DG 

Competition, with  their  powers  to  undertake  unannounced  raids  on  corporate 

HQs,  issue market  access  orders  and  impose  heavy  fines  if  new  entrants  have 

heir route to market blocked. t

 

This  interaction  between  EU  rules  and  LNG  suppliers  and  unconventional  gas 

producers  is  likely  to  ensure  the  completion  of  the  EU’s  single  market  in  gas 

einforcing Europe’s supply security. r

 

A  second  factor  is  the  impact  on  the  Russian  gas  market.  Notwithstanding 

increasing  quantities  of  LNG  supplies  and  the  prospect  of  unconventional  gas 

production Russia has the potential of remaining a major gas supplier to Europe 

nd adding to European energy security.  a

10

downstream while neglectin

   

 

Although there has been concern at the prospect of politically motivated cut offs, 

especially after the incidents in 2006 and 2009 the deeper concern over security 

of  supply  has  focused  on  the  overall  fall  in  Russian  gas  production.  The  great 

supergiant  fields  in  the  Nadym  Pur  Taz  region  where  80%  of  Russian  gas  is 

produced  are  depleting.  The  critique  of  the  International  Energy  Agency  has 

been  that  rather  than  investing  in  new  fields  Gazprom  has  been  investing 

g its fundamental productive capacity25.  

                                                      25 International Energy Agency, Optimising Russian Natural Gas: Reform and Climate Policy, (Paris, 2006) 29. 

232

 

From  Gazprom’s  perspective  this  reluctance  to  invest  is  not  entirely 

unreasonable. The capital costs for developing the Siberian Yamal fields and the 

Shtokman  field  in  the Arctic Sea are upward of $100 billion26. Given European 

gas  market  liberalisation  Gazprom  can  legitimately  question  the  safety  of 

investment in these fields if it cannot rely on secure long term supply contracts 

o pay for the development of Yamal and Shotkman. t

 

The development of unconventional gas provides Gazprom with a solution to its 

investment  conundrum.  Gazprom  and  other  Russian  energy  companies  have 

substantial  quantities  of  unconventional  gas  around  their  existing  energy 

infrastructures.  There  is  no  need  to  heroically  and  expensively  develop  Yamal 

and  Shtokman.  For  much  smaller  investments  Gazprom  can  begin  to  develop 

heir own unconventional gas resources. t

 

This  however,  poses  two  major  difficulties  for  Gazprom  and  the  Russian 

government. First, unconventional gas production is much more a manufacturing 

process  which  requires  a  much  greater  focus  on  efficiency  in  order  to  be 

profitable27.  The  existing  Gazprom  dominated  Russian  gas market  which  puts 

little premium on efficiency and which allows Gazprom an export and pipeline 

monopoly  combined with dominance of  the exploration, production, wholesale 

and  retail  markets  is  unlikely  to  be  able  to  easily  generate  the  efficiencies 

ecessary to make unconventional gas production profitable. n

 

However, the prospect of LNG and unconventional gas supplies cheaper than gas 

that  can be produced  in Yamal  and  Shtokman arriving  in  very  large quantities 

into European markets threatens Gazprom’s market share. This market share is 

very  important  to  Gazprom. While  it  represents  only  one‐third  of  Russian  gas 

   

11

                                                     26 EPRINC, Gazprom: Is it Time to Hit the Reset Button? (Washington, 2009). 27 Unconventional gas production does not simply require one off drilling to maintain flow rates  drilling and fraccking have to be repeated and to be profitable great attention to detail as to the means of driving costs down while maintaining the gas flow. 

233

supplies by value  it  is two‐third’s of Gaprom’s  income28 and more than 12% of 

ederal tax revenueF 29. 

 

Faced  with  the  prospect  of  the  loss  of  revenue  and  the  loss  of  political  and 

economic  influence  it  is  difficult  to  see  how  the  Russian  government  will  not 

onsider some form of liberalisation of the Russian gas market.  c

 

It  is  not  necessary  for  the  Russian  government  to  adopt  a  European model  of 

liberalisation. The  focus would be  to ensure efficiency whilst maintaining state 

surveillance  and  control.  It  is  possible  to  envisage  a  Russian  approach  to 

liberalisation which unbundles the pipeline network into one state company and 

then create a series of baby Gazprom production companies some state owned, 

some Russian private owned and some foreign owned to introduce the necessary 

degree of knowhow, technology transfer, capital and efficiency into the Russian 

as market.  g

 

However, in order to encourage foreign capital and knowhow the Russian state 

will  have  to  reconsider  its  approach  to  investor  protection.  Signals  such  as 

withdrawing  from  the  Energy  Charter  Treaty  in  October  2009  undermined 

ncentives for firms to invest in the Russian energy sectori 30.  

12

 

                              

 

The  second major  difficulty  for  the  Russian  government  and  Gazprom  is  their 

current  pipeline  strategy.  If  we  have  gas  to  gas  competition  in  Europe  it  is 

imperative that Russian gas is delivered as cheaply as possible into the European 

market if market share is to be maintained. This requires not only some form of 

efficiency  focused  liberalisation  at  home  but  an  entirely  different  external 

ipeline strategy.  p

                           28 ssian Natural Gas Production and Exports­the Outlook to 2020 Balti

0)  Pirani, Ru c Rim Economies 

(Turku, 20129 10)  Abdelal, The Profits of Power: Commercial Realpolitik in Europe and Euroasia (Harvard, 2016. 30 For the official statement on the Energy Charter Treaty secretariat website as to Russia’s withdrawal from provisional application of the Treaty see http://www.encharter.org/index.php?id=414&L=1%2F\\\\\\\#c1338. 

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The current pipeline strategy involving the delivery of new pipelines particularly 

Nordstream  and  Southstream  significantly  increases  the  cost  of  gas  delivery. 

These costs can be carried  in closed national markets where Gazprom has  long 

term  supply  contracts  which  effectively  foreclose  the  market  and  there  is  no 

alternative  source  of  supply.  Effectively  the  costs  are  passed  on  to  the 

consumers. This however becomes increasingly difficult to maintain in markets 

hich are being liberalised where new sources of supply are coming on stream. w

 

Nordstream is now too late to stop as the capital has been committed. However, 

Southstream  is  not  yet  at  that  stage  and  can  be  stopped.  In  order  to  ensure 

Russian gas remains competitive the Gazprom and the Russian government have 

o rethink their pipeline strategyt 31. 

 

In a liquid European market with gas to gas competition and spot markets price 

is  fundamental.    To  keep  the  cost  of  transit  down  there  is  no  alternative  for 

Gazprom but to seek to extend and develop the Ukrainian pipeline network. It is 

much  cheaper  to  refurbish  than  to  develop  Southstream  and  the  Ukrainian 

network  has  a  maximum  throughput  capacity  of  180bcm,  far  greater  than 

outhstreamS 32. 

13

system and a supranational t

 

The  difficulty  lies  in  the  well  known  risks  of  Ukrainian  transit.  The  Russian 

Federation  and  the  European  Union  came  close  in  2006  to  agreement  on  a 

Transit  Protocol  under  the  Energy  Charter  Treaty.  There  is  a  compelling 

argument  for  the  Russian  Federation  to  reopen  negotiations.  Given  the 

difficulties with Ukrainian  transit  there  is a compelling Russian argument  for a 

very  tough  ECT  Transit  Regime.  This  would  include  including  a  distinct 

international  legal  regime  for  transit;  a  secretariat  to  supervise  the  transit 

ribunal to ensure enforcement of the regime33. 

                                                        31 It may well be that the Russian government is rethinking its strategy given that the Prime M utin recently annou  into the prospects of replacing Southstream inister P nced an investigationwith an LNG liquefaction terminal on the Black Sea coast. 32 Pirani, Ukraine’s Gas Sector OIES (Oxford, 2007). 33 Westphal makes a compelling argument for a revised Energy Charter Treaty Plus with Russian participation in the ECT. As he points out the ECT is the only multilateral energy investment and transit treaty we have. A revised ECT Plus could both assist in delivering energy security to the 

235

 

In essence in order for Russia to remain competitive and maintain a significant 

market  share  of  the  European  gas  market  it  has  to  follow  to  introduce  a 

significant degree of legal security and market liberalisation into its gas market 

and its external gas market policies. This is partly about domestic liberalisation 

law and partly about returning to the Energy Charter Treaty regime for investor 

nd transit protection purposes. a

 

From  a  British  and  European  perspective  a  Russian  Federation  focussed  upon 

gas market liberalisation and seeking legalisation of the European transit system 

would  be  a  welcome  development.  Unconventional  gas  would  be  delivering 

energy security  to  the European Union by encouraging Gazprom to develop  its 

own such resources. No longer would Europeans be so worried about Gazprom 

running short of gas supplies. In addition, the prospect of liberalisation of the gas 

market and  legalisation of  the transit regime would reinforce European energy 

ecurity by encouraging production and ensuring effective transit. s

 

The  triple  impact  of  significant  EU  domestic  unconventional  gas  supplies; 

completion of the European single gas market and a Russia compelled by market 

circumstance  to  liberalise  to  produce  unconventional  gas  would  significantly 

nderpin British and European energy security. u

 

14

two key points to recognise in respect of unconventional gas resources first, the 

          

5.0.  onclusion 

Too  many  policymakers  are  still  wedded  to  the  gas  insecurity  and  scarcity 

narrative which is no longer true. Half a decade ago a strong case could be made 

that  gas  was  a  premium,  scarce  fuel  which  carried  significant  energy  security 

risk. No longer. The unconventional gas revolution is in process of transforming 

British and European energy security. The ability  to access unconventional gas 

resources  across  the  planet  easily  and  relatively  cheaply  will  result  in  the 

upturning of energy and climate change policies in every major nation. There are 

C

                                                                                                                                                      EU and Russa but also open up its territorial scope to the Middle Eastern states of the Arab Spring. See Westphal, The Energy Charter Treaty Revisted, SWP (Berlin, 2011). 

236

sheer scale of the resource base. It is several times of the order of magnitude of 

existing  conventional  resources.  Second,  the  variety  of  locations  where 

unconventional gas resources are  found across  the planet  reinforces  its energy 

ecurity value. s

 

In addition, unconventional gas production directly and  indirectly, actually and 

prospectively  is  enhancing  European  energy  security  through  reinforcing 

liberalisation  and  the  attitudes  of  our  principal  importer.  EU  gas  market 

liberalisation  is  being  reinforced  as  new  energy  actors  selling  unconventional 

gas  and  LNG  enter  the  market.  These  actors  are  able  to  deploy  EU  rules  on 

liberalisation  and  create  the  incentives  to  build  the  necessary  physical 

nfrastructure to link up the European gas market.  i

 

Equally unconventional gas is beginning to make Russia gas importers to Europe 

rethink  their commercial  strategy. There  is now a compelling commercial  logic 

coming into place which  is pushing Gazprom and the Russian government in the 

direction of  liberalisation and the creation of an effective rule of  law system in 

the energy sector. This  is not due  to Western pressure but  instead commercial 

logic.  It  is  in  the  Russian  state’s  own  best  interest  for  unconventional  gas 

development  to  take off. That  requires  some elements of market  liberalisation. 

The same commercial logic requires binding rules of international energy law to 

be  put  in  place  to  encourage  investment  and  ensure  transit.  Both  these 

developments reinforce British and European energy security by making Russia 

 much more reliable gas supplier. a

 

Given the scale and variety of locations where unconventional gas can be found 

combined with the relative low cost nature of the fuel; the low cost and speed of 

installation of gas turbines gas the incentives for a very significant expansion in 

ritain, Europe and round the world are compelling. B

15

 

In addition, there is a significant climate change benefit. Major reductions in C02 

emissions  can  be  obtained  as  coal  fired  power  stations  are  switched  off  and 

replaced with gas.  

237

  16

By contrast current climate change policy is in danger of failing due to the high 

costs  of  developing  renewables  to  meet  ambitious  EU  targets  at  a  time  of 

conomic crisis.  e

 

The  Unconventional  gas  revolution  may  well  remodel  British  and  European 

climate change policy. That policy  is  likely  to shift  to cutting C02 via switching 

from coal to gas and energy efficiency rather than renewables. It will also create 

a  problem  for  policymakers.  How  to  ensure  that  gas  is  a  bridge  fuel  to  a  low 

carbon  future  rather  than  a destination  fuel? One of  the major difficulties,  and 

perhaps the real environmental issue with unconventional gas, is the temptation 

to  stop  with  gas.  In  a  world  of  plentiful,  relatively  cheap  gas  supplies,  which 

permits  significant  C02  cuts  there  is  a  tremendous  temptation  to  not  push  on 

with decarbonisation. Policymakers will have to adjust climate change policy to 

that  reality  and  the  requirements of  a progressive  carbon  tax  to  ensure we do 

ot end up in gas complacency. n

 

For the United Kingdom there is a powerful case for seeking a leading role in the 

development of European unconventional  gas. Encouraging  rapid development 

of  our  unconventional  gas  resources  would  enhance  our  energy  security  and 

help  build  up  a  British  industry with  export  potential.  UK  policymakers  could 

also  lead  European  remodelling  of  energy  and  climate  change  policy  to  take 

account of a world in which there is radical gas liquidity. We could help ensure 

Europe did not  fall  into gas  complacency and  focussed  instead on ensuring we 

ontinued to move down the path of effective and progressive decarbonisation. c

 

March 2011 

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Memorandum submitted by SSE (UKES 32)

Given the increasing reliance of the global economy on energy over the last century it has been important for countries to ensure that their energy supply – for generating electricity, producing heat, and powering transport – is:

secure; stable; and affordable.

With fossil fuels – oil, gas, and coal – meeting the vast majority of global energy needs delivering all three of these ambitions was, until recently, relatively straightforward as energy supply capacity outstripped demand; prices were relatively stable; and withholding fossil fuel supplies was rarely used as a way to exert political influence. However the economic growth of many developing countries has increased demand for fossil fuels, leading to increased, and more volatile, prices particularly for oil (and gas which has historically been linked to the oil price). These increases have been compounded by the fact that:

Fossil fuel reserves are being depleted at a faster rate than new reserves are coming online; The rate at which these reserves can be exploited (i.e. the speed at which oil and gas can

physically be removed from the ground) is limited; and The stability of the countries exporting large amounts of the world’s supplies has been called

into question. This is not to say that the supply of fossil fuels will not improve – the introduction of shale gas for example has increased the amount of gas available and consequently reduced the price. However the trend of higher, and more volatile, prices resulting from increased demand and limited reserves means that ‘energy security’, and in particular ‘fuel security’, is now an increasingly prevalent political issue globally. Governments are therefore examining different ways in which they can maintain secure, stable and affordable energy supplies. Energy Security vs Energy Independence It has been suggested that the best way to be truly energy secure is to be energy independent i.e. the ability of a country to produce enough energy domestically to meet demand. However whilst increasing self sufficiency is one way in which energy security can be maintained, achieving complete energy independence is extremely difficult unless a country has significant natural resources. It may also be extremely expensive, and therefore unrealistic/ unappealing for many governments. As such whilst most countries, including the UK, do seek to increase their self sufficiency they also pursue a number of additional options. These include ensuring that a country is not overly reliant on one fuel source, and that its imported fuel comes from a diverse range of sources, thereby exposing it less to major supply disruptions. In addition working to maintain a secure global energy market for all participants (both producers and consumers) will help to ensure that price and supply volatility is reduced. Energy Security in the UK The UK’s oil and gas reserves, whilst still significant, are no longer sufficient to meet domestic demand and it is therefore increasingly exposed to the volatility of the global fossil fuel market. This has, in recent years, increased prices for electricity (mainly generated from burning coal and gas), heating (mainly produced from gas, but also oil), and transport (mainly powered by oil). Both the previous and current Governments recognised this problem and have sought/ will continue to seek to ensure that:

239

The UK’s supplies come from a diverse range of sources (including maximising North Sea output);

The potential for interconnection with European neighbours is fully explored; The UK has greater storage capacity; The amount of import facilities, particularly for LNG, has increased; and The UK’s demand for fossil fuels is reduced, thereby reducing overall exposure.

Electricity Security in the UK However, in addition to managing concerns about the rising costs and reduced security of imported fuel supplies, the UK also has to consider how to ensure that it can generate enough electricity domestically to meet demand. Currently the UK has around 80GW of electricity generating capacity. This gives it a ‘capacity margin’ (the different between what is needed to meet peak demand and what it actually has available) of above 20%. This capacity margin is needed to ensure that in extreme situations - i.e. power station failures, sustained periods of high demand - the UK has sufficient reserve capacity to keep the lights on. A significant proportion of the UK’s current electricity generation capacity is due to come offline in the next decade as older plant reaches the end of its life, and other plant is forced to close as a result of environmental directives. All of this capacity is ‘firm capacity’ – i.e. it is almost always available when needed. The UK will therefore need to replace around 25% of its firm capacity over the next decade if it is to continue to meet demand, and ensure security of supply, by maintaining an adequate capacity margin. Where Will This Capacity Come From? Given this need to replace and build a significant amount of firm capacity over the next decade, an important question to consider is what type of generation plant can provide this at scale? Unabated coal is not an option because of its environmental impacts; CCS is not yet proven at scale; nuclear will take too long to build; and renewables can not provide firm capacity at the scale needed. Therefore the only technology which can provide firm capacity at scale, and be built in the timescales required, is gas. There are concerns that this might result in a ‘dash for gas’ in the UK which will result in large numbers of unabated gas plants operating into the 2030’s and 2040’s – this could make it extremely challenging to decarbonise the power sector by 2030. However whilst a ‘dash for gas’ might result in unabated gas plant being built in the next ten years SSE does not believe that these new plants will have an adverse impact on the UK’s 2030 ambitions. This is because:

Any unabated gas operating in 2030 is likely to have extremely limited running hours – it will only operate as peaking or back-up plant, with the vast majority of the power provided by renewables and nuclear.

Therefore whilst there might be a significant amount of conventional plant on the system in 2030, it will only be able operate at full capacity if it has CCS fitted.

Carbon ambitions can therefore still be achieved, and the UK will also be able to maintain a sufficient capacity margin to ensure security of supply. Will Enough Capacity Be Built? In terms of gas capacity there is currently less than 2GW under construction, and 7-8GW with planning permission (although some of this is highly questionable). However these projects will only go ahead if they are deemed financially viable; and the electricity generation market is currently extremely unattractive for investors in gas.

240

As the level of inflexible plant on the system increases (i.e. wind and nuclear), these problems will be exacerbated, with flexible plant becoming increasingly reliant on infrequent and uncertain price spikes to pay back investment*. There is therefore a risk that not enough gas capacity will be built in the UK as investors seek more certain returns elsewhere. Government is therefore concerned that the UK will not have enough ‘firm’ capacity over the coming decade to ensure that the UK’s electricity supplies remain secure. What is the Government Proposing to do? The Government is proposing to introduce a capacity mechanism, which rewards power stations for having capacity available, rather than for the amount of electricity they produce. Generators would therefore have a minimum revenue stream even if they do not generate, providing investors with certainty that they will receive a return in the 2020’s and 2030’s when the use of unabated fossil-fuel plant will be extremely limited. The hope is that these payments, together with the revenue they generate, should provide an economic case to build gas to come online as and when it is needed. Capacity Mechanisms What Type of Capacity Mechanism is it Proposing to Introduce? In the EMR consultation the Government’s preferred option was to introduce a ‘targeted’ capacity mechanism in GB. This would involve:

A central Government body forecasting how much additional capacity would be needed in the future i.e. in 3, 5, 10 years to maintain an adequate capacity margin;

Putting contracts for the required amount of capacity out to a competitive tender. Different types of capacity (e.g. gas stations, demand-side measures) would submit their bids

and the Government would make a final decision; This capacity would then receive payments (the level of which would be decided during the

tendering process) from Government for being available, in addition to its normal revenue streams.

This would mean that payments would only be made to those GB generators that provided the additional capacity that Government believed was needed. Are there alternative capacity payment models which could be considered? Yes there are. SSE believes that a general capacity payment to all firm capacity, including demand side resource, would be a better option. This payment (which SSE estimates to be £3 - £5 per MWh), plus the returns it received from generating electricity, would enable plants to become economically viable. What are the problems with the Government’s approach? The major concern is that if Government was tendering for plant then market-based investment could stop (as investors would be concerned that their plant would not be used because of the amount of tendered plant on the system). Investment in capacity would therefore become incredibly risky as future returns, which are all already extremely difficult to predict, became even less certain; developers would therefore wait for tenders, or invest elsewhere. This would lead to a situation where all additional capacity was tendered for by Government. The history of Government involvement in the electricity sectors illustrates that this type of centrally planned Government approach is generally significantly more expensive than a market based one. So, will paying all capacity be cheaper than just paying specific amounts of capacity? Yes it will. A general capacity mechanism, because it provides more certainty to investors than a targeted mechanism, would also result in a cheaper cost of capital thereby reducing overall prices for

* It is worth pointing out that there is also uncertainty as to whether these price spikes would even be allowed – in a scenario where prices are extremely high there is a risk that Government will step in to cap prices, as happened in California where the lights went out as a direct consequence.

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consumers. In addition the most cost-effective forms of capacity will often be existing plant – this would not be rewarded under a targeted mechanism (which would only be available to new plant), and would therefore be forced to close. Finally there is a risk that the level of Government involvement in a targeted mechanism will discourage investors from even bidding for a capacity contract. This would result in Government having to offer extremely high payments just to ensure that the capacity margin was maintained, further increasing overall costs to consumers. But won’t a general capacity mechanism just reward old, dirty power stations that we should be closing? The general capacity mechanism does allow older stations to stay open. However, as noted above, it is significantly cheaper to do this than build new plant. (To build a new gas plant and keep it on the system costs £60/kWh per year, compared to £30/kWh per year to keep an existing plant on the system). In addition these plants will be generating very occasionally and therefore will not be producing large amounts of CO2 (which is, in any case, already capped by the EU ETS). Building new plants will also be carbon intensive. As such it is logical to keep these stations open. Wouldn’t a general capacity payment result in lots of unnecessary plant being built? No it would not. As noted above the level set (£3-£5 per MWh) would mean that plant would still have to generate some electricity to be economic and therefore developers would still be making decisions based on analysis and risk. This would ensure that the amount of capacity built was appropriate to GB’s needs. In addition the Government could introduce a capacity ‘ceiling’ which would mean that once the capacity margin of 20% was reached then payments reduced, thereby making additional generation investment unattractive. SSE Responses to Specific Committee Questions 1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 7. How exposed is the UK’s energy security of supply to international events? Whilst the UK’s energy system is currently extremely resilient to changes in uranium and fossil fuel prices, the move towards the UK becoming a ‘price taker’ of energy, rather than a ‘price maker’ (i.e. it is becoming more dependent on imports as North Sea production decreases), will mean that it feels the impact of price movements more keenly. However the effects of future changes in fuel prices will largely depend on the electricity generation mix. The Government has stated that it does not want to be over reliant on one technology and this push towards a diverse portfolio will naturally mitigate the effects that fuel price changes will have. However it is likely that gas will continue to play a significant role in the UK’s energy mix for some time. The UK will therefore have some exposure to price increases here, although this exposure could be relatively low if many of the gas stations will be acting as back-up for renewables, or used as peaking plant, and therefore run for short periods in the 2020’s and 2030’s. Price increases can also be mitigated by increased use of gas interconnection and LNG terminals, both of which the Government is currently looking at, and the increased production of shale gas could also mean that prices reduce, whilst availability and security of gas supplies increase. 2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? Investment in the transmission system is vital if the UK is to meet its renewable and carbon reduction targets, as well as maintain secure energy supplies. The current system needs to be upgraded to cope with:

the increased amount of renewable generation that will be coming onto the system in remote parts of the country;

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the increase in electricity production that will be needed to meet rising electricity demand (which could rise significantly if electricity is used to decarbonise heat and transport).

However it is important to note that these infrastructure projects have long lead times, and need to be built before generation projects to ensure that these can be connected as soon as they are built. Without this investment the UK will not be able to meet both renewable/climate change targets and maintain secure electricity supplies, and a choice would therefore have to be made. Whichever route is chosen it is likely to be significantly more expensive than making the necessary investment in the transmission system now. In terms of distribution there is a role for more effective and dynamic distribution networks that manage demand more effectively and enable a larger amount of decentralised energy to generate. These smart grids could have a major impact in terms of minimising new infrastructure costs by using assets as effectively as possible, whilst reducing overall demand thereby reducing the UK’s reliance on, and exposure to, imported fuels. Whilst it is difficult to quantify exactly how much of an effect these types of demand-side measures will have it is possible that they could be significant. In terms of gas storage the UK has managed to maintain secure gas supplies without large amounts of gas storage capacity. This has been due to increased interconnection with Europe, an increase in LNG capacity, as well as use of the UK’s domestic resources. Continued focus on these areas is likely to ensure that gas supplies remain secure, and it should also be noted that the investment in gas storage is currently uneconomic. 3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? Clearly any significant moves to electrify heat and transport in the UK will result in less reliance on oil and gas, whilst significantly increasing the demand for electricity. As electricity is likely to be produced from a diverse range of sources this move, together with the reduced dependence on oil and gas, could improve the UK’s energy security. However, whilst the reduced reliance on fossil fuel imports is clearly desirable there is a question as to whether the necessary generation capacity needed to produce the volume of electricity the UK would need to meet this additional demand will be built in time. In order to ensure that this happens changes need to be made to the planning system, the grid needs to be upgraded, and the support mechanisms for low-carbon technologies and additional capacity need to be established. Smart grids could have a major impact here by minimising new infrastructure costs by using assets as effectively as possible while still allowing for significant electrification. 4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? Put simply, the less energy the UK consumes the easier it will be to maintain secure energy supplies. This is because (a) the UK will be less reliant on external sources of fuel; and (b) energy efficiency, and other demand reduction measures, can help to ‘balance’ short-term differences between supply and demand. However during periods of extremely high, sustained, demand (e.g. the middle of winter) energy efficiency cannot ensure secure supplies – these can only be maintained by having adequate amounts of electricity generation capacity and gas supplies available. 5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? The current electricity system is dominated by large power stations which can meet peak demand as and when required (coal, gas and oil); and operate constantly to meet the minimum level of demand (some coal and gas, as well as nuclear).

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The Government’s legally binding renewables and carbon emissions reduction targets will see a significant change from this system to one which is increasingly dominated by intermittent renewable, and inflexible nuclear, generation, with traditional fossil fuel plant being used as back-up. This move brings with it a number of challenges including the need to upgrade the electricity network to cope with, and better manage, this intermittency and the increased volume of electricity generated; and extend the network to connect renewables which will often be located in remote areas. The largest challenge however will be ensuring that a sufficient amount of new gas plant is built to back up this intermittent renewable generation and run when renewables and nuclear output can not meet overall demand. As noted above the current market is extremely unattractive for gas developers and a number of projects have recently been delayed or cancelled as a result†. The design of the capacity mechanism (discussed above) will therefore be crucial in ensuring that secure supplies are maintained. 6. What would be the implications for energy security of a second dash-for-gas? It could be argued that a second dash for gas is already happening, albeit subtly. In the UK a number of the oil majors are beginning to concentrate more on gas, and a number of mid-size gas companies are being bought by large utilities. In addition there has been an increased demand for gas in developing countries, particularly in China and India. The implications of this direction of travel are difficult to predict. Whilst increased global demand will theoretically increase prices, the exploitation of unconventional sources of gas (e.g. shale gas in the US), has kept prices relatively stable. If prices do rise, and gas becomes scarcer, then the impact on the UK’s energy security will depend largely on the future electricity generation mix. If this mix is dominated by renewables and nuclear, with gas acting primarily as back-up plant (it might also regularly run at baseload with CCS) then, whilst there might be a dash to build gas power stations over the next decade this will be a dash for capacity, rather than a dash for gas as a fuel – overall demand for gas will therefore be lower. However there is clearly still a need to ensure that the gas that is required can be sourced securely and affordably - increased interconnection and LNG capacity, together with a diverse range of sources for imported fuel (including using domestic supplies), could achieve this. 9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? The potential capacity shortfall that could result if not enough new ‘firm capacity’ comes online this decade is clearly a serious concern, and the debate, outlined above, about how to best mitigate this risk through a capacity mechanism is certainly something that the Committee should be aware of. March 2011

† SSE recently announced the closure of its Fife gas-fired power station, as well as a delay to its development of a gas-fired plant in Abernedd, South Wales. Centrica also recently announced that it is postponing plans to build a new gas plant at Brigg, North Lincolnshire.

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Memorandum submitted by the Institution of Engineering and Technology (UKES 33)

Evidence from the Institution of Engineering and Technology (IET) endorsed and supported by The Royal Academy of Engineering, The Institution of Mechanical Engineers and the Institution of Chemical Engineers. Introduction 1. Energy security is a complex and multidimensional problem and solutions with a positive impact in some areas can have negative effects in others1. Broadly one can break the problem down into:

• Having sufficient access to primary fuel feedstocks in the long term. • Managing short term interruptions to feedstock supply. • Creating a diverse range of energy sources using different feedstocks (or a diversity

of sources of the same feedstock). • Having robust technologies that convert primary energy supplies into usable or

transportable forms of energy. • Having robust and resilient networks to get the appropriate form of energy to its point

of use. • Dealing with the intermittency of energy supplied by certain renewable sources.

2. In many cases energy price is a proxy for security (in other words if one can afford the energy, one can buy it, or over time develop new sources) however high energy prices create their own tensions, particularly if other competing countries are able to rely on low cost indigenous resources or legacy assets. Continued increases in energy costs will also have a serious effect on the economically disadvantaged members of society. There is also a political dimension to reliance on certain producer countries considered to be risky. This currently applies mainly to oil and gas but also, for example, to proposed schemes such as major deployment of wind and solar energy in North Africa and its transmission to Europe. 3. One of the best and cheapest means to improve energy security is simply to use less. One of the major risks to our energy security is that we don’t make the investments in renewables, grid, electrified transport etc in time and at the scale required. Reducing energy demand reduces the scale of investment in these programmes, and hence reduces the risk of failure to deliver them in time. This can be achieved through a number of measures such as more efficient building stock and end-use appliances, smaller and more efficient personal transport choices, and improvements in industry. These could help to reduce the aggregate demand for energy over the course of a year or, equally importantly, could reduce the peaks of demand through the course of a day. Reducing demand is critical to the future security of the UK energy system. 4. Our answers to the specific terms of reference questions follow: Question 1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 5. The UK, in common with other fuel importers, is vulnerable to price increases in primary fuels, especially oil, gas and coal. Of these:

1 For example, using large amounts of wind energy reduces fossil fuel imports but makes the electricity system more difficult to operate.

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• concern over the volatility of the price of oil remains high because of increasing global demand, the vulnerability of supply to price shocks, and longer term concerns about resource depletion;

• gas is relatively plentiful with shale gas having eased global supply pressures substantially;

• coal is plentiful, globally traded and seems unlikely to suffer large price increases, in part at least owing to its poor carbon emissions profile. The adoption of carbon capture and storage (CCS) technology would almost certainly lead to increased demand. This is unlikely to happen in the near-term but could become an issue before long.

6. Uranium is a different case. The cost of uranium fuel is a small but significant part of the cost of nuclear electricity. The uranium can be bought ahead and is therefore not vulnerable to price shocks. If the global nuclear renaissance takes place2 then there will be a price pressure but this will encourage greater exploration and production, something that has been subdued in recent years.

7. If renewable energy plays a substantial role going forward this will improve resilience to price changes but at a cost of higher capital charges for the technology likely to make most difference in the UK – offshore wind. 8. Resilience can of course be improved dramatically by focussing hard on energy efficiency and energy conservation. Any significant reduction in overall energy demand will mean that a major price swing will have a proportionately lesser economic impact. Question 2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 9. Energy security can be sensitive to investment in infrastructure because of the scale of investment required and the length of time required to build the infrastructure. 10. Traditionally, the demand for space heating has been subject to the biggest fluctuations both in the short-term and seasonally. In the UK this demand is met predominantly by gas. Gas storage in the UK is limited (historically it was assumed that the North Sea acted effectively as a reservoir) but work is under way to provide a sufficiently robust gas storage system. 11. The future energy system will be much more diverse both in primary fuel feedstock and generating technologies. Creating this system will take time and capital investment but it will also involve building power networks suitable for the 21st century. This will allow the effective management of demand to balance with intermittent renewable supply and enable the effective integration of transferred demand such as electric vehicle charging and heat pumps should the current policy direction in these areas be realised. This so called “smart grid” is crucial to UK energy policy and security and the investment needs to be made. 12. Dealing with intermittency presents a need for demand management, storage, back-up generating capacity and potentially greater international interconnection. Each of these has a role to play and there are complex technical issues in their optimisation and integration. For example, each storage technology has different technical characteristics which suit it to different roles over different timescales. Long-term storage over several days (for example,. to deal with prolonged low wind) may ultimately be possible but very costly.

2 Following the recent earthquake and tsunami in Japan there is likely to be a global reassessment of nuclear power but it is difficult to forecast the effect this will have on new nuclear build programmes.

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Question 3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? 13. The transfer of space heating and transport from fossil fuels to electricity would have a profound effect on the electricity system, potentially doubling electricity demand. This will make investment in low carbon generation, networks, smart grids and other infrastructure the key to energy security. The development of institutional structures that enable such changes will also be crucial. Should these investments not be made, measures such as rationing of vehicle charging could become commonplace. Other challenges such as privacy and information security will need to be solved when evolving the smart grid and its associated smart metering systems. 14. The upside, of course, is that the UK’s exposure to oil price risk will be reduced commensurately, but replaced by an exposure to the construction costs of new generating capacity and smart grids. These costs are largely locked in at project completion and there are choices to make in respect of construction start times to take the lowest prices where possible. It is worthy of note that construction costs of new generating capacity have, in recent years, proved almost as volatile as oil prices depending on global market conditions. Question 4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 15. As stated above, reducing energy demand can only have positive impacts on energy security and exposure to price volatility in the long-term. Reducing peak demands in the short-term, also reduces the extent of plant construction needed and hence its capital cost and deployment risk. Energy efficiency is therefore highly desirable as a cost effective means of mitigating so many risks. Question 5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 16. The main impact of a shift to greenhouse gas reductions and renewables is on the electricity sector and in particular the operability of the power system. We are moving from a world where flexible gas and coal fired power plant provide demand-matching capability in a straightforward, controllable manner. Going forward, power plant will become either relatively inflexible (nuclear and probably advanced coal with CCS) or intermittent (such as wind). This makes the minute by minute balancing of supply and demand more difficult and dependent upon intensive management of demand, use of storage, rapid response (thermal or biofuel) back-up plant and greater transmission interconnection. There is much still to learn about how to operate such a power system securely. 17. On the positive side, however, more renewables and nuclear power decrease the UK’s dependence on international supplies of fossil fuel. Question 6. What would be the implications for energy security of a second dash-for-gas? 18. Many might argue that the second dash-for-gas happened some years ago and what is now proposed is the third or even fourth such dash. Gas fired power plant provides secure reliable baseload or load-following electricity, provided the gas is available. It can be built in dual-fuel format so liquid back-up fuel is available for a few days or weeks if gas is short.

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19. Gas is now much less scarce in the world since shale gas has become widely available and it seems rather less of a security risk than once feared. However, a large build of new gas fired plant would expose the UK to price volatility and most likely slow progress towards meeting greenhouse gas reduction targets. Question 7. How exposed is the UK’s energy security of supply to international events? 20. With the UK becoming a net importer of fossil fuels, its energy system has become more exposed to international events. This is particularly true in terms of exposure to price volatility but there is also a risk of actual supply shortages in extreme situations. Question 8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? 21. UK energy policy (for example, the proposed electricity market reforms) does not place a financial value on diversity of input energy source and instead leaves it, in general, to the market to decide. This means that price and perceived future price volatility will be the main drivers in such decisions. This should, in theory at least, deliver a balanced energy system, but in practice the build incentives are skewed:

• Coal with carbon capture is difficult to get consented and built, has long construction times, high capital costs and complex regulatory issues. It is therefore more difficult to fund than gas. This situation would change if gas were also to be subjected to CCS requirements.

• Nuclear has even higher costs, more complex relationships with Government and financers and is arguably even more challenging than coal.

• Gas is relatively straightforward given the right incentives.

• Renewables vary but onshore renewables at any scale have demanding planning consent issues and offshore renewables have technical, commercial and funding challenges.

There is therefore no guarantee that an optimal scheme is taken forward. 22. Confidence in the future UK energy market is crucial if the necessary investment is to be made. It is therefore vitally important that the current electricity market reform is completed in a timely manner and to an appropriate level in order to allow the private sector to make its investment decisions. Question 9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? 23. Other relevant issues would seem to include: Localism versus large scale solutions

24. There is significant opportunity for small scale integrated energy solutions and for meso-scale (community level) solutions that might integrate power and heat via a smart grid and a district heating network. This would allow maximum capture of local community heat pump systems, solar-thermal, biomass and other resources at high levels of operating efficiency. Such solutions need to be engineered robustly to provide security by creating the opportunity to reduce dependence on fossil fuels. They are not, however, a total solution.

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Infrastructure resilience and interdependency

25. The recent Engineering the Future report Infrastructure, Engineering and Climate Change Adaptation – ensuring services in an uncertain future explored interdependencies between infrastructures. For example, a coal fired power station requires a functional rail system to deliver its coal as well as a functional private transport system so its employees can get to work. Networks of all kinds require telecommunications and information systems to be operable. This is equally true of supply chains during the construction phase of the infrastructure. It is important to consider the wider impacts of events such as flooding and cyber-terrorism in this context. Uncertainties in technology pathways

26. None of the main technologies currently proposed for large-scale decarbonisation of the UK energy system can guarantee to be successfully deployed at large scale, for example:

• the full chain of carbon capture and storage has not yet been proven on a commercial scale;

• nobody has yet operated a large power system with very large percentages of wind energy;

• nuclear power is proven but support is vulnerable to the consequences of nuclear scares or accidents, as the current events in Japan remind us;

• many practical issues around electric vehicle or plug-in hybrid deployment on a universal scale are untried, for example mass installation of charging points at reasonable cost;

• estimating the future demand of certain technologies such as electric vehicles or heat pumps is extremely challenging;

• international agreements around major intercontinental transmission are a new area;

• the willingness of the public to engage in the process and to accept issues such as privacy impacts is untested and has been an issue elsewhere in the world.

27. This means that the risks of non-delivery in one or more areas of UK energy policy are quite large. There is a need to plan a degree of flexibility into the system and to provide contingencies should some aspects fail. About the IET 28. The Institution of Engineering and Technology (IET) is one of the world’s leading professional bodies for the engineering and technology community and, as a charity, is technically informed but independent of network company, equipment supplier or service provider interests. 29. This submission has been prepared on behalf of the Board of Trustees by the IET’s Energy Policy Panel. March 2011

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Memorandum submitted by the UK Hydrogen and Fuel Cell Association (UKES 34)

This paper provides the response from the UK Hydrogen and Fuel Cell Association to the Committee’s examination of how the security of the UK’s energy supply relates to the UK’s energy independence, and the sensitivity of the UK’s security of supply to changes in various factors. The UK Hydrogen and Fuel Cell Association (UK HFCA) aims to accelerate the commercialization of fuel cell and hydrogen energy technologies. Through the breadth, expertise and diversity of our membership, we work to trigger the policy changes required for the UK to fully realise the opportunities offered by these clean energy solutions and associated elements of the supply chain. The UKHFCA also makes the fundamental distinction between hydrogen reformed from fossil fuels and that produced by electrolysis which is fossil-independent and emissions free. 1. Executive Summary Fuel cells and hydrogen are ‘game changing’ technologies providing low-carbon solutions across transport, stationary power and beyond. The growing industry is already bringing benefits that the UK cannot afford to miss: creating new jobs, supporting UK economic growth and improved competitiveness in the energy markets globally. Fuel cells provide a high efficiency alternative to conventional heat engines. Their increased use offers significant carbon emissions reductions across the power and transport sectors; with even greater emissions reduction potential when hydrogen itself has a low carbon footprint.

This response has been produced through consultation with our members and presents the Association’s response to those aspects of the consultation of most relevance to the sector. Our focus is on the needs of the future energy and technology mix, in an area which both supports and challenges the current status quo. Because of the associated supply / demand matching, low transport costs, and wide process options, we see substantial potential for a hydrogen, generation infrastructure, and widespread deployment of fuel cells, as part of a reformed electricity market and even more critically in addressing the dependence on natural gas for heat and oil for transport. Realising this potential requires hydrogen to be produced at various scales within the energy system, including the potential role of electrolysis for managing and storing the increasing proportion of time-varying renewable power in the power system. Fuel cells offer innovative help in a range of application otherwise dependent on fossil fuel combustion. Increasing potential exists across segments of the electricity industry to apply electrolyser and fuel cell technologies. This will help to deliver the whole spectrum of UK de-carbonisation, diversity and security of supply, and fuel poverty objectives. The ability for hydrogen to allow fuel source shifting gives a unique opportunity for UK to diversify its industrial skills at the same time as addressing energy security across power, transport, and heat.

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2. Detailed response 2.1 How resilient is the UK energy system to future changes in fossil fuel and uranium prices? We observe that only fossil fuel price is likely to remain most volatile, while the main alternative source of hydrogen - wind energy, will probably be much less volatile. Both distributed solar PV and wind power sources are expected to reach grid parity in the next few years (due to burgeoning market growth in the US, China and other parts of Europe) and so the indigenous security of the UK energy system can be improved provided these renewable sources are used to generate both power and hydrogen fuel.

2.2 How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? There is a complete lack of distributed energy storage in the power system, which is fundamentally incompatible with the government’s targets to generate and utilise increasing amounts of renewable power. It is important to deploy energy storage and to view it not only as an electricity-in/electricity-out conversion, but also as an electricity-in/fuel-out process, where the fuel is hydrogen. This hydrogen may be generated at various levels within the energy system to help manage both the supply and demand side variations faced by the electricity industry, whilst providing green hydrogen for the Fuel Cell Electric Vehicles that numerous OEMs expect to launch in 2015.

We note that energy movement by pipeline is the most efficient transport method and that hydrogen gas is very similar to natural gas in that way. We also note that hydrogen generation at the points of use via electrolysis can often be applied to circumvent the large investments required to construct a national infrastructure similar to natural gas.

2.3 What impact could increased levels of electrification of the transport and heat sectors have on energy security? We consider that the problems of greater reliance on electricity to provide low carbon energy will be mitigated by inter-sector transfers and some storage of hydrogen. This becomes economic because of increased carbon costs and the need to de-carbonise, leading to investment in pre-combustion carbon capture and storage (CCS) systems for both electricity and industrial use. Application of gasification techniques allows use of a wide range of fuels, including biomass, waste streams, natural gas and coal. This CCS process has hydrogen as an intermediate product, which is already used as an alternative to natural gas across the industry, including power, heat and chemicals. Like natural gas buffer storage is used to match supply and use for the hydrogen.

While hydrogen production from CCS is large scale in nature, other low-carbon hydrogen production techniques compatible with distributed generation, such as electrolysis, are available on the smaller scale.

Hydrogen power vehicles allow for gasoline-like range and refuelling time but are generally hybridised to allow regenerative braking. Fuel cells should be viewed as a complementary technology to battery electric configurations, with the latter more suited to smaller, low range vehicles in urban settings.

The fact that almost all major car OEMs committed in 2009 to launching FCEVs in 2015 should not be overlooked with respect to reducing the transport sector’s dependency on foreign oil post 2015. To facilitate this in the UK requires increased generation of

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renewable power, increased production of low carbon hydrogen and the deployment of hydrogen vehicle refuelling infrastructure.

The heat loads, even with CHP, will be difficult to address without use of hydrogen. Given CCS applied to biomass, natural gas or coal, the hydrogen can be piped to local CHP or heat loads without change to the size of local CHP plants without local storage and which is important to such plants in built up areas where most heat is used. In advance of a full hydrogen grid, local reformers could convert network gas to hydrogen for final distribution to homes in an intermediate stage, thus enabling a progressive rollout of domestic hydrogen conversion technologies, such as fuel cells, prior to a complete switch of the grid.

The 2013 and 2016 targets for low and zero carbon homes in the emerging UK Building Regulations are most helpful with respect to reducing the heat demand of the domestic sector. As these low energy buildings emerge there is much greater scope for meeting heat demands by local heat recovery from fuel cell and electrolyser systems working in conjunction with solar PV roofs. These zero-carbon solutions can be facilitated by engineering hydrogen systems for such mass produced markets without necessarily requiring a large national infrastructure solution.

The use of hydrogen as an intermediate and economic energy vector enables diversity of primary energy sources and will increase our energy security.

2.4 To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? Attempts to reduce energy demand by energy efficiency have not resulted in significant reductions in fossil fuel consumption at existing unit price levels. We would expect energy efficiency to be more effective as prices rise and to be a key component of limiting demand growth to improve UK energy security.

We believe that the UK’s energy security issues can only be solved through application of a range of techniques and that rollout of new energy efficient technologies is essential. The efficiency of fuel cells is one of the drivers for their adoption, and generally higher efficiency is always sought as long as cost and the embodied carbon implied by extra investment is taken into account.

2.5 What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? We have argued, in our submission to the Government’s Consultation on Electricity Market Reform, that increased base load wind and nuclear power means more flexible generation of fossil fuel with CCS. Further to that if the incentives are correct it will be reasonable to capture CO2 from biomass as well as the fossil fuels. To make CCS flexible the best technology is pre-combustion as it is possible and cost effective to decouple the gasification from the generation, because of the hydrogen used to transfer energy in this process.

The de-coupling is more efficient if an inter-sector transfer of energy (with the use of hydrogen) takes place. Beyond that line packing and buffer storage may be necessary to offset increased penetration of renewables.

In some cases, wind energy is best converted to hydrogen for transport and heat, and this could be very relevant to isolated communities and some electricity market conditions. For example one of the Danish electricity suppliers – Modstrom, is supplying wind electricity free of charge overnight. As wind and solar penetrations increase in the

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UK power system, and the availability of excess renewable power increases, the viability of generating hydrogen from renewables will reposition it to that of a significant mainstream pathway. Fundamentally it is risky to base our future energy security on overseas sources of gas, oil and coal and it is better to utilise indigenous sources of renewable power and hydrogen as the energy carrier.

We note that DECC’s latest energy statistics1 highlight the following features of recent renewable generation:

• Renewables’ share of electricity generation fell from 6.7% in 2009 to 6.6% in 2010

• Onshore wind generation fell by 7.7% due to low wind speeds in 2010, compared to 2009

• This was against the fact that onshore wind capacity increased by 14% (476 MW) between 2009 and 2010

These data reinforce the importance of storage to enable us to better harness weather dependent renewable energy and allow its provision to provide zero carbon energy and fuel.

2.6 What would be the implications for energy security of a second dash-for-gas? No specific comment. 2.7 How exposed is the UK’s energy security of supply to international events? No specific comment. 2.8 Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? UK energy security policy is focused on electricity. We expect this to evolve as security is added to cost concerns in other sectors, including reliance on imported biomass. The merits of hydrogen as a common energy vector will enable fuel shifting and make end user investments cheaper.

We note that the core technologies of fuels gasification for production of hydrogen, and electrolysis of water to make hydrogen, have been routinely used in industry for a long time and at all scales.

At the large scale, the major exposure will be if the Government does not progress and follow up the CCS demonstration projects with commercial plants, including the production of commercial scale, low cost, de-carbonised hydrogen. This will naturally occur with pre-combustion capture of CO2 rewarded under a successful electricity market reform and adequate price for CO2.

At the small scale, the major exposure will be if the Government does not progress the development of distributed hydrogen systems based on electrolysis. This is especially relevant to the refuelling of FCEVs which are the only option for meeting the range and rapid refuelling expectations of consumers. This requires recognition of this low carbon pathway and assistance with the demonstration and deployment of electrolyser and fuel cell systems in distributed applications.

2.9 Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

1 http://www.decc.gov.uk/assets/decc/Statistics/publications/trends/1512-pn11-031.pdf

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Making the UK energy mix more resilient to external factors, including fuel price by valuing carbon reduction and enabling hydrogen as an intermediate energy vector, will show case UK climate change management and industrial skills. The importance of economies of scale for CCS means that support for the current CCS demonstration projects must follow through into support for CO2 infrastructure and general deployment.

Energy storage and energy security are synonymous. The continued deployment of renewable power sources will soon require energy storage unless the renewables are to be wasted at times of low demand. It is important that the form of this storage facilitates decarbonisation of the transport and heat sectors and is not just confined to the boundaries of the power system. Sector export of renewable power as hydrogen is a major option for improving indigenous energy security. We should be wary of basing assumptions on business as usual energy prices; we need to invoke change and develop solutions at large and small scale, both at which hydrogen has excellent prospects. The views expressed in this document have been developed through consultation across the UK HFCA membership; they do not necessarily reflect the views of individual members of the Association but reflect a general consensus within the Association. March 2011

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Memorandum submitted by Electricity North West Limited (UKES 35)

I write in response to your call for evidence published in January and welcome the opportunity to comment. Electricity North West Limited is the electricity distribution network operator based in the North West of England, with no supply or generation interests. Our comments are therefore from the perspective of an energy network provider regulated by Ofgem. We have recently responded to the Department for Energy and Climate Change’s Electricity Market Reform consultation which discussed the same issues but was predominately focused on ensuring that low carbon electricity generation assets are delivered in a timely and efficient manner. Whilst we support the Government’s objectives, we are particularly concerned with the implications for electricity networks of decarbonising the UK and note that many of these issues are not addressed in that document.

The energy security versus independence debate must recognise a third factor – cost. It is appropriate that the UK should make a conscious decision on the balance between energy independence (secured through renewable or localised resources) and security of resources, but the debate must consider the wider picture of increasing costs of electricity.

Moving to a lower carbon generation mix will have implications for networks. The increasing use of renewable resources as part of the energy mix decreases the flexibility of the energy supply. To maintain the current standards of performance, the solution will be increasing management of electricity demand. Networks must assume an important role in balancing the available supply with customer demand. A failure to achieve this control will either result in increased requirement for flexible, carbon intensive generation or risk supplies being unavailable to consumers.

We have focused this response on the relevant questions which affect the Network Companies.

Question 2 - How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

The UK’s energy security is very sensitive to the level of investment in energy infrastructure. The UK energy sector faces two capacity challenges – availability of generation and availability of network infrastructure to deliver energy to consumers. The focus of most publications has been the need to build a new, low carbon generation fleet with a passing reference to the ability to connect the assets to a network. The Government must recognise that the future role of networks will need to change radically to facilitate the decarbonisation of energy usage. This role is critically important and goes beyond the physical connection of new generation fleet to the connection of small scale renewable generation and ensuring that sufficient capacity is available throughout the network to allow energy usage to switch from high carbon gas, petrol and diesel for heating and transport toward low carbon electricity. The Committee must ensure that these issues receive serious attention from Government in order to prevent additional significant barriers to low carbon investment.

The Government must recognise the potential financial constraints placed on the networks. The UK will be undertaking an unprecedented increase in network and generation infrastructure investment at the same time as many other international economies. The Government must ensure that regulators are required to provide appropriate financing arrangements to ensure that debt and equity investment is available for networks as well as generation. There is a global market for infrastructure investors and these markets will become saturated potentially raising the cost to customers. Securing sufficient favourable financing is key to ensuring that our objectives of

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delivering cost efficient decarbonisation. Therefore regulators must be conscious of the investment climate being created now.

Question 3 - What impact could increased levels of electrification of the transport and heat sectors have on energy security?

Electricity usage will increase in scale and in usage profile with significant impacts on the requirements on networks. To be successful in achieving our decarbonisation goals, the 2050 Pathways Analysis demonstrates that the low carbon policy objectives must penetrate all sectors including transport, space heating and process heating. Our domestic load growth projections based upon the expected impacts of electric vehicle charging and the growth of heat pump usage suggest that the level of network reinforcement investment will need to increase dramatically in the next five to ten years. Initial estimates suggest a minimum doubling of domestic electricity demand, even if the new loads are optimally scheduled.

On a localised level, a single fast electric vehicle charger or small number of domestic heat pumps in a street will often cause significant issues for the local low voltage grids. This is likely to cause voltage limits to be breached and significant investment will be required in distribution transformers due to peak load having doubled. This issue is clearly illustrated when one appreciates that the expected additional demand increase due to electric vehicle charging in Manchester city centre almost matches its present total day-time demand.

We estimate that using current network management standards and policies these load increases would require a minimum of £1bn of investment before 2030 in our network area alone, with a quarter of this funding required in our next price control period (RIIO-ED1, 2015-2023). Using traditional techniques, load related expenditure within our next price control would be expected to rise by over 200%.

To mitigate the twin risks of high reinforcement costs and delays in the delivery of additional network capacity, significant technology innovation and investment will be required in load management and demand side response; there is greatest opportunity for this at the higher voltages. In some instances, networks will be the key enabler of localised generation. It is therefore important that network development must at least match generation development. The (unstated) working assumption is that issues created by the introduction of heat pumps and electric vehicles will be addressed by network companies in an efficient and timely manner. This will not be the case without changes to the current regulatory framework. DECC must provide regulators with clear guidance on the need for networks to support wider policy objectives or risk delays in both local generating capacity and low carbon reduction technologies.

DECC must also ensure that Ofgem provide sufficient incentives to deliver the innovation required to tackle these issues and recognise that innovation represents a significant departure from typical infrastructure investor risk profiles and will require appropriate return on investment.

Question 5 - What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

The chosen solution to meeting our greenhouse gas targets via renewable generation will improve the UK’s energy security but we recognise that there is a balance required between energy security, carbon reduction and affordability for customers. For network companies, the traditional approach of physical network reinforcement will create significant increases in customer bills at a time when generation charges will also increase. The generation profiles of the new low carbon fleet will significantly differ from the existing assets and therefore a new approach to network management is vital to deliver the Government’s targets at an affordable price.

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Our view is that Government, Regulators and Network companies need to understand how to match increasing demand patterns with intermittent and/or less responsive generation. We suggest that there will ultimately be a need for a Distribution System Operator role to achieve the desired low carbon penetration. The existing approach of matching generation to meet demand requirements will need to change to an optimised supply matching approach, where customers’ demand profiles can be matched to availability of generation capacity. On a local level, Distribution Network Operators have begun to experiment with commercial agreements to defer investment requirements. This approach will need to be replicated and expanded to manage the localised capacity issues.

Linked to this issue is the current approach to incentivisation of network management. Networks are currently incentivised to increase utilisation rather than increase capacity. When regulators were responsible for capturing short term efficiencies on behalf of customers, these objectives were appropriate but we now operate in an environment which requires a longer-term, expansive view of efficiency. The current approach will result in the availability of network capacity becoming a “bottle-neck” that delays the move to the low carbon economy, and in particular can create issues for future generation investments. If the future role of networks is to facilitate the transition to low carbon generation, the incentive mechanisms adopted by Ofgem must change to support this changed role. To achieve this, Ofgem must be given clear guidance on the objectives and roles for future networks, to ensure that the mindset of Ofgem changes away from a narrow focus on cost efficiency to the efficient enablement of a low carbon economy.

Regulators should be free to determine the appropriate tools to deliver the policy but the overall objectives must be consistent with Government policy. Ofgem are somewhat restricted in adopting this wider perspective by their statutory duties. DECC can support and enable Ofgem to make this change by drafting more explicit Social and Environmental Guidance for Ofgem that reflects the key implementation requirements of government policy.

Question 7 - How exposed is the UK’s energy security of supply to international events?

Whilst a generation fleet with greater reliance on local renewable energy resources increases security of supply, the global energy markets are all looking to decarbonise, replace or build generation assets. There will be international demand for infrastructure finance and manufacturing resources which will have significant implications for the UK’s ability to deliver its carbon and energy diversity targets. Ofgem suggested that over £200bn will be needed to deliver the required investment and whilst a sizeable portion could be raised through the debt markets, equity will continue to play a vital role. The amount of finance which could be provided by typical infrastructure investors is uncertain and highly sensitive to changes in risk profiles. With competition for these scarce resources from other UK and international investments, DECC must ensure that the appropriate long-term commitments to investors are retained or enhanced. For regulated networks this can only be achieved by ensuring that Ofgem provide long-term competitive returns packages whilst minimising the level of uncertainty associated with investments. It is reassuring that Ofgem has recognised the long-running and consistent opposition of investors and network businesses alike to its proposals for financeability under their RIIO model and has made several concessions in the Gas and Transmission reviews. These adaptations must be carried into the RIIO ED1 controls to demonstrate Ofgem’s and the Government’s commitment to investors.

March 2011

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Memorandum submitted by National Grid plc (UKES 36)

National Grid plc’s submission to the House of Commons Energy and Climate Change Committee inquiry on the UK’s Energy Supply: Security or Independence? Executive Summary 1. Diversity of sources of supply, both fuel type and location, is the key aspect of UK

energy security as it serves to minimise reliance on any single source and reduces risk. This is important when many energy sources can be affected by geopolitics and natural disasters.

2. Alongside this, National Grid recognises that security of supply has to be discussed with reference to both sustainability and affordability. National Grid recognises that in the longer-term, the demand side will play an increasingly important role in mitigating security of supply concerns by postponing energy use until generation or network capacity becomes available through the use of smart technology or more proactive participation in the provision of system operator commercial services. In the near-term there will be the need to manage increasingly volatile generation patterns and gas demand profiles as the level of intermittent generation increases.

3. Issues associated with energy supply security are summarised below:

In order to meet the environmental targets, while maintaining energy security, there is a requirement for a balanced, diverse approach to the electricity generation mix to minimise exposure to a single supply source. This would see an even emphasis on development of low carbon generation technologies – e.g. a combination of nuclear, Carbon Capture and Storage (CCS) plant and renewables.

In gas markets there will be an ongoing requirement to integrate diverse gas supplies as the level of imports increase due to diminishing UK Continental Shelf (UKCS) sources. In addition new gas storage sites are likely to be developed and the gas network will need to be more flexible in order to cope with the range of import options and fluctuations in flows due to gas-fired power demand responding to intermittent renewable generation. Non UK demand will have a greater influence on the market and competition with other markets will result in a need for wider market opportunities and arbitrage in order to attract new supplies.

Generation and supply terminals are expensive and it is important that networks are invested in to deliver flexibility and certainty so that connecting customers can be confident of getting energy to the market. This will increase both security and lower overall costs.

A significant amount of investment in the energy infrastructure is required in order to deliver sustainable and secure markets for 2020 and further into the future. With significant development in the electrification of the heat and transport sectors in the coming decades, investment in electricity networks is unavoidable if secure supplies are to be delivered to meet growing demand. Smarter energy solutions, optimising between gas and electricity networks are important in assuring affordable, secure, low carbon energy. Although demand side participation in markets is expected to increase it will only be one part of the solution with a key aspect being that demand cannot be delayed indefinitely.

Increasing levels of intermittent renewable generation are expected to require back-up generation and increased levels of system reserve requirements. In the longer-

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term, demand side response will become increasingly important to alleviate intermittent supply issues. The changing make-up of UK electricity generation with an increasing contribution from wind will also significantly impact the operational characteristics of running the UK’s gas network, with gas-fired power generation identified as the primary source to cover for wind intermittency in most instances.

A greater level of interconnection in the power market will provide greater diversity of potential supplies as well as facilitating competition in the European market and assisting the transition to a low carbon energy sector by integrating various renewable sources. It is an established view that increased interconnection with Ireland and mainland Europe can help with the intermittency issues posed by renewable (mainly wind) generation and so aid and support electricity security of supply.

The slow development of new low-carbon generation and the closure of existing nuclear plants will probably result in a heavy reliance on gas-fired generation and will effectively result in both gas and electricity markets being reliant on significant levels of imported energy.

Any market intervention to deliver a long-term sustainable energy sector has to also consider the security of supply implications.

Introduction to National Grid 4. This response is provided on behalf of National Grid which owns and operates the high

voltage electricity transmission system in England and Wales and, as National Electricity Transmission System Operator (NETSO), operates the Scottish high voltage and offshore transmission system. National Grid also owns and operates the gas transmission system throughout Great Britain and through our low pressure gas distribution business we distribute gas in the heart of England to approximately eleven million offices, schools and homes. In addition, National Grid owns and operates significant electricity and gas assets in the US, operating in the states of New England and New York.

5. In the UK, our primary duties under the Electricity and Gas Acts are to develop and maintain efficient coordinated and economical systems and also facilitate competition in the generation and supply of electricity and the supply of gas. Our activities include the residual balancing in close to real time of the electricity and gas markets.

6. Through our subsidiaries, National Grid also owns and maintains around 18 million domestic and commercial meters, two electricity Interconnectors facilities operating between England and France (IFA) and England and the Netherlands (BritNed), and a Liquefied Natural Gas importation terminal at the Isle of Grain. We have also formed National Grid Carbon Limited which is a wholly owned subsidiary advancing the transportation and storage elements of the Carbon Capture and Storage (CCS) supply chain.

7. National Grid welcomes this opportunity to provide comments on the inquiry to explore the nature and extent of UK energy security. Our submission relates to our UK businesses, with the response concentrating on the gas and electricity sectors of the UK energy industry.

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Q1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

8. The UK gas and electricity markets are sensitive to changes in global fossil-fuel prices. Changes to these prices are more likely to have a strong influence on the type of fuel used for power generation, the level of energy demand and end-user prices rather than any security of supply implications.

9. As the amount of imported gas increases, the UK will become more exposed to increasingly complex world gas markets. Given the lack of long-term supply contracts the UK will need to be competitive against these markets to secure supplies. This does not necessarily result in security of supply implications provided that there is a diverse range of potential supplies. Should new low carbon generation be slow in reaching the market, the most likely impact will be a high percentage of electricity generated from gas, thus potentially exposing the UK market to high gas prices, resulting in higher end-user tariffs.

10. Gas and coal-fired generation are far more exposed to changes in fuel prices than nuclear power plant. The variable (fuel) costs of gas and coal plant is likely to be around 75% of the lifetime costs of the plant while, for nuclear plant, it is more likely to be around 10%. It would therefore take a substantial increase in the price of uranium to result in an impact in the operation of nuclear power plant.

Q2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

11. A significant amount of investment in energy infrastructure is required in order to facilitate sustainable, secure and diverse markets in the future. National Grid is planning to deliver a ~£16 billion investment programme, in the UK’s energy infrastructure, over the next 5 years. This investment will focus on our regulated networks businesses (funded through the RIIO (Revenue = Incentives + Innovation + Outputs) price control framework and other regulatory mechanisms) but may also include commercial ventures, for example, our LNG terminal facility at the Isle of Grain.

12. One of the key elements in delivering this investment will be the planning regime. An efficient planning process is required in order to facilitate the delivery of large scale investment in new power generation, transmission and distribution infrastructure and gas storage facilities.

13. In the next decade the focus of network investment will be centred on the transmission networks to connect new power generation and reinforce networks to deliver increasingly diverse power flows. Beyond 2020, significant investment in electricity distribution networks will be required to enable the electrification of the heat and transport sectors.

14. Without network investment there are a number of significant components of security of supply that could not be realised. Much of the focus of the debate is on the connection of supply and demand to networks, particularly as the sources of supply are anticipated to change significantly as energy is decarbonised. A second key area of investment is in maintaining existing networks, to continue to secure reliable supplies of energy (the UK electricity transmission network reliability is typically around 99.9999%, with the UK gas transmission network at 100%).

15. Below we summarise the key investment drivers and describe the supporting network required to deliver them. In addition our annual documents - Gas Transportation Ten Year Statement and Electricity Transmission Seven Year Statement – detail the forecast level of investment on National Grid’s Transmission Systems. National Grid also expects to have a significant amount of input to Ofgem’s new annual statutory security of supply publication.

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Power Generation Mix

16. During the course of this decade we will see the power generation mix in the UK change substantially. Normal power station asset ageing, together with the legislation in the form of the Large Combustion Plant Directive (LCPD) and the Industrial Emissions Directive (IED) is expected to result in around 20GW - or approximately 25% of existing capacity - of fossil-fuel generation capacity closing by 2020.

17. Driven by the 2020 EU renewable energy target, there will be an increase in renewable capacity, principally wind. In 2020, gas-fired power stations are likely to still make up a significant proportion of the capacity mix, although the amount of wind power will have significantly increased from around 5GW to approximately 28GW connected to the Transmission network. Other renewables and interconnectors will also have increased their contribution, while coal fired power station capacity will decrease significantly due to environmental legislation. Nuclear power station capacity is likely to remain broadly the same or decrease over the next decade, with any decrease likely to be offset by further gas-fired capacity. In the period post 2020 the picture is likely to change even further with the drive for lower carbon generation resulting in new nuclear plant, fossil-fuel plant with carbon capture and storage (CCS) technology and further renewable development.

18. National Grid’s analysis suggests that there is sufficient contracted generation (customers with grid connection agreements) to meet the 2020 renewable targets. There is also sufficient Combined Cycle Gas Turbine (CCGT) plant with a connection agreement and/or planning consents to fill the supply gap created by the plant closures detailed above. This should not result in complacency with regard to security of supply however, as history has shown that a large number of plants do not progress from this stage to construction. The main barriers to progression are planning and financing (securing consents and capital). The vast majority of the capital costs are associated with the Engineering, Procurement and Construction (EPC) phase of a project.

Electricity Network Investment

19. All this points to a significant amount of investment required in order to deliver sustainable and secure markets in the future. The long-term history of the power markets has been one of supply in the north and demand in the south around population centres. Transmission networks have been developed, incrementally, to accommodate these north to south power flows. Going forward, the next generation of UK electricity supply will have much greater geographic diversity (see figure 1), with these changes already impacting the development of the gas network.

20. Most new wind power generation will be deployed at locations across Scotland, mid Wales, and at offshore locations around the entire UK coastline. New nuclear power stations will be deployed at coastal sites around the UK. Interconnection with mainland Europe will also bring electricity import/export points into the UK mainland network at diverse coastal locations. Many of these new power generation facilities will exist in areas where transmission capacity will need to be significantly increased, thus driving a step-up in investment in new power lines. Future power flows will therefore also vary in time and direction (unlike the historic relative stability of north to south power flow).

21. An important aspect of network investment is asset replacement (maintenance capital investment) as this seeks to ensure that the networks maintain their current levels of reliability (UK electricity transmission network reliability is typically 99.9999%, with the UK gas transmission network at 100%). This type of investment is critical as a 1% reduction in the reliability performance of the electricity transmission network would result in around 230,000 households not being supplied for an entire year.

22. There is also a need for a timely connection process with regulatory allowances for wider network reinforcement and anticipatory investment in order to ensure that power is supplied to the market.

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Figure 1 – UK onshore electricity transmission networks

23. A greater level of investment in electricity interconnection capacity with our European neighbours will promote greater diversity of potential supplies. It is an established view that increased interconnection with Ireland and mainland Europe can help with the intermittency issues posed by renewable (mainly wind) generation and so aid and support electricity security of supply. National Grid is currently exploring the opportunities for increased electricity interconnection capacity; with new links to European countries (Belgium, Norway and France) currently being evaluating and/or actively progressed.

Gas Network Investments

24. In gas markets there will be a requirement to integrate an increasing diversity of gas supplies as the level of imports increases due to diminishing UKCS supplies. In addition new gas storage sites, potentially with high injection/withdrawal rates, are likely to be developed and the gas network will need to be more flexible in order to cope with the range of import options and fluctuations in gas-fired power demand driven by intermittent renewable generation.

25. Like electricity supply, the location for future gas supply is also forecast to change further. Historically gas supply flowed predominately from north to south, however in recent years the development of new import routes has shifted the gas supply away from the north to create in terms of network entry a more balanced and diverse network. This however has not reduced network investment, as the supply concentration at the individual entry locations (particularly for imports) has in most cases significantly increased to an extent where the aggregated supply capability requirements now far exceed the peak day supply requirements. Peak demand is around the 500 mcm/d level, with aggregated supply requirements reaching 600

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mcm/d. Going forward this trend of increasing supply concentration at many entry locations is expected to continue to require further investment, with the capability requirements likely to be around 700 mcm/d.

26. The specifics of future UK gas supply continue to be dominated by further declines in supply from the UKCS and growing import requirements. Currently imports make up 50% of annual supply; this is forecast to increase to about 75% by 2020. Imports are currently sourced from Norway, LNG and the Continent through BBL and IUK. Over the past year or two on the back of disappointing Norwegian exploration and reserves down grading we are now forecasting a plateau in Norwegian gas production followed by a decline. This has significant implications as future imports will probably need to be sourced more from either LNG or from the Continent. With European gas supply also in decline any imports via the Continent will essentially be displaced by supplies from either Russia or to a lesser extent North Africa and the expansion of existing LNG terminals. Longer term if new pipelines to Europe are built, these could also be from the former Soviet Union or even the Middle East. The investment implications of more imports from LNG or the Continent could be significant if existing entry points are expanded or if new terminals are built.

Gas Storage

27. It is expected that further UK gas storage will be developed beyond that currently under construction. Currently with low summer/winter price differentials (including those on the forward curve) the most likely type of new storage facilities will be fast cycling facilities driven by short-term volatility, rather than seasonal storage. These are most likely to be developed in the UK’s salt strata located primarily in the Cheshire or Yorkshire areas. Other salt bearing locations include Lancashire and Southern England and proposals to develop facilities in these areas also exist. In aggregate, the potential delivery from new fast cycling storage and storage under construction could be considerable; potentially well in excess of 100 mcm/d. To meet the entry and exit requirements, these storage facilities may require significant network investment. Figure 2, from National Grid’s Ten Year Statement, shows the potential build up of new storage developments in the UK market.

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Electrification of Heat and Transport

28. With significant development in the electrification of the heat and transport sectors, investment in the electricity networks is unavoidable if secure supplies are to be delivered to meet growing demand. Should the 2050 carbon reduction targets be met

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then we estimate that the Transmission electricity network would need to grow to 1.7 times the 2010 level with the electricity distribution network needing to grow to more than 4 times the 2010 level.

Q3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

29. Much of the future scenario work to date has focussed on achieving 2020 renewable targets and carbon reduction targets. These approaches have naturally drawn attention to the role of electricity, which in all scenarios is significant and increasing with electrification of many of our energy needs. To date, less focus has been placed on the transition period post 2020, during which an increasing amount of the energy requirements for heating and transport will transferred from the gas to electricity network. This post 2020 period will also see a change of emphasis for the gas sector; as its role in facilitating the delivery of the peak energy requirements increases.

30. As discussed in question 2, increased levels of electrification in the heat and transport sectors could impact on energy security should the requisite level of infrastructure not be in place. An increasing level of heat energy provided from electricity will introduce a much greater level of seasonality to the electricity demand profile. This, combined with a large proportion of intermittent renewable generation, will require backup energy requirements for heat. This could be delivered by gas heating providing peak heat requirements as well as backup for intermittent electricity supply. This would require the maintenance of the gas distribution network in order to provide this security.

31. The electrification of the transport sector will increase electricity demand with the requirement for back-up plant in order to maintain supplies.

32. Whilst the dependency on electricity for all our energy needs will grow, electric vehicle charging and electrification of heat could however help deliver greater security of electricity supply by introducing greater levels of demand side response. These electrical appliances can allow supply interruption without appreciable loss of amenity and, as already noted, demand could be flexed to meet available generation or network capacity.

Q4. To what extent does the UK’s future energy security rely on the success of

energy efficiency schemes? 33. The most cost effective way of reducing demand and therefore emissions is by

improving levels of energy efficiency; this is especially the case for building heat insulation – it should therefore be the first element of a low carbon strategy. Without energy efficiency measures, demand requirements will be greater, resulting in greater investment requirements and a greater reliance on imported gas supplies.

34. However, even with improvements in energy efficiency there will still be significant energy requirements in the UK and all the security of supply implications discussed in this response.

Q5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

35. In order to meet the UK’s targets for greenhouse gas emissions reductions as well as the increased penetration of renewables, while maintaining energy security, there is a requirement for a balanced diverse approach to the power generation mix to minimise exposure to a single supply source. This would see an even development of low carbon generation technologies – a combination of nuclear, CCS plant and renewables.

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Plant closures and generation requirements

36. If the expected ‘energy gap’ due to LCPD, IED and nuclear plant closures is replaced with intermittent and inflexible plant then there is a definite risk that the ‘Expected Energy Unserved’ (EEU) will increase if no action is taken. In order to maintain supplies, this intermittency will require flexible back-up generation, probably at almost a one-for-one capacity basis given the possibility of a low contribution from wind generation at the time of peak demand. Should this back-up generation be principally gas–fired then this would result in a less predictable operation of the gas networks (see below).

Operating the electricity networks with new nuclear generation

37. The connection of new nuclear plant to the transmission network will increase the size of the largest individual loss of load (from 1.26 GW to 1.8 GW). This increases the amount of reserve generation required in order to counter this potential loss. It is also unclear how flexible new nuclear and CCS plant will be. The requirement for flexible back-up plant to counter the intermittent nature of wind generation will also impact the type and amount of reserve plant required.

Operating the electricity networks with intermittent generation

38. As discussed in question 3, the electrification of heat increases the dependency on electricity and therefore need for back-up energy requirements to counteract the intermittency of renewables, but it also affords the opportunity for greater demand side response.

39. This intermittency will also impact the operation and balancing of the transmission networks. Our consultation on operating in 2020 suggests that electricity system reserve requirements will rise in order to manage uncertainty in output, with more wind generation connecting to the system. As the amount of wind generation capacity grows, operational procedures have to be developed with relation to forecasting wind output and to cater for wind generation output uncertainty.

40. The addition of a significant amount of renewable energy to the generation mix will add diversity with the focus moving from ‘where the energy will be supplied from’ to ‘when it will be supplied’. In the longer-term demand side response mechanisms have the potential to alleviate some of the risk associated with an intermittent supply source (please refer to question 9).

41. Additional interconnection, while adding to the diversity of supplies, will also add to the uncertainty and potential volatility of supplies with an increase in the possible range of interconnector flows from maximum exports to maximum imports and interaction with an increasing number of markets.

Operating the gas networks with intermittent generation

42. As wind generation capacity increases, the network operation challenges become material in both the electricity and gas networks. In most instances, gas fired power generation has been identified as the primary source to cover for wind intermittency. The consequences of this are largely dependent on the level of installed wind capacity and the location of gas fired power generation.

43. A major impact of wind intermittency is rapidly changing gas demand (in terms of volume (higher and lower) and location) and the increased frequency and rate of such demand changes. Obviously the resulting demand changes will require similar changes to the gas supply, notably from flexible supply sources such as gas storage and possibly Interconnectors and LNG. This will require a gas network that can flexibly respond to significant short term supply and demand changes. To enable such a response the network will have to operate in a less predictable manner than is currently experienced, which will in turn require significant network investment to enable variable flow patterns and potentially increased pressure variations. These needs are also

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compounded by the changing nature of future supplies, notably the expected increase in supply concentration and the coincidental loss of any major supply source.

Q6. What would be the implications for energy security of a second dash-for-gas? 44. It could be argued that we are already in a second dash for gas with around 10 GW of

new gas-fired power generation connected since 2009 or currently under construction.

45. With the imminent closure of the LCPD opt-out coal and oil plant, gas’ share of the power generation market in output terms is likely to rise to over 50% in the first half of this decade, notwithstanding the relative coal and gas prices. The continued decline of the UKCS will result in an increase in gas imports and could therefore result in both gas and electricity markets being effectively reliant on imported energy.

46. A combination of slow development of non-renewable low carbon options and the closure of the existing nuclear plants could exacerbate this position and result in gas’ share of the market becoming greater. This scenario could result in gas demand growing over the longer-term (post 2020) thus resulting in additional import requirements. This would also result in the power market being overly exposed to a single fuel source with the need for a diverse range of gas supplies even more important.

47. This could also impact on gas network investment lead times, with new capacity struggling to keep pace with demand should there be a rapid change in policy and/or market conditions such as the closure of existing nuclear stations.

Q7. How exposed is the UK’s energy security of supply to international events?

International events

48. Recent events in Libya and Japan have highlighted the exposure of the UK market to international events. The increasing reliance on gas imports will only increase this exposure. The events in Japan are likely to impact the global LNG market, but in the absence of long-term contracts, exposure to all gas import sources needs to be examined. The key is again a diverse set of import options to mitigate the risk of exposure to one supply source. Currently the development of shale gas in the United States and elsewhere may provide a security upside in that a greater level of LNG is available to the market.

49. There are two aspects to the impact of international events to consider. The first is related to supply availability constraints where, for example, supplies are restricted in Libya or diverted to Japan. The second relates to market sentiment – e.g. the recent events in Japan impact on planning consents and consultation periods associated with new nuclear plant. In this instance there is a requirement for a clear and unwavering government commitment.

Interconnection

50. A greater level of interconnection in the power market will provide greater diversity of potential supplies as well as facilitating competition in the European market and assisting the transition to a low carbon energy sector by integrating various renewable sources. It is an established view that increased interconnection with Ireland and mainland Europe can manage the intermittency challenges posed by renewable (mainly wind) generation and the flexibility challenges posed by wind and nuclear generation, so aiding and supporting electricity security of supply. Increased interconnection does increase the risk of a reliance on imported power, particularly if changes to the UK market were to provide an incentive for this e.g. through a UK carbon floor price mechanism. A reliance on imported energy is, however, not uncommon in many parts of Europe.

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Q8. Is the UK’s energy security policy sufficiently robust to be able to deal with

uncertainties and risks inherent in all of the above areas? If not, how could this be improved? Market Intervention

51. As stated above an energy policy that encourages a diverse set of supply sources is important to minimise risk. Therefore any market reform should also therefore address any security of supply implications. The Electricity Market Reform seeks to address this through proposals such as carbon price support, a feed-in tariff for low-carbon generation and a capacity mechanism. This form of market intervention can encourage the market to deliver the changes required to ensure the continued diversity in the sources of energy supply.

52. This approach has been adopted by several other European countries which have introduced market incentives to encourage the delivery of low carbon generation. Examples of this approach can be found in Germany, Spain, the Netherlands and Denmark.

Market Mechanisms

53. Although the carbon floor price mechanism has the potential to promote the necessary investment in appropriate, low-carbon technologies, we are concerned that it could create an incentive to import electricity to the UK to the extent that it may create a price materially above the EU traded carbon price. This could result in a reliance on imported power and potentially a slower rate of power generation development in the UK market. There are still many issues to be resolved to overcome some of the consequences of introducing a capacity mechanism, not least the risk of a central approach making incorrect decisions on the level of capacity and the mix. The market-based approach provides diversification of decision making which should produce the most efficient solution.

Q9. Are there any other issues relating to the security of the UK’s energy supply that

you think the Committee should be aware of? Demand side response

54. In principle, demand side response enabled through smart meters and smart grids, has the potential to affordably enhance security of the UK’s energy supply by allowing energy use to be postponed until off peak times, or when generation (e.g. in the case of wind) is more plentiful. In this way, less peaking generation will need to be built to deliver the required level of security. Short-term generation shortfalls could also be overcome by postponing the use of energy until replacement generation output is established. There is however uncertainty about how much demand side response will be available, when in the future it might materialise, and how long it can be postponed for. In the domestic setting, existing wet appliances (washing machines etc) offer the foremost opportunity for demand response, with electric heating, cooling and electric vehicles (EV) charging offering the greatest future opportunity; the key is the ability to interrupt use without appreciable loss of amenity. In the commercial arena, building services management of heating and cooling also offers the opportunity to provide demand side response. The introduction of time of use tariffs for all users, education and consumer engagement and perhaps in some instances mandating appliance standards for energy consumption, are key to cultivating demand side response. It is important to understand that this is only a short-term mechanism and that demand cannot be delayed for protracted periods.

55. Demand side response is also important in reducing gas demand through high gas prices. To date, the majority of any response has been through fuel switching for power

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generation and to a lesser extent large industrial users. In the future this could be extended to smaller gas consumers.

Strategic storage

56. Though current gas prices do not favour the development of large offshore seasonal storage, such projects may still be developed to satisfy shipper needs and a UK market that has appreciably less storage than any other major market in Europe. Obligations on shippers or a shift in opinion for increased UK energy security through the need for strategic storage would also promote such developments. If built offshore storage would probably utilise depleted gas fields in the Southern Basin and flow to/from Bacton or possibly Theddlethorpe or Easington. To meet the entry and exit requirements, these storage facilities would require significant network investment.

High impact/low probability events

57. The UK’s gas supplies, although increasingly diverse with the advent of significant LNG supplies, have a number of large single supply sources on long supply chains outside of UK waters e.g. Norwegian gas supplies via the Langeled pipeline. Supply sources such as these have a potential exposure to high impact/low probability events, the consequences of which are highlighted by recent events in Japan.

March 2011

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Memorandum submitted by Neil Crumpton (UKES 37) Evidence from Neil Crumpton, energy consultant to B9 Coal (developing fuel cell CCS power stations), ex Friends of the Earth energy specialist (16 years as staff member, including main anti-nuclear campaigner and energy campaigner), ex campaigner for Bellona Foundation (6 months as UK representative supporting CCS technology). This evidence is given as an individual. Summary The main points of my evidence are : The highest degree of UK energy security (and climate protection) would be best achieved in my opinion, considering the UK and global context over this Century, by : 1) the deployment of fuel-flexible, load-following energy generating carbon capture and storage (CCS) schemes and transmission infrastructure able to back-up very large deployments of intermittent renewable energy systems (RES) 2) the deployment of pre-combustion CCS technologies as they offer huge fuel-fleixibility and load-following capability - as their generating technologies can be fueled by syngas and synthetic natural gas (ie gas turbines, gas engines) or hydrogen (fuel cells, gas turbines, gas engines) produced by gasifying coal, biomass and residual waste, reformation of natural gas, LNG and biogas, or electrolysis of water (using peaking RES electricity) 3) the deployment of infrastructure linked to the UK's gas transmission pipeline network to enable the injection and use of synthetic natural gas (SNG), bio-methane and or hydrogen and mixes there-of (produced by gasification of coal, biomass, residual waste, or plasma treatment, or electrolysis of water) 4) the deployment of sufficient reliable energy-generating capacity (probably around 210 - 290 GW including power stations, gas boilers, mCHP, CHP, hydro) to provide sufficient peak winter energy demand including a weeks-long cold snap, comprising a windless anti-cyclone 5) the deployment of as much RES capacity, particularly offshore wind as is commercially viable and could be fully backed-up by the reliable energy generating capacity in (4) 6) recalling the decision to allow new-build 'Generation III' nuclear power stations until the early 2020s by which time it will be better understood if CCS is a viable technology and to what degree it could be scaled up, and whether claimed safer and radwaste-consuming Generation IV reactor designs would be technically feasible and commercially deployable 7) the deployment of significantly more industrial, commercial, district and community CHP and mCHP, possibly integrated with ground source heat pump and inter-seasonal storage infrastructure (eg shared underground conduits) 8) supporting the international development of commercially viable and very large-scale sustainable sources of bio-energy, particularly desert-produced algae fuels, for possible carbon-negative energy generation in CCS infrastructure 9) supporting the development of 'direct air-capture' (DAC) technologies (which can extract carbon dioxide from atmospheric air) and deployment if commercially viable as necessary to meet UK climate agreements/leadership 10 supporting the development of synthetic hydro-carbon transport fuels (aviation fuel particularly) using captured carbon dioxide and hydrogen from water electrolysis RES electricity

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Global context The rising global population is giving rise to increasing concerns about the availability and access to numerous global resources including food, water and energy. Global (final) energy demand is likely to roughly double by 2050 from about 98,000 TWh/y in 2009 to about 180,000 TWh/y in 2050 (estimates vary considerably). This assumes a global per capita demand averaging 20 MWh/y (55 KWh/day) per person including aviation and shipping and a global population of about 9 billion by 2050 (ie 20 MWh/y/capita x 9 billion = 180,000 TWh/y). Currently UK per capita demand is about 31 TWh/y excluding aviation and shipping and net imported goods. Given such global resource issues it is likely that UK energy security would only be significantly enhanced by the development and exploitation of the UK's indigenous energy resources. Exceptions to this may be the wide global availability of shale gas in the medium term and desert-produced algae fuels from the medium term onwards. Indigenous energy resources includes declining conventional sources of coal, gas and oil but potentially very large amounts of renewable energy sources which are inherently not subject to resource depletion and are also 'low-carbon'. Considering UK and global climate policy the UK's indigenous geological carbon dioxide storage resource (eg sub-sea sandstone formations) is also a consideration for UK energy security in terms of responsibly exploiting UK fossil resources, particularly coal. Fossil resources All the UK's conventional fossil resources are in steep decline following the exploitation of deep-mined and open-cast coal for over a Century, and high levels of oil and gas production in the North Sea and Irish Sea over the last 40 years. In the last decade the UK became a net importer of oil and gas following the peak UKCS production in both oil and gas production in 2001 -2005 period.. New technology and higher global oil and gas prices could result in new economically exploitable oil and gas resources mainly offshore. However, such technologies, including Enhanced Oil Recovery (EOR) and Enhanced gas Recovery (EGR) are only likely to slow indigenous decline and the increase in imports of such fuels to meet future UK demands over the next two to three decades. In contrast, new coal production techniques, particularly underground coal gasification (UCG) could open economic access to some or much of the estimated 17+ billion tonnes (180,000 TWh of primary energy*) of hitherto unmineable coal seams under the UK and off the coast. For comparison, UK coal mining (deep and opencast) has been producing around 17+ million tonnes per annum (1,000+ times less than the 'unmineable' coal resources) and has been consuming around 60 million tonnes of coal per year in recent years, of which about two thirds is imported. Coal use has fallen off to about 50 million tonnes per year in 2009. Most coal demand (about 85 %) is used for electricity production at 37.7 % gross electrical efficiency. In 2009 power stations generated 105 TWh/y of electricity, a record low, from 40.1 million tonnes of coal (containing 278.5 TWh of gross primary energy). Consequently, if UCG is proves itself technically and economically in the UK's thin and faulted coal seams then the UK would have huge energy security. The coal could be used in gasifiers to produce hydrogen for fuel cell power stations and or synthetic natural gas (SNG) for use in CCGT power stations, fuel cell power stations (after reformation to hydrogen) and via the gas distribution network to boilers and mCHP boilers in buildings. * power station coal has a gross primary energy of 6.94 MWh per tonne (25.0 GJ per tonne). So

144,000 tonnes of coal contains 1 TWh of gross primary energy.

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Renewable resources In terms of indigenous renewable resources, the UK has potentially a considerable natural resource, particularly marine, capable of supply much or indeed all of future UK energy demands (assumed to be about 1,400 TWh/y including aviation and shipping). However, the degree to which the various indigenous and imported natural / renewable resources could provide energy security depends on the development of technologies which achieve economic exploitation of such renewable resources, particularly offshore wind, tidal and wave technologies. * Marine renewable resources : The indigenous offshore wind resource may be in the order of 1,950 TWh/y and another 150 TWh/y from tidal and wave sources (2010 Offshore Valuation Report : http://www.offshorevaluation.org/downloads/offshore_vaulation_full.pdf). However some of this offshore wind resource is above deep water (ie over 50 meters), or further from the coast, which may lead to higher costs. Some of the offshore wind resource may be unexploitable due to the needs of other marine users and uses, including shipping channels and Ministry of Defence radar requirements. Ironically, the sea areas deemed necessary to date for clear radar cover for national security reasons potentially threatens access to sites with considerable offshore wind energy resources which would themselves be of benefit to national security. Technical improvements to long-range radar provision (eg anti-clutter software) and supplementary radar based on the wind turbine/ transformer structures themselves may help resolve this conflict. The HM Government / DECC 2050 Pathways 'Call for Evidence' publication has an offshore wind scenario (ambition level 4) of 140 GW generating 430 TWh/y (page 194). Note that this annual output equates to a 'Capacity Factor' of only 35% (ie 140 x 8.76 x 35/100 = 430). However, some studies suggest that higher capacity factors would be achieved in many sea areas and the average offshore wind capacity factor could be around 40 % in which case a deployment of 140 GW would generate nearly 500 TWh/y (140 x 8.76 x 40/100 = 490). The amount of intermittent renewable capacity which could be integrated would depend on the reliable back-up capacity required, when intermittent output is low or essentially zero, to meet peak winter daily needs. In the analysis below this back-up capacity is estimated to be 210 - 290 GW, which could back-up marine renewables generating 700 - 965 TWh/y (at an average 38 % Capacity Factor). More intermittent capacity could be built, for example to manufacture 'green' hydrogen via electrolysis at times of high output (excess to instantaneous demand). * Bio-energy : Indigenous biomass (primary energy) production is estimated to range between 60 - 500 TWh/y (DECC Pathways page 133). Imported biomass may be 140 TWh/y on an equitable basis (DECC Pathways, page 164) states : An estimate of the likely market share accessible to the UK was made on the basis of its relative population size, using 2050 population estimates of 9 billion globally, and 75 million for the UK. This calculation produces an estimated UK market share of these projected resources of 70 TWh of liquid transport fuels, and the same amount of solid biomass fuels for combustion. In this analysis it is assumed that an equitable share is imported (140 TWh/y) and a similar amount is produced indigenously (140 TWh/y). There will be conversion losses to useable fuels assumed to be 30 - 40 % for the sake of brevity in this analysis. Consequently, a overall final energy demand (including aviation bio-fuel and possibly shipping bio-fuel oils) supplied by bio-energy may reach 170 - 200 TWh/y. This would be sufficient to cover international aviation demand by UK residents (assumed to be about 140 TWh/y distributed at airports around Europe and the world) and shipping bio fuel-oils (30 TWh/y) with possibly some bio-fuels remaining for use in the power sector (assuming most surface transport switches to hydrogen, electric motive power). Alternatively, shipping could be powered by carbon-neutral green hydrogen (eg liquified) produced by water electrolysis using renewable electricity (at times of excess / peak production) or low-carbon 'black' hydrogen from coal etc in CCS-gasfiers. This would help utilise peak intermittent outputs by

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manufacturing fuels which could then be used at times of low intermittent outputs and conserve storable biomass fuels for times of peak consumer demand. * Heat pumps (air-source and ground-source) may harness up to 150 TWh/y (see below) but deployment practicalities may result in a significantly smaller annual supply, say 50 TWh/y. * Energy from residual waste - declining amounts of residual waste would be available for so-called 'slagging' gasifiers or hot-plasma treatment as recycling rates increase to say 70 - 90 % of future arisings by 2050. The DECC 2050 Pathways analysis estimates a recycling rate reaching 80 % by 2050 and energy from waste (ie gasified syng-gas, SNG, hydrogen) falling to 80 TWh/y by 2050 as a result. So for several decades residual waste may provide around 100 TWh/y if gasified in slagging gasifiers (possibly more with efficient fuel cells and configured in CHP mode) though falling as low as 50 TWh/y for very high recycling rates. Energy from residual waste from DECC 2050 Pathways consultation (page 157) : Trajectory C (Figure F7) represents a possible path to ‘zero’ waste to landfill by 2050,249 achieved through zero waste growth between 2007 and 2050 (therefore implying a significant decoupling from economic and population growth) and ambitious recycling levels which reach 60% by 2020 and almost 80% by 2050. In 2050, emissions in Trajectory C are around 60 % of those in trajectory B (Figure F3). Energy from biodegradable waste, landfill and sewage gas amounts to just under 80 TWh in 2050 * Other intermittent onshore renewable resources include onshore wind, solar PV, solar thermal, hydro and geothermal, may provide between them in the order of 120 TWh/y of which 100 TWh/y would be intermittent (solar / onshore wind) . Summing the broad estimates above (see below) the renewable energy harnessed may amount to between 1,000 TWh/y to 1,400 TWh/y of which about 280 TWh/y(primary)/ 170 TWh/y (final) might be imported bio-energy, mainly aviation fuel (imported in the sense of for example being produced in deserts and available at airports around the world, a share of which would be attributed to flights by UK residents). Minimum = 1,000 TWh/y = 730 intermittent marine /onshore wind / solar + 150 bio + 50 heat pumps + 50 residual waste + 20 hydro/ geothermal Maximum = 1,400 TWh/y = 930 intermittent marine /onshore wind / solar + 200 bio + 150 heat pumps + 100 residual waste + 20 hydro/ geothermal Saharan wind and solar electricity imports by HVDC SuperGrid could supplement renewable energy provision to address climate targets by possibly 100+ TWh/y (requiring perhaps 15 GW of inter-conectors). Indeed, imports from what may be considered unreliable regions/countries may well be acceptable because there is immediate indigenous back up (eg hydrogen from coal with CCS) if such Saharan imports are cut or disrupted. UK energy system scenario overview The deployed infrastructure, might consist of about 210 - 290 GW of reliable energy generating and gasifier capacity (load-following power stations, industrial CHP, district-heating, domestic mCHP gas boilers, hydro). Much of this capacity could be based around load-following gas turbine and or fuel cell power stations (including CHP) and fuel cell mCHP boilers in building. Some fuel cell types would require hydrogen supplied via the gas network (eg NaturalHy is a 20% hydrogen mix with methane which could be separated out at the user end). This reliable capacity would be scaled to provide future UK peak winter day energy requirements assuming very low availability of intermittent renewable electricity.

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For example, 250 GW of capacity could generate about 6 TWh per DAY (250 x 8.76 / 365 = 6). For comparison, daily UK energy demand in the cold-snaps in January 2011 from the electricity generating sector was 1.2 TWh per day, and about 5 TWh per day of heat via the gas network (to boilers in buildings etc, excluding gas to CCGTs). Heating demand off the gas network in rural areas would have been additional to this 6.2 TWh/d energy demand. Perhaps future peak daily UK energy demand may amount to somewhere between 5 - 7 TWh per day considering energy efficiency improvements, increasing population and transport sector demands from hydrogen-powered or electric vehicles. This would require between 210 GW and 290 GW of reliable energy-generating capacity (excluding ground-source heat pumps, interconnectors, thermal stores, other energy stores). Crucially, this capacity would also determine the amount of intermittent renewables that could be connected/integrated into the UK energy system as, even assuming zero intermittent renewable output at night in a windless anticyclone, there would be reliable back-up. So 210 - 290 GW of reliable capacity could back-up for example intermittent renewable energy schemes generating 700 - 965 TWh per year at an average 38 % capacity factor (eg a mix of offshore windfarms at 40 % CF and wave, tidal and onshore wind schemes at around 33 % CF, eg 290 x 8.76 x 0.38 = 965). Future UK aviation and shipping fuel demands (assumed to be 140 and 30 TWh/y respectively) could probably be met by sustainable bio-dervied liquid hydro-carbon fuels (eg bio JET-A, algae oil) possibly mostly imported. If so then indigenous intermittent renewables plus bio transport (aviation /shipping) fuels could supply around at least 900 - 1,100 TWh/y out of an assumed final demand of 1,400 TWh/y. The remainder (300 - 500 TWh/y) would be mainly supplied by the standing capacity (210 - 290 GW) fueled by either fossil sources with CCS (eg UCG or North Sea gas, imported shale LNG), or additional bio-energy sources if available (eg, algae-oil, bio-LNG, Saharan HVDC electricity), hydro reserves, plus residual waste derived syngas / SNG / hydrogen. Heat pumps schemes may also make a sizeable contribution (and possibly geothermal). Significant electricity imports via inter-connectors and HVDC transmission links (EU SuperGrid) to Saharan wind and solar schemes may also be a possibility. However, 'Saharan' electricity imports may not be energy secure so are optional in this analysis in the sense that while there is no reason not to import such renewable electricity if available and competitively priced, an indigenous based back-up would be available to provide energy security. The back-up in this case would be some of the reliable (210 - 290 GW) of energy-generating capacity (with CCS) fuelled by any available biomass (perhaps 30 TWh/y) and residual waste (estimated at 50 - 100 TWh/y) or indigenously sourced or stock-piled coal (gasified to syn-gas, SNG or hydrogen). Note that bio-hydrogen produced from biomass in CCS gasifiers is essentially a strongly carbon-negative fuel (depending on the energy inputs to producing and transporting the biomass to gasifier). Another 20 TWh/y could be available from reliable hydro sources Air source heat pumps (ASHPs including exhaust air source) could provide considerable heat energy annually (but hardly during a severe cold snap) as could ground source heat pumps (GSHPs) if deployed at scale, which may be difficult in urban and sub-urban areas. The potential of ASHPs and GSHPs could be considerable, perhaps harnessing perhaps between 50 - 150 TWh/y (see Annex 1 below) if commercially viable, consumer-friendly and realistically deployable. So between 150 - 300 TWh/y of the 300 - 500 TWh/y might be supplied by heat pumps, biomass, hydro and 'renewable' residual waste sources. Any other sustainable biomass sources available after the production of aviation and other bio-transport fuels could also be gasified as and when required for load-following duties. Consequently, perhaps between 0 - 200 TWh/y in 2050 may need to be supplied to the CCS-fitted gasifiers from fossil sources (eg indigenous coal, UCG, CBM) if indigenous or imported renewable

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sources were not available in sufficient quantities. As regard meeting climate targets (ie at least 80 % by 2050 and possibly 100+ % required) even with some residual coal use (possibly only used in emergency fuel shortage / disrupted import situations) UK carbon dioxide emissions could be net carbon-negative depending on the availability of sustainable biomass sources (and the amount gasified in CCS gasifiers). Note that even carbon dioxide emissions captured and stored during the aviation fuel manufacturing processes at CCS-fitted bio-refineries from the primary biomass resources count in reducing net UK emissions (conversion losses of 80 - 110 TWh/y are assumed in the above scenario). Direct air-capture devices, utilising reject heat from power generation could also significant add to net carbon-negative emissions. Alkaline fuel cell power stations would be ideal for such DAC technology as the reject hot water from the cells can be made available at an optimal 95 Centigrade without loss of their 50 % HHV electrical efficiency. Load-following capability - key to enhancing energy security As most of the indigenous renewable energy generated would be from intermittent resources (ie wind, marine) the UK system requires back-up that can load-follow quickly, widely, constantly and preferably without loss of electrical efficiency. Very fortunately, alkaline fuel cells (of the type being commercially developed by British company AFC Energy Ltd near Guilford)) in particular have excellent, possibly unrivalled load-following capability. CCS-fitted pre-combustion power stations comprising stacks of AFC cells (IGFC) would have fast dynamic response (MW per unit time) and wide dynamic range (from 0 output to full output at essentially no efficiency drop-off). In comparison with gas turbine (IGCC) pre-combustion technologies or post-combustion CCS fuel cells would have considerable advantages. In comparison with fuel cell and gas turbine power stations new-build (Generation III) nuclear power stations are very inflexible (see Annex 2 below). Inflexible baseload generation would increasingly cause major Grid conflicts (over and under supply) leading to system de-optimisation, additional costs and possibly brown/black outs. The better the ability of an energy generating technology to load-follow essentially enables more of the UK's abundant indigenous renewable resources to be harnessed thus improving energy security. For this reason fuel cell power stations would enhance UK energy security much more than new-build nuclear stations. Furthermore the hydrogen fuel for the cells can be produced from a variety of indigenous and storable sources and the energy output (electricity and hot water at a useful 95 Centigrade) would be 'low-carbon' to 'carbon-negative' in emissions per kWh. In contrast, uranium fuel has to be imported (possibly with armed escort in future times), and the electricity output (little CHP potential due to locations) would only be low-carbon (and possibly rising due to diminishing uranium ore content requiring increasing extraction energy required at mines). New-build nuclear would not add to UK energy security and would actually detract from security into the 2020s at least due to its high up-front costs when equivalent spend on non-nuclear energy technologies would save or deliver more low-carbon energy. By 2018 only 1.6 GWe on new-build may be operating, generating just 12.5 TWh/y or less than 1 % of UK (final) energy demand (ie 12.5/1,500). By 2020 it may be 4.8 GW generating 38 TWh/y or just 2.5 % of UK energy demand. For an equivalent spend of nearly £ 16 billion (assuming nuclear build costs of £3.3 billion per GW) a similar amount of energy could be saved or generated by non-nuclear means. Consequently, the marginal energy security provided by Generation III reactors by 2020 could be minimal if not negative. Yet by 2020 CCS will have either have been commercially proven or not and the potential for scale-up much better understood. Generation IV reactor designs may also be at the stage for demonstration by the 2020 and are claimed to be safer and can burn existing nuclear waste (plutonium, uranium, actinides from previous programmes).

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As there is clearly no marginal energy security benefit afforded by a Generation III nuclear deployment (and possibly a dis-benefit) then the building of additional load-following CCS capacity rather than nuclear would enable more intermittent renewables to be Grid integrated in the 2020s. For this and other reasons the plans for a Generation III nuclear programme (National Policy Statements) should be recalled /amended to defer decisions on new-build until the 2020s and the UK's CCS planned demonstration programme (four schemes of about 300 MW net each) should be expand and accelerated instead. A recent estimate by Doosan Babcock at a DECC conference (APGTF) recommended about 3 GWe per year deployment rate to meet CCC 2030 targets. Note that AFC Energy fuel cells are being designed for mass-maunfacturing techniques to facilitate rapid scale-up and build rates. This will potentially create many UK jobs and bring energy security in the form of UK manufacturing facilities and British construction skills at a time of increasing demands, bottle-necks and costs for energy infrastructure globally. Aviation fuel security Securing adequate imported aviation bio-fuels to UK airports / military bases in adverse global situations may be problematic but synthetic aviation fuel could be made by manufacturing synthetic Jet-A using captured carbon and green hydrogen, or hydrogen from indigenous coal. It requires about 3 kWh of renewable electricity to produce 1 kWh of 'carbon-eutral aviation fuel to power the synthesis process (according to AFS Ltd). Coal-to-liquids processes even with CCS at the manufacturing plant would produce aviation fuel with emissions close to that of fossil aviation fuel (about 260,000 tonnes of CO2 per TWh). -------- Annex 1) 2050 UK heating demand scenario The future annual heat demand of urban and sub-urban buildings on the current fossil gas network could fall to about 340 TWh/y following cost-effective insulation schemes across the country within the next two decades. The table below gives estimates for heating demand in urban, sub-urban, rural and new-build homes. The domestic demand is then multiplied by 1.3 to account for other buildings in the area (ie offices, hospitals, schools etc). 7m gas-connected urban homes falls to 12 MWh/y and other buildings

110 TWh/y

4.2m flats falls to 9 MWh/y and other buildings

50 TWh/y

9.3m gas-connected sub-urban homes falls to15 MWh/y and other buildings

180 TWh/y

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6.3m rural homes not gas-connected falls to 15 MWh/y and other buildings

120 TWh/y

5.2 m new-build with heat need of 6 MWh/y and other new buildings

40 TWh/y

Total 500 TWh/y

industrial process (high temperature process heat)

70 TWh/y

Heat pump lock-out If all the 340 TWh/y heat demand of existing urban and sub-urban buildings were met by heat pumps with a Coefficient of Performance (COP) of 3:1 the renewable heat harnessed from the local environment would amount to about 225 TWh/y (340 x 2/3). Ironically, the amount of heat produced by fuel cell mCHP boilers in providing electricity to power heat pumps could reduce heat pump demand to 186 TWh/y. Of this demand about two thirds (124 TWh/y) would be heat harnessed from the local environment by the heat pumps from air and ground at a COP of 3:1. So, fuel cell boiler heat could potentially lock-out up to 100 TWh/y of indigenous renewable heat, a significant amount. However, mCHP boilers would reduce the physical size, disruption and cost of domestic heat pump installations. Note that rural buildings with a heat demand of 120 TWh/y in this scenario could also deploy heat pumps, which at coefficient of performance 3, could supply up to 80 TWh/y of low-grade heat using 40 TWh/y of Grid electricity. Total heat pump potential may be in the order of 164 TWh/y (124 + 40). ----------------- 2) Fuel cell versus gas turbine versus nuclear load-following limitations Fuel cells (eg alkaline fuel cells) are virtually instantaneously load-following (the time it takes to changing the hydrogen pressure) from 0 capacity to full capacity, and maintain their high electrical efficiency of about 50 % HHV at any load. The best load-following gas turbines are aero-derivatives in combined cycle mode and may have maximum electrical efficiencies of 45 - 50 %, fast response times but efficiency drops of at lower loads and they cannot generate below a certain point. So fuel cells are ideal for load-following and considerably better than gas turbines. Nuclear 'Generation III' reactors (eg EPR) have far less load-following capability in comparison to gas turbines, let alone fuel cells. It appears that an EPR could ramp-up from 25 % capacity at 5% per minute of its maximum output (1,600 MW) which would be 80 MW per minute over 1,200 MW (eg from 400 MW to 1,600 MW in 15 minutes) BUT ONLY by around 100 cycles per year (eg once every three days). Such a ramp capability may be useful to some utilities in the summer months - eg 3 summer months with full ramp-down at night would reduce annual output from 12.6 TWh/y at 90 % load-factor by 1.3 TWh/y (90 nights at 12 hrs x 1.2 GW) to 81 % load-factor.

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Annual cycling between 60 - 100 % (essentially 1 GW to 1.6 GW) may be more useful but there is no manufacturer's data on that (no data on ramp-down times either). Perhaps the 60-100 % ramp-up/down might even be repeatable up to say 365 times a year - or once per 24 hours - so a 10 GW EPR programme MIGHT provide a 4 GW two-shift per day capability at best. The loss of annual generation IF such a scenario is technically possible could be 2.6 TWh/y per EPR so a load factor of 71 %. This could possibly still be within a business case if the EMR fiscal incentives were sufficient I guess. In terms of load-following in a future UK energy system even 4 GWe of capability per 10 GW of nuclear capacity (or in anything eg CCS ) would be relatively inconsequential compared centralised gas turbine or fuel cell power stations or a de-centralised electrical generating system could do, ie in CHP mode a 100 GWe deployment of alkaline fuel cells becomes 180 GW of - because de-centralised generation tackles the PEAK heating demand. ---------------- Questions

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? Investment in multi-fuel technologies could be key to UK resilience to future fuel prices. Resilience obviously very much depends on the future mix of fuels but also the ability of the UK's energy infrastructure to switch between fuels. Those technologies which are fuel-flexible or multi-fuel, would have added value to the UK economy and security as they could achieve lower energy prices by switching the lowest cost fuels at any given time in a highly uncertain future. Future prices for fossil and uranium resources over the next 25-40 years, the life of typical gas or coal stations, or 60 years for Generation III nuclear stations could well be highly uncertain. Even by 2040, let alone 2080, there are likely to be major global resource issues and geo-political consequences arising due to global population growth (to over 9 billion by 2050) and increasing per capita energy consumption of much of that population. The increasing demand for water, food and energy resources has been described as a 'Perfect Storm' by Chief Scientist Dr John Beddington and, in the absence of future low cost renewable technologies, fossil fuels would be extensively used. Indigenous resources of conventional gas and coal (eg North Sea) are now of limited availability and steep decline, which is already having an adverse effect on the balance of payments. Globally while conventional coal and gas resources would be available for a few decades at least their price is likely to rise given the increasing global demand. However, price increases may be moderated considerably by the production of unconventional coal and gas resources. In terms of fuel-flexibility pre-combustion Carbon Capture and Storage (CCS) technologies which gasify fuels offer significant advantages over post-combustion CCS technologies and nuclear power. Such fuel-flexible technologies could exploit price differentials between gas, coal and potentially emerging sustainable biomass resources (eg indigenous or imported algae oils/solids). Pre-combustion CCS technologies can gasify gas, coal, biomass and residual waste to make synthetic methane and or hydrogen which can be used energy schemes comprising gas engines, gas turbines and or fuel cells (hydrogen only). In comparison post CCS technology (ie super-critical coal, CCGTs) is far more limited in terms of fuel switching and essentially cannot switch between coal and gas. In terms of nuclear power Generation III technology is limited to uranium imports for 60 years of operation from the

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commencement of operation (probably 2018 at the earliest) and before Generation IV technologies become available (probably 2030 if technically achievable and economically viable) Note that coal and gas fuels would have a 'low-carbon' electricity and heat output and biomass would have a 'carbon-negative' output, as would residual waste which is deemed a zero-carbon fuel in policy terms. Significantly, hydrogen produced from the electrolysis of water using 'excess' electricity from intermittent renewable energy schemes ('green hydrogen') could also be utilised by fuel-flexible schemes and would have a very low carbon-content. The output from pre-combustion CCS schemes becomes increasingly carbon-negative the more biomass, green hydrogen, or residual waste that is used to supply the gas-turbines or fuel cells. March 2011

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MEMORANDUM SUBMITTED BY DRAX POWER LIMITED (UKES 38)

EXECUTIVE SUMMARY • The current, relatively comfortable, capacity margin enjoyed in the UK is largely an

accident of history, and this will be eroded quickly and come under severe pressure if existing fossil fuelled plant is closed prematurely, before the required low carbon replacement plant can be commissioned;

• Increasing the deployment of intermittent wind and inflexible nuclear capacity

towards 2020 and beyond will require a significant volume of complementary capacity that delivers responsive, flexible plant capable of maintaining security of supply;

• A broad capacity mechanism will be required to maintain security of supply and to

ensure there are adequate returns for making both new and existing flexible capacity available to the market, thereby avoiding early and inefficient closure of existing plant which would otherwise exacerbate security of supply issues;

• Measures to address the low levels of medium term wholesale market liquidity are

also required to provide efficient market signals for investment which will also help maintain security of supply;

• Drax currently plays a vital strategic role in providing the necessary flexibility and

system support services to ensure the UK’s security of supply. That role will become even more important as the UK progressively decarbonises its generation mix; and

• Enhanced co-firing of biomass with coal and /or conversion of existing coal-fired

power stations, such as Drax, to biomass could play a key role in the cost-effective transition to a decarbonised electricity system. Such stations would continue to provide the vital system support services which will be increasingly required to complement intermittent wind.

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ABOUT DRAX

1. Drax is predominantly an independent power generation business responsible for meeting some 7-8% of the UK’s electricity demand. It also owns Haven Power, an electricity supplier serving the needs of business customers.

2. Drax is the owner and operator of the 4,000MW Drax Power Station in North

Yorkshire, which is the largest, cleanest and most efficient coal-fired power station in the UK. It comprises six 660MW coal-fired generating units; the largest and most flexible in the country. This capability means that Drax is one of the most significant providers of flexible generation and system support services in the UK. It was the first thermal generator, and for a significant period of time the only thermal generator, to consistently tender for Firm Frequency Response (FFR) services with National Grid. In 2010, Drax provided FFR services from three of its units during the summer overnight periods (April through September) and two units during the daytime in the winter.

3. Drax is also highly active in the Balancing Mechanism (BM), providing National Grid

with real-time balancing options (via BM Bids and Offers) throughout the year. In addition, the Black Start capability of the plant, using three onsite OCGT units, ensures further network resilience should the UK’s electricity supply be interrupted. It should also be noted that Drax currently has the capability of storing over two million tonnes of fuel on site. All of these factors highlight the significant, strategic role that Drax currently plays, and can continue to play, in ensuring the UK’s security of supply.

4. Drax is also committed to playing its part in reducing its carbon footprint and that of

UK power generation. To this end, in summer 2010 the largest biomass co-firing facility in the world was commissioned at the power station.

5. With the capability to produce 12.5% of the station’s output from sustainable biomass

– equivalent to the output of over 700 2MW wind turbines – Drax is by some distance the largest renewable generating facility in the UK. In 2010, Drax produced around 7% of the UK’s renewable power, more than twice that of the next largest renewable facility.

6. Drax is pleased to have the opportunity to respond to the call for evidence on security

of supply. As one of the most significant providers of system support services and a very significant investor in renewable electricity generation from biomass, Drax believes it is well placed to comment.

INTRODUCTION

7. The UK electricity sector is facing unprecedented challenges if we are to meet our

binding 2020 carbon emissions and renewables targets, and put the UK on a sustainable and credible path to its longer-term commitment to reduce carbon emissions by 80% by 2050. This will involve an estimated £200bn+ investment in the sector and will put the UK’s security of supply at significant risk if not appropriately managed.

8. Drax therefore supports the need for changes to the current market arrangements in

order to deliver the Government’s key climate change, decarbonisation and renewables targets while maintaining secure energy supplies and minimising the cost to UK consumers. These objectives are best achieved by putting in place a stable, enduring, credible and efficient framework to incentivise investment in low carbon generation; introduce a new market mechanism to ensure there is adequate generation plant margin and sufficient flexible capacity to complement and support

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Incentives for Flexible Capacity to maintain Security of Supply

9. Significant generation investment is needed to maintain secure supplies and ensure

we can meet future peak demand and flexibility requirements, despite relatively low forecast demand growth over the medium-term. At least 20GW of intermittent wind capacity is expected to be connected to the system by 2020, with the closure of around 18GW of fossil plant and 7GW of nuclear plant expected to occur over the same period. In addition, the availability of existing flexible plant is also expected to reduce over the next decade, as such plant has to comply with increasingly stringent environmental legislation. However, the need for flexible plant will actually increase because:

• typically, demand increases by up to 50% on a winter morning between the hours of 5am and 9am. This will not change and may actually increase; and

• by 2020, the extreme hour-to-hour changes in demand net of wind output could be as much as 17GW1, which is a significant increase from the maximum variation of 5GW in 2009.

10. In these circumstances, security of supply will be at risk unless there are market

mechanisms which recognise the critical importance of flexibility in maintaining security of supply in real time. This is best done by ensuring there are adequate returns for making all flexible capacity available to the market, thereby avoiding early closure of existing flexible plant. In addition, provision of medium-term signals for investment in existing and new flexible plant and demand side measures is required. This would ensure the most efficient investment prevails, lowering the cost to end consumers. Neither of these is provided by the current energy-only market arrangements and it is therefore clear that a capacity mechanism of some kind is required.

11. In order to deliver efficient investment in flexible capacity and demand response, the

capacity mechanism must provide signals to the market that allow both new and existing plant to compete both to meet peak demand, and for the provision of flexibility and system support services. DECC’s preferred approach to a capacity mechanism, the Targeted Capacity Mechanism (TCM), does not provide existing plant with the appropriate signals to deliver security of supply services. The proposal could threaten security of supply by forcing existing flexible thermal capacity to close prematurely, when such plant may well represent the most efficient investment option to provide peak demand and flexibility services.

12. DECC’s preferred solution focuses too narrowly and exclusively on meeting extreme

peak demand scenarios (such as winter peak requirement), and fails to address the looming issue of flexibility in low demand periods. There will be increasing volumes of intermittent wind and inflexible baseload nuclear generation capacity coming on stream over the next decade. To maintain security of supply, it is therefore essential that the capacity mechanism addresses both seasonal capacity demand extremes and hour-to-hour flexibility requirements. The technical characteristics of certain plant, like Drax (i.e. the ability to quickly increase or decrease output) makes them more suitable for providing flexibility services than others. This needs to be reflected in the capacity mechanism.

1 Green, R., (2010) “Are the British Electricity Trading and Transmission Arrangements Future-proof?”, Utilities Policy

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13. Drax advocates a broader capacity mechanism that is available to all types of plant and demand measures capable of providing reliable flexibility services. It should be underpinned by clear investment signals either set by a central body or by a market mechanism. Competition should provide the most efficient and cost effective solution to incentivising investment in plant to meet both extreme peak demand and hour-to-hour variation in intermittent generation output.

14. A well designed capacity mechanism would also ensure that the value of both

capacity and energy is transparent to all investors in the market, promoting a competitive and efficient wholesale market in which to invest.

Wholesale Market Liquidity

15. A liquid, competitive wholesale market is also fundamental to promoting efficient

investment by both independent incumbents and new entrants. Except in the very short-term, the current market has inadequate liquidity, competition and tenure of contracts. Inadequate levels of medium-term liquidity continue to have a detrimental effect on the development of efficient market price signals, which diminishes investor confidence in the GB wholesale electricity market. This has the potential to jeopardise future security of supply, increasing consumer costs and damaging the wider economy and needs to be addressed.

16. Drax considers that a (possibly time-limited) requirement for the six major vertically

integrated players to trade a proportion of their future requirements transparently through the wholesale market would be a useful and potentially effective initiative. For example, on a rolling basis, they could be obliged to trade a minimum of perhaps 5% of their expected generation and supply requirements for year 5, 10% for year 4, 15% for year 3, 20% for year 2 and 25% for the year ahead. This would not be an onerous requirement on them, but would create liquidity further out on the forward curve, which may stimulate more active trading.

Role of Biomass

17. Biomass is currently burnt alongside coal in existing coal-fired power stations such as

Drax. However, there is the potential to significantly increase the substitution of biomass for coal via enhanced co-firing of biomass and /or conversion of existing coal-fired power stations. This could play a key role in the cost-effective transition to a secure, decarbonised UK electricity system. Such options would make efficient use of existing generation and transmission assets and continue to provide the vital system support services which will be increasingly required to complement intermittent wind.

18. There is ample sustainable biomass available. For example, a recent AEA report for

DECC2 concluded that by 2020 the UK could have around 20% of its primary energy demand met from biomass. The fuel itself also has relatively stable costs with low volatility compared to other fossil fuels (see Chart 1). The capital cost of enhanced co-firing of biomass alongside coal is a fraction of that of new offshore wind capacity.

19. Furthermore, biomass co-firing generation plant will have a higher availability / load

factor than most other renewables and will not impose increased costs on the operation of the electricity system. In short, electricity generation from biomass can reduce the cost to the consumer of maintaining security of supply whilst making a vital contribution to meeting Government targets for renewables and CO2 emissions reductions.

2 UK and Global Bioenergy Resource – Final Report for DECC, AEA, March 2011

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Question 1: How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

20. Fossil fuel prices are set by global and regional markets. Hence the UK is vulnerable to changes in electricity price stemming from changes in fossil fuel input prices as the recent crises in Japan and Libya have demonstrated. Maintaining a broad spectrum of conventional and renewable generation technologies is one way of mitigating this risk. Thus, the current UK plant mix provides some protection, but the likely growth of gas and reduction of coal generation will see this diminish. Uranium prices are less critical, given the relatively very low marginal fuel cost of nuclear generation relative to other thermal generation.

21. The development of other technologies may also help. For example, for biomass,

there is a relative low volatility in the global pulpwood market, and low correlation when compared to coal and gas on a GJ basis (see Chart 1)

Chart 1: Comparison of fossil fuel and wood prices

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Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

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API2 Coal (£/GJ) Global Pulpwood Index (£/GJ) Gas NBP (£/GJ) "US$ fx"

Note: The Global Pulpwood Index does not incorporate transportation and processing costs. Due to the water content of pulpwood this will significantly raise the actual cost per Gigajoule for electricity generation

22. Thermal generators are essential for the provision of system flexibility in the event of

rapid demand change, or unexpected loss of supply such as failure of a nuclear unit or unpredictable changes in the output of intermittent plant. Thermal plant are largely unabated today, but could in future consist of existing plant converted to burn biomass, new dedicated biomass developments or CCS (with either coal, gas or ideally biomass). Security of Supply will only be assured if both capacity and flexibility are properly valued; current market price signals do not reflect the value of providing these services. The reason for this is that the six vertically integrated companies which dominate the domestic supply market are able to optimise internally with little requirement to trade their generation output on the wholesale market. There is very limited liquidity in the wholesale market beyond 18 months.

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Question 2: How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

23. Security of supply is extremely sensitive to the levels of investment in our energy infrastructure. Firstly, significant investment in generation infrastructure is needed to maintain secure supplies and ensure we can meet future peak demand and flexibility requirements, despite relatively low forecast demand growth over the medium-term. At least 20GW of intermittent wind capacity is expected to be connected to the system by 2020, with the closure of around 18GW of fossil plant and 7GW of nuclear plant expected to occur over the same period. In addition, the availability of existing flexible plant is also expected to reduce over the next decade, as such plant has to comply with increasingly stringent environmental legislation.

24. In these circumstances, security of supply will be at risk unless there are market

mechanisms which incentivise investment by recognising the critical importance of flexibility in maintaining security of supply in real time. This is best done by ensuring there are adequate returns for making all flexible capacity available to the market, thereby avoiding early closure of existing flexible plant. In addition, provision of medium-term signals for investment in existing and new flexible plant and demand side measures is required. This would ensure the most efficient investment prevails, lowering the cost to end consumers. Neither of these is provided by the current energy-only market arrangements and it is therefore clear that a capacity mechanism of some kind is required.

25. Secondly, transmission investment is a key issue which the UK will have to address.

It is targeted that a high proportion of the UK’s renewable power will be provided through wind power in remote locations both onshore and increasingly offshore. Investment to provide the connections for these developments will be critical. However, the overall transmission investment requirement could however be reduced through a greater use of other renewables in less remote locations, and the decarbonisation of existing generation assets. For example, it would be more efficient and cost-effective to meet a greater proportion of the renewables targets from new and co-fired biomass capacity than from offshore wind. Both of these would require relatively little, or no, additional grid infrastructure.

26. The UK need not become so sensitive to fuel storage (i.e. gas storage dependency),

depending upon the mix of flexible technologies that are maintained and constructed (e.g. abated coal (biomass co-firing & CCS) and dedicated biomass technologies). CCS will require first-of-kind investment in carbon transportation and storage infrastructure, which is likely to require costly support.

Question 3: What impact could increased levels of electrification of the transport and heat sectors have on energy security?

27. Increased levels of electrification of transport and heat will have a potentially profound impact on both demand patterns and on distribution system operation and design. If the change is to decrease peak demand, thereby flattening overall demand, then the security of the system may be enhanced at a lower cost. If however peaks are increased and the demand pattern becomes more volatile, then the security of the system will be diminished, thereby creating a greater cost. Increasing overall demand would put pressure on energy security and hence capacity.

28. Upward pressure on the price of carbon, particularly with the introduction of UK-only

Carbon Price Support, could actually disincentivise increased levels of electrification.

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This is because non-electric domestic heating and transportation fuel prices are not affected by the proposed Carbon Price Support.

29. Increased electrification of heat and transport will require very significant investment

in the distribution system if it is not adversely affect energy security. To ensure the resultant costs do not become prohibitive, it will be vital to achieve the correct balance of delivered investment in infrastructure, renewable / low-carbon technologies and flexible plant. Flexible plant will continue to perform a critical role in providing system balancing services due to the increase in use of intermittent technologies, regardless of the future daily demand profile. Using biomass for power generation is one of the most cost effective ways to provide flexible low carbon generation to meet new demand.

Question 4: To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

30. Energy efficiency measures will have a role to play. However, lower demand is likely to be offset by the increase in consumption from heat and transport sectors. More importantly, energy efficiency measures will not address the pressing matter of output variation from intermittent generation. As a result, flexible thermal generation such as coal, gas and biomass will retain its crucial role. Only a visible market valuation of capacity can protect future UK energy security; this will ensure that investment signals are visible to all investors, whether they are new entrants, existing independent generators or vertically integrated companies.

Question 5: What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

31. A side effect of meeting the UK’s targets for greenhouse gas emissions reductions will be high volumes of intermittent capacity connecting to the Grid. The implication is negative for energy security because such capacity cannot be relied upon. The extreme hour-to-hour changes in demand net of wind output could be as much as 17GW by 2020, which is a significant increase from the maximum variation of 5GW in 20093. On the other hand, biomass with the right incentives can deliver reliable, flexible, firm power from a broad range of sustainable biomass fuel sources uncorrelated to fossil fuel prices. By way of example, there is low volatility in the global pulpwood market, and low correlation when compared to coal and gas on a GJ basis (see Chart 1 ).

32. This extreme level of capacity intermittency has never before been managed

anywhere in the world, but this is essential if the UK is to ensure energy security and meet decarbonisation targets. Energy security means offsetting the half hourly variations in demand net of wind, and meeting demand troughs; it is not just about meeting peak demand4. To do this, plant such as Drax, which play a vital strategic role in providing the necessary flexibility and system support services, must be incentivised to decarbonise. The role of flexibility providers will become much more important as the UK progressively decarbonises its generation mix.

33. For UK security of supply to be maintained, a market mechanism which values

capacity must be implemented. A serious shortcoming of DECC’s proposed targeted capacity mechanism is that it focuses purely on reserve capacity to meet extreme

3 Green, R., (2010) “Are the British Electricity Trading and Transmission Arrangements Future-proof?”, Utilities Policy 4 The construction of new inflexible nuclear plant will reduce the scope for management of flexible spinning reserve at times of low demand.

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peak demand. DECC’s proposed targeted capacity mechanism neglects the importance of flexibility in securing supply. It also fails to recognise the considerable forecasting challenge required by such an approach. Only a broader market mechanism (utilising a range of technologies) will address these issues.

Question 6: What would be the implications for energy security of a second dash-for-gas?

34. If the UK becomes even more dependent on gas for power generation, the power

price volatility to which end users are exposed will increase. In other words, fuel switching opportunities from gas to coal are reduced. Seaborne coal and LNG are traded internationally, and will go to the highest bidder irrespective of the energy security requirements of any given country.

35. Over-reliance on a single commodity (within the fuel market) would expose the UK to

risk of extreme price shocks and security of supply uncertainty due to global and regional demand or production pressures. In addition, there are concerns about the physical ability of the UK gas transmission system to respond to large and unpredictable variations in supply and demand. For example, in a scenario in summer with gas interconnector exports at maximum and storage injection at maximum, there would be nowhere to send the excess gas from decreased CCGT running, in the event of a spike in wind power output.

36. No single energy source will provide a security of supply solution for the UK. The

solution will require a balanced and diverse energy mix which makes the most of all of the energy sources at out disposal, including biomass. Electricity generation from sustainable biomass is unique in that it is renewable, cost effective, reliable, and can respond to changes in demand.

Question 7: How exposed is the UK’s energy security of supply to international events?

37. The UK position as a large net importer of energy makes us fundamentally vulnerable

to international markets. This has been illustrated by the recent volatility of prices in the wake of the events in Japan and Libya. We therefore need to mitigate the physical and geopolitical threats to our security of supply by maintaining a balanced mix of generation technologies. This should ideally comprise a range of low carbon and fossil technologies including domestic coal (ultimately with CCS), renewables, including biomass, and nuclear, as well as maximising the contribution provided by the demand side and energy efficiency measures.

38. Investors in low carbon generation are likewise able to invest anywhere in the world.

For the UK to be attractive to investors, a robust and bankable incentive mechanism is required, i.e. the CFD Feed-in-Tariff. In addition, a UK-only carbon price floor certainly does not help security of supply. The UK must work with the EU in respect of global markets for power fuels and investment.

Question 8: Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

39. The UK’s energy security policy is of questionable robustness today. This position may be weakened further if the correct incentives for flexible capacity are not

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implemented alongside Government’s policy to decarbonise the power sector. Many in the industry consider the present capacity margin in the UK power market to be an accident of history which will not continue into the future. This concern is primarily due to the intermittency of wind capacity, the inflexibility of new nuclear capacity and a medium term concentration of gas fired generation assets. Gas alone cannot be relied upon to respond to the increased volatility of wind output.

40. Today, coal plant such as Drax performs a strategic role providing essential flexibility

and system support services, along with millions of tons of reserve fuel storage. In addition, the Black Start capability of Drax, using three onsite OCGT units, ensures further network resilience should the UK’s electricity supply be interrupted. Current UK and EU policies (for example the UK carbon price support, and the EU Industrial Emissions directive) will result in early closures of such plant, at a time when wind volatility and the closure of end-of-life plant will make the role they serve ever more important.

41. This situation could be improved, particularly during the vital transition period of 2016-

2025, by incentivising low carbon investment in new and existing generation. Investment in decarbonisation of existing flexible thermal capacity via efficiency upgrades or enhanced biomass co-firing would ensure the UK retains the flexibility that is critical for the maintenance of the UK’s security of supply (and at a more acceptable cost to consumers). Similarly, incentivising the construction of new flexible renewable generation such as dedicated biomass would deliver new firm flexible capacity. Unlike wind, biomass-fired generation technologies can respond quickly to changes in electricity demand.

42. The incentives required could be best achieved via the introduction of CFD FiTs and

a capacity mechanism. Improving medium-term wholesale market liquidity would also enable market prices to reliably stimulate the construction of new capacity. Absent of intervention, there might be insufficient incentive to invest in adequate flexible capacity.

Question 9: Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

43. The majority of industry participants agree that there is a need for reform to the wholesale electricity market if the Government is to achieve its decarbonisation targets. Drax believes that a CFD FiT and a well-designed Capacity Mechanism would deliver the EMR objectives without the need for an EPS or Carbon Price Support.

44. Implementation of the Treasury’s carbon floor proposal could adversely affect security

of supply. It will have an adverse impact on flexible coal plant and will not provide ‘bankable’ incentives for investment in new low carbon generation.

45. The coal-fired capacity which we have in the UK today is among the most flexible on

the system, and as such is a perfect compliment to wind intermittency. In addition, it can be adapted to deliver secure reliable biomass-fired generation, which when coupled with high availability means it is there when it is required. However, without the right support this plant will be forced to close earlier than expected, well before low carbon replacement plant can be built. This will reduce the diversification of UK generation assets and increase risk to security of supply.

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MEMORANDUM SUBMITTED BY THE ENERGY NETWORKS ASSOCIATION (UKES 39)

INTRODUCTION The gas and electricity networks are a key part of the UK’s infrastructure and play

the central role in our energy economy.

Gas is a major part of our energy mix: the fuel of choice for most of the UK. In 2009

gas provided over 30% of final UK energy demand. The gas network companies

connect up to 100,000 new gas consumers a year and are currently replacing up to

4,000km of mains per year.

Both the gas and electricity networks are currently facing the challenge of replacing

and redesigning the GB energy infrastructure to meet the Government’s climate

change objectives. Indeed, Ofgem predict that over £30bn of network investment will

be required by 2020 to support the development of the new renewable generation.

ENA is concerned that Ofgem’s current proposals will deter rather than encourage

investment, and so put at risk the delivery of the investment required in GB

infrastructure over the period to 2020, with obvious implications for both energy

security and the prospects of moving to a low carbon economy.

How sensitive is the UK’s energy security to investment (or lack of investment)

in energy infrastructure, including transmission, distribution and storage?

Reliable energy networks are critical to the UK’s energy security. The energy

network companies are effective monopolies and are therefore subject to economic

regulation which is overseen by the energy regulator Ofgem. Since the privatisation

of the companies, the regulatory framework which was created has encouraged

them to reduce costs and increase operating efficiencies whilst maintaining or

improving their customer service.

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However, Ofgem recognised that if the sector is to contribute fully to the transition to

a low carbon economy, such an approach may not be appropriate. In the future

significant increases in investment will be required together with the development

and adoption of new technologies. Ofgem therefore conducted a major review of the

regulatory framework culminating last October in RIIO – A New Framework for

Energy Regulation. RIIO (Revenue=Incentives+Innovation+Outputs) has been

specifically designed to incentivise companies to meet the unprecedented

challenges they will face during the next decade, in particular to find the over £30

billion of investment needed to meet environmental targets and secure energy

supplies through to 2020, while delivering long-term value for money for consumers.

The RIIO framework is currently being implemented in the two price control reviews

for the gas distribution and gas and electricity transmission companies, which will be

effective for the eight years from April 2013. The next price review for the electricity

distribution companies will not be effective until April 2015.

ENA supports a number of the RIIO proposals, particularly the emphasis on longer

well justified company business plans, enhanced engagement with stakeholders and

the encouragement of innovation. However, there remains a very important area in

the context of a low carbon future where ENA members have significant concerns.

This relates to Ofgem’s proposals on financeability.

What impact could increased levels of electrification of the transport and heat

sectors have on energy security?

Energy networks are vital to the delivery of our low-carbon future and as such gas

and electricity networks will be at the heart of the transformation needed. Increased

levels of electrification of the transport and heat sectors will have a profound impact

upon both the development and operation of electricity networks. The increase in

demand, and changes to the load characteristics of that demand, together with the

expected increase in the amount of distributed generation connecting to the

electricity distribution networks will present significant challenges to the network

operators (DNOs) and in turn could impact security of supply. This transformation will

be different in shape and nature from anything that has gone before.

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ENA is working with its members, other trade associations and Government

organisations in both the UK and Europe to examine how best to meet these

challenges and effect the transformation necessary in our energy networks, to

ensure no impact to supply security. At the heart of this work is research into the

development of smarter electricity grids and the potential change is gas supply and

use, which will be required to accommodate these profound changes in energy

production and consumption, whilst maintaining supply reliability and ensuring costs

to customers are kept to an absolute minimum.

The primary role of the networks will continue to be to transport the energy from

wherever it is generated to wherever it is used. However, in order for the costs of

meeting the expected increase in electrification to be mitigated, networks will also

need to engage with customers to encourage them to actively participate in the

process by moderating their demands or perhaps shifting their consumption to

different times of the day to avoid the need for costly reinforcement investment.

Customer choice is crucial in all this. A smart grid in partnership with smart meters

can empower the consumer by providing tools such as real-time displays, remotely

read meters, financial incentives and time-of-use tariffs to encourage customers to

modify their energy usage. .

The Distribution Network Operators (DNOs) are key in this process of transforming

the electricity grid and will be at the cutting edge of this new approach to energy

production and consumption.

Is the UK’s energy security policy sufficiently robust to be able to deal with

uncertainties and risks inherent in all of the above areas? If not, how could

this be improved?

It will be important in developing UK energy policy that the uncertainties inherent in

moving towards a secure, low carbon energy environment are acknowledged. This

will require a flexible strategic planning framework that can adapt to changing

circumstances and new developments without compromising the country’s energy

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security and low carbon aspirations. One very important element of such a

framework is to ensure that the importance of gas in any long term UK energy

scenarios is recognised. ENA members are convinced that there is a very important

long-term role for gas in helping deliver the UK’s energy security, affordability and

sustainability targets.

Gas is central to the UK economy and has an ongoing role in the energy mix. It is the

cleanest fossil fuel and with carbon capture and storage and bio-methane injection

into the grid it will be crucial in meeting our low carbon targets. Gas is tried, tested

and proven – and more importantly the heating fuel of choice for most of the UK’s

households. The UK gas network is a national asset and has and continues to

provide for security and diversity of supply.

As part of their DECC 2050 pathways analysis the government is reviewing the

future of energy and new technologies. ENA has a major role in these discussions

and commissioned an in-depth, independent analysis into the future role of gas in a

low-carbon economy, by the respected energy consultants Redpoint.

The Report found that gas (including biogas) can continue to play a major role in our

energy mix and can provide a low-cost, sustainable, secure and flexible solution to

our energy and climate change needs. There could be savings of up to £700bn

between 2010 and 2050 – around £20,000 per household or £10,000 per person –

relative to scenarios where gas is phased out of the energy mix by 2050. All potential

pathways to a low-carbon future will involve huge investment in new technology, with

its associated risks and uncertainty, so there is significant value in retaining the

option for a ‘high gas’ future, with proven and existing technology.

The Report concludes that gas is the cleanest fossil fuel and new supplies being

discovered could also be relatively plentiful and low-cost. It can enhance diversity of

energy supply and provide additional flexibility with respect to energy balancing

particularly at times of low renewable output. Finally, the report also established that

maintaining existing gas networks is less expensive than other options for meeting

the UK’s energy needs.

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Are there any other issues relating to the security of the UK’s energy supply

that you think the Committee should be aware of?

Skills In its bid to help halt climate change and to tackle the growing threats to UK security

of energy supply the energy industry must recruit and grow workers with new skills,

to meet the challenges of new technologies, as well as maintain its pool of skills in

more conventional areas.

ENA is at the forefront of the development of energy networks for the future that will

help deliver UK targets for reduction of carbon dioxide emissions by 2050. We are

acutely aware that the energy sector requires engineers and technicians who are

able to develop and operate the smart, low-carbon energy systems needed for the

future.

ENA has for many years supported the Sector Skills Council for the energy sector.

Energy and Utility Skills has established an employer-led forum to consider the skill

challenges for the gas and electricity sector and, supported by ENA, has been

successful in a bid to develop a National Skills Academy for Power.

Significant investment is expected in energy networks to bring on the connection of

renewable energy sources, to install gas and electricity smart metering in every

property and to accommodate the increased electricity demands in heat and as

transport moves away from carbon-based fuels. This will take future energy networks

away from current designs. It will require sophisticated monitoring and

communications systems to deliver the information required to maintain reliable

energy supplies while accommodating intermittent renewable energy sources.

Planning

Network companies were heartened by the approach the Coalition Government has

taken on the Energy National Policy Statements (NPSs). With the need for £200

billion of energy infrastructure investment by 2020 getting planning right is crucial.

The NPSs are central to underpinning the new planning system. We believe the

energy NPSs are a significant step in delivery of vital energy projects. We also

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welcome the emphasis on accountability and proper scrutiny – we have long said

that the key to delivering effective planning reform is ensuring the NPSs have the

necessary democratic accountability.

We also welcome the development of a National Planning Policy Framework (NPPF)

– which we hope and expect will deliver consistency, certainty and clarity across the

entire planning system. If the reports that the NPSs are not to be incorporate in the

NPF are true, we believe that this would be a mistake.

We look forward to a national debate on energy infrastructure development and

network companies are actively engaging with local communities to ensure they are

fully consulted and understand the need for the essential energy development

needed to support the UK.

SUMMARY

The gas and electricity sectors are facing significant changes in order to meet the

Government’s climate change targets and the networks will play a fundamental role

in achieving these policy objectives. A regulatory framework that encourages the

network companies to carry out the required investments in infrastructure is

essential.

Considerable investment will be required to meet our energy security needs. A smart

grid will allow us to allow us to make more efficient and targeted investment on

behalf of the UK. The Secretary of State for Energy & Climate Change has talked of

the "lowest possible cost energy security" - the smart grid can help facilitate this by

ensuring energy is used more effectively. The networks companies will be at the

heart of delivering a smart grid.

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Memorandum submitted by the RMI Petrol (UKES 40) 

1. Executive Summary 

1.1 The road transport industry, reliant upon fossil fuels for the foreseeable future, remains the heartbeat of the UK economy and society at large and deserves much greater support from Government 

1.2 The independent forecourt retail sector has borne the brunt of site closures since the OFT report in 1998 to the detriment of many neighbourhoods and locales, especially those in more rural areas. 

1.3 With just 2,000 rural sites remaining and closure predicted at the rate of 200 a year, the UK risks becoming a “rural fuel desert” by the end of the decade. 

1.4 This scenario will impact adversely on jobs, travel times and costs and being amenity deprivation to these already economically challenged rural areas. 

1.5 Anti‐competitive behaviour by some hypermarket chains and certain oilcos have exacerbated this rapid decline which is predicted to continue if left unchecked. 

1.6 There is clear evidence of market distortion with the re‐emergence of the two tier pricing phenomenon as independent struggle to achieve sustainable margins. 

1.7 Ancilliary forecourt business streams have suffered margin shrinkage at the same time but for different reasons eg. unregulated hand car washes and convenience stores. 

1.8 Government to date has failed to heed the warning calls from industry that future planning and regulation needs to address the support for our filling station network in order to provide a robust level of future energy resilience for the vital road transport industry. 

1.9 DECC has been working with industry for several years through the Downstream Oil Industry Forum (DOIF) but their reports completed last year have yet to see the light of day. Can such a laissez faire attitude continue to be tolerated ? 

1.10 The introduction of biofuels under the RTFO scheme is contentious. With problems of handling, product contamination, increasing product cost, issues over sustainability, lower performance and reliability it must be time for a fresh and objective study into the direction ahead. 

1.11 The Government should move the duty point from the terminal to the point‐of‐sale ie the forecourt dispenser as this would overcome many of the problems detailed in this briefing document and would also make duty cuts (including options for a future fuel stabiliser) easier to embrace. 

  

2. Objective 

2.1 With some 32mn cars and 2mn HGV’s using our roads, the entire UK economy and society remains hugely dependent on fossil fuels to power these vehicles and will do so for very many years. It is estimated that over 80% of UK freight travels by road transport and some 80% of the working population commutes by car. 

2.2 Thus it is imperative that we have a secure and stable source of road fuels both now and into the future. An essential ingredient in this mix is a robust and well structured network of filling stations, not least across rural areas including our island communities. 

2.3 This paper briefly highlights current and future issues that will affect our energy resilience in this vital sector. 

 

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3. Scope 

3.1 RMI Petrol operates under the umbrella of the Retail Industry Motor Federation Ltd and is the sole trade association for the independent forecourt retailers across the UK. It was formerly known as the Petrol Retailers Association. 

3.2 This report is intended as an initial briefing document to the Chairman and Members of the Select Committee for Energy and Climate Change to inform as to the principal issues affecting their market sector, especially from the standpoint of future energy resilience. 

 

4. Recent history of petrol retailing  

4.1 Refineries  4.1.1 Refineries – from a peak of 19 refineries around the coast in the early ‘70’s, 

successive closures from market withdrawals has resulted in just 8 refineries being available at the present time as the Petroplus facility on Teesside has also been closed to production. 

4.1.2 BP sold on their refineries at Coryton and Grangemouth to Petroplus and INEOS respectively over the last few years. These are highly leveraged “merchant” refiners without any downstream integration into the retailing sector.  During the last year, several remaining multi‐nationals also declared their refinery exit strategy with Shell (Cheshire), Chevron and Murco (Pembrokeshire) and Total (Humberside) available for sale.  To date, Chevron has sold to another US refinery operator, Valero Energy Corp. and Royal Dutch Shell has completed the sale to Essar Energy, an Indian conglomerate. 

4.1.3 This would leave just ConocoPhilips (Jet brand) and Esso as long‐term integrated refiners to the UK market. 

4.1.4 Such major changes are bound to impact on future supply arrangements across the UK, with negative prospects for the independent retailers but it is too early to be categoric about likely changes.  

4.2 Wholesalers/distributors   4.2.1 With the decline of onshore refineries and the growth of diesel for road fuel use, 

independent wholesalers have been established with both storage and blending facilities.   

4.2.2 Much of their base refined fuel is now imported both from the near continent and also further afield.  One such company, Greenergy, has a major shareholding invested by Tesco, another Harvest Energy offers a national brand identity and is building long term supply    relationships with independent dealers. Mabanaft is also building supply relationships with the hyper sector. 

 4.3 Petrol Filling Stations 

 4.3.1 From a peak of over 35,000 forecourts and 20,000 as recently as 1990, there has 

been a continuing decline in numbers to less than 8,800 at the end of 2010. Whilst there has been site rationalisation by the major oilcos, the greater part of this 

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reduction, averaging close to 500 sites/year, is accounted for by the independent sector. (See Appendix 1) 

 4.4 Retailers 

 4.4.1  As defined by Experian Catalist, there are three broad sectors, viz: 

 • Oilco – sites owned and operated by the oil company or commission 

operator under their direct management. ( COCO = Company Owned, Company Operated.  COMOP = Company Owned, Commission Operated and CODO = Company Owned, Dealer Operated) 

 • Hyper – sites owned and operated by the “big four” supermarkets being 

ASDA, Morrison, Tesco and Sainsbury  

• Independent – all other sites embracing motorway service areas (MSA), convenience store chains (eg Co‐Op and SPAR wholesalers) plus those owned and operated by individual, private companies. The latter vary from multi‐site groups to small, rural singletons. (DODO = Dealer Owned, Dealer Operated) 

 4.4.2  Over the last 20 years, there has been a surge in hypermarket development activity 

of forecourt operations such that today Tesco is the UK market share leader with over 15.0% eclipsing Esso, Shell and latterly BP who have all been leaders at some juncture.  

4.4.3  Site numbers, average fuel volumes and market shares are provided by Experian Catalist (See Appendix 1) 

  

4.5 Fuel taxation  4.5.1 Although the “escalator” principle for excise duty on road fuels was established by 

the Conservatives in 1993, there has been little consistency of policy since that time.  Suffice to say that duty has been levied in a relentless manner, especially by the previous Government. (See Appendix 2) The result has been continuing inflation of prices at the pump, suppressing fuel demand and increasing cashflow problems for smaller retailers. 

4.5.2 More recently, VAT has been increased from 15% to 17.5% from 1 January 2010 and from 17.5% to 20% on 4 January 2011.  

4.5.3 Today, the total tax “take” is around 80 to 82ppl for ULP equivalent to some 60% of the total average UK price of 133.50ppl. 

 

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5. Current issues affecting the Independent sector  

5.1 Supply  

 5.1.1 One of the dramatic features of the reducing number of refineries and the change 

of ownership is the virtual cessation of the “product exchange” system. This enabled oilcos to provide supply to Dealers more or less across the UK irrespective of their own facility restrictions.  As a result, there has been consolidation with oilcos focusing on geographical areas where they have compelling competitive advantage. 

5.1.2 The outcome for the independents is that they now have limited supply options when it comes to re‐signing 5 year supply contracts. For instance, in Scotland independents are limited to just BP and Shell amongst the major brands.  Others including Conoco (Jet), Chevron (Texaco) and Esso will decline to quote. There are  minor brands available but these do not have the pulling power of a major brand particularly when facing hypermarket competition. 

5.1.3 Whilst not yet a monopolistic position, it is not ideal to have such limited competing supply options available in many regions of the UK. 

5.1.4 This rapidly developing situation does not yet appear to be recognised by Government based on comments made by the Chief Secretary to the Treasury during Budget week. 

 5.2 Pricing/Competition 

 5.2.1 Most oilcos quoting for dealer business today will insist on supplying against Platts 

wholesale prices on a daily basis.  Their mark‐up (on‐cost) is assessed after factoring in such details as actual and estimated fuel volumes, local area pricing, distance from the refinery or cold supply terminal and inclusion of part/all costs of card payments.  This package is offered to the dealer as a Platts plus price.  It is now virtually impossible to negotiate a weekly Platts plus price.  

5.2.2 Additionally, both methods carry zero protection to the dealer from an oil company that ignores the Platts wholesale pricing structure eg an oilco building up tactical volume through COCO’s to sell their refinery at a better price or an oilco supporting their dealers to the lowest market prices with no regard to ROCE or an oilco establishing  local market share with their COCO’s in selected areas where they want a presence. Such activities can place their prices several pence below dealers under the same brand. This confuses the consumer, financially disadvantages the dealer and must be questionable as a fair franchise agreement between oilco and dealer. 

5.2.3 Several oilcos have their retail estate up for sale and appear to have been pushing volume at the expense of profit so as to get a better capital value for their respective portfolios.  

5.2.4 And then there are the Hypermarkets. Previous investigations (Competition in the supply of petrol in the UK – Office of Fair Trading : May 1998) suggested that it was in the public interest for these companies to offer low prices.  This report ignored warnings from industry that such unchecked pricing tactics could cause major 

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damage to the retail fuels infrastructure and thus the UK’s overall energy resilience for road transport.  

5.2.5 The facts speak louder than words : total forecourt numbers across the UK have reduced from 13,850 in 1999 to less than 8,800 in 2010.  It is averred that this collapse of nearly one third of all petrol filling stations has been largely due to the anti‐competitive pricing tactics adopted by the four major hypers and certain oilcos. 

  

5.2.6 As an example, one of the oilcos has been selling at less than some dealers buying price in the last few weeks. (See Appendix 3) How damaging to the remaining retail network if this were to continue much longer ?  Predatory selling by both oilcos and the hypers could potentially threaten our energy resilience by forcing closure of yet a larger swathe of the independent dealer market. Vital, secure underground storage being lost as has already been the case with 11,000 less forecourts since 1990. 

5.2.7   

5.2.8 These hyper chains have buying advantages due to their size which are believed to include duty deferment arrangements with HMRC, prices negotiated with a two week time lag, full compensation for “hot product” and headline buying levels at Platts minus rather than Platts plus.   

5.2.9 The hypermarkets regularly use their store profit to cross‐subsidise fuel by means of deeply discounted promotions, usually "spend £50 in store and get 5.00ppl off fuel". This is yet another contentious and anti‐competitive sales device which hits the indies as they have no means of retaliating. 

  

5.3 Measured product and “hot” product  5.3.1 Independents have to accept the volumetric measurement of the supplying oil 

company as stated on their delivery note and invoice. The delivered fuel is not metered out into the tanks on site. Many dealers use fuel monitoring systems installed and monitored by respected and accredited companies, which show that short loads frequently happen but there is no way of obtaining compensation from the supplier. Dealers are unable do anything about it, being contractually obliged to accept the supplier’s terms.  

5.3.2 A serious financial issue is the well‐researched phenomenon of “hot” product. (Temperature Compensation of Liquid Fuels 1999 : National Engineering Laboratory).  Many deliveries, are made at temperatures significantly above those of the dealer’s tank temperatures.  “Hot” product, delivered into colder underground storage tanks contracts when it is cooled (petrol cooling by 10oC shrinks by 1.2%) further disadvantaging the dealer as the “invoiced quantity” is not available to be sold.  Some suppliers recognise this problem and offer modest “hot” product compensation arrangements.  

5.3.3 There is also the issue of vapour returned to storage as part of the tanker loading process. A Department for Environment report (1995), in justification for stage 1b Vapour Recovery legislation, confirmed that up to 0.18% of the petrol loaded is taken back across the duty point. No allowance is given to the dealer for the product or the duty which could amount to £20 per 10,000 litres. Also, as part of the delivery process, vapour is taken from the dealer’s tanks and, again, no allowance is given by the supplier.  

 

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5.4 Duty   

5.4.1 The retailer collects tax in the form of duty, now at 57.95ppl and VAT now varying between 20 and 23ppl at the 20% rate.  However, there is real concern that HMRC does not agree to repay duty on the vaporised hot product element returned to the terminal by tanker and subsequently charged out again on another delivery.   

    

5.4.2 Also HMRC does not allow duty reclaim on fuel theft from the site – this cost has to be carried by the retailer as most low level theft such as drive‐offs is practically uninsurable. This unfair and unnecessary cost to industry is yet another financial burden to the retailer. 

 5.5 Allstar  

 5.5.1 This company appears to have a dominant share of the company fuel cards sector 

and individual retailers are unable to challenge their costs of business. Allstar charge the forecourts for taking the card and the retailer makes little, if any profit.  

5.5.2 Independents do provide a full service to the vital HGV and commercial van sectors, unlike the hypers, with hi‐speed standalone diesel pumps and other specialist facilities. This sector risks being seriously impaired should closure rates accelerate.  

5.5.3 Diesel fuel is generally provided on a bunker basis at ultra tight margins but remains integral to independents through good shop spend. 

5.5.4 The oilcos do not offer a discount to provide customer accounts. The scheme is not transparent. Who else benefits? Some suggest that Allstar is a hugely restrictive practice in which many of the oilcos have a similar practice with company fuel cards again at the expense of the independent retailer. 

 5.6 Other credit and corporate cards 

 5.6.1  As the fuel prices rise so card costs rise, as they are percentage based, which 

reduces independents margins yet further. This practice must be challenged but individual companies lack the leverage to address the issue with global players including VISA and Mastercard.. 

 5.7 Margins 

 5.7.1 The independents are able to determine their own pump pricing but within 

parameters which, in theory, offer an optimum return on the supply agreement formulae from the oilcos.  However, most pricing is driven by local competition from aggressive hypers or oilcos.  

5.7.2 In reality, the independent is being forced to accept gross margins in the range 1.0 to 3.5ppl which is unsustainable given the increases to business rates, energy, employment, insurance, banking and other overhead costs for the site.  The gross margin needs to be in the range of 4.0 to 5.00ppl for survival in most cases.  

 5.8 Shop  

 

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5.8.1 Many of the smaller sites still offer the old “kiosk” style forecourt shop which houses the payment point and a range of oils and car accessories.  Others have embraced the CTN (confectionery, tobacco and newspapers) concept from slightly larger shop premises whilst the modern forecourt has invested in the fast‐growing convenience store facility.  

5.8.2 There are now several strong secondary “symbol” convenience brands available to the independents including Budgens, Spar, Mace, Londis, Costcutter etc which provide a good range of products and fresh produce both own brand and proprietary brand such as Heinz, Kellog and so on.  IGD and other research consultancies advise that the convenience sector is growing at 6% per annum in real terms. 

5.8.3 This explains the major shift by the hypers to take full advantage of this trend towards convenience shopping as their major out‐of‐town centres struggle to achieve real growth other than by extension of their product lines. 

   5.8.4 Gross margins between 18 to 24% can be achieved but only with significant 

investment, outstanding service and extended hours working. Over the last 20 years, there has been a huge swing in the source of forecourt income from fuel to shop and this has prevented yet a higher rate of closures. 

5.8.5 The principal concern of the independent retailers is the anti‐competitive business rating system being applied by the VOA (see para 5.10 below). 

 5.9 Car and jet wash 

 5.9.1 For many years investment in these ancilliary forecourt services provided an 

important alternative income stream to the independent retailer to help offset rapidly declining fuel margins. However, over the last five or so years, the market has been destroyed by the sudden emergence of the “unregulated” hand car washes spearheaded by the large out‐of‐town retailers offering such service in their large car parks.  

5.9.2 Forecourt retailers estimate that up to 50% of their market has been lost from this dubious cash trade because of the lack of any Government intervention. 

5.9.3 It is maintained that the unregulated hand car wash activity can breach many UK regulations including : 

 • Employment of illegal workers (HM Border Agency have recently had a number 

of successful raids on unregulated car washes) • Disregard for local Planning Approvals • Avoidance of business rates whilst operating on brownfield sites • Avoidance of income and corporation taxes • Contravention of PPG13 issued by DEFRA for the control of waste effluents 

 5.9.4 The independent sector, through the Car Wash Association, is seeking support from 

Government to provide committed monitoring and control of the “unregulated” hand car washes so that competition, based on level playing field terms, can be quickly re‐established.  Without such intervention, the financial plight of independents will continue deteriorating and lead to further unnecessary closures. 

5.9.5 This is yet another example of the previous Government’s disinterest towards the independent petrol retailers, typified by the reluctance to provide proper enforcement of regulations. 

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 5.10 Business Rates 

 5.10.1 Whilst the average increase for all commercial properties at the 2010 Revaluation 

Scheme was said to be 18%, the average for petrol filling stations was over 60% with many exceeding 400%.  Thus Government increased the financial stresses on independent retailers from another angle. 

5.10.2 Both Scotland and Wales withdrew their Transitional Relief schemes so increasing the financial plight of many small and rural sites. RMI Petrol  led an industry wide challenge to the VOA which resulted in a number of concessions, especially related to the forecourt fuels element. The Scottish Assessors Association (SAA) adopted many, but not all, of these concessions into their Rateable Values implemented from 1 April 2010. 

5.10.3 In England and Wales, these concessions are only now starting to be distributed in revised assessments to each site. 

5.10.4 In negotiations with the VOA, their officials refused to concede ground on the key issue of the rating assessment methodology being employed for forecourt shops versus standalone shops.     

5.10.5 The former are rated based on annual turnover whereas the latter are rated using the square area (ITSA) of the selling premises. This has produced extraordinary comparisons whereby a Tesco Express (estimated sales £4.0mn/year at 35% gross margin = £1.4mn) with the same floor area as an adjacent forecourt store (estimated sales £1.5mn at 22% gross margin = £330K/year) has a Rateable Value of just £26K/year compared to the forecourt at £85K/year. 

5.10.6 This is considered to be unjust and unfairly discriminating against the forecourt operator. 

5.10.7 RMI Petrol appointed Barber Wadlow, specialist property advisors, to investigate this anomaly and their report dated April 2010 is enclosed. (See Appendix 4). Note their findings that it would financially benefit nearly 500 forecourt operators to close their forecourt to fuel sales and to trade solely as a convenience shop.  

5.10.8 It cannot be right that the VOA’s methodology leads to such bizarre decision‐making which, in turn, would lead to job losses and withdrawal of fuelling facilities often in rural or semi‐rural areas. 

 5.11 Biofuels 

 5.11.1 The introduction of both bio‐ethanol and bio‐diesel has been fraught with 

operational and performance difficulties, not least for the independent operator. (see Appendix 5) 

5.11.2 Regulation is pushing refiners/blenders to consider introducing new grades of biofuel which would need to forecourts to offer additional grades to service all vehicle engines. 

5.11.3 Most small and rural sites only offer a limited selection of grades and any addition would be difficult both financially and physically to accommodate. Will the Government provide capital grants ?  Will the Government provide operating subsidies ?  Without such moves, it is estimated that closures will accelerate. 

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 Appendix 1. 

 

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 Appendix 2 

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 Appendix 3  

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 Appendix 4 

  

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CONTENTS  

  

1.  Business Goodwill .................................................................................... 3   

2.  Profitability Of Standalone C‐Stores & Petrol Filling Stations ................... 6  

 

3.  VOA Proposed Valuation Framework –  Impact On Petrol Filling Station   

Market ..................................................................................................... 8   

4.  Conclusion ............................................................................................. 10        

APPENDICES   Appendix A  ‐ Turnover Analysis of Petrol Filling Stations / Standalone C‐stores 

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   1.  BUSINESS GOODWILL 

  1.1               A  rateable value  is  supposed  to  replicate  the potential  “annual  rental  value” of a property, 

therefore  the VOA has based  rateable values upon actual  rental  transactions of petrol  filling stations (which is the same approach adopted for other property sectors). 

 1.2          In practice, when a petrol  filling station  (PFS)  is  let  in  the open market, the annual  rent not 

only  reflects  the  value  of  the  property, but  also  the  goodwill  in  the  business.    The market does NOT pay a premium on top of the rent for the business – the premium is factored into the rent – and because the VOA  is relying on market evidence to set petrol station business rates, they are also reflecting the “value” of the business in all rateable values. 

 1.3           The VOA  consider  it  to be correct to  incorporate  this element of goodwill  in a PFS  rateable 

value  because  it  is  inherent  and  transferable  goodwill  as  opposed  to  personal  goodwill. Inherent goodwill is defined as “that intangible asset that arises as a result of property specific name  and  reputation,  customer  patronage,  location  and  similar  factors,  which  generate economic benefit.    It  is  inherent to  the specialised  trading property and will  transfer  to a new owner on sale”. [RICS] 

 1.4         Whilst we acknowledge this point and accept that this is how PFS rental values are assessed, it 

is critical to highlight that the fuel sector property market is entirely unique to other property sectors  and,  as  a  consequence,  by  adopting  this  approach  to  value  for  rating  purposes,  it creates huge inconsistencies with other very similar property sectors. 

 1.5         For example, if you buy a leasehold c‐store business (without a forecourt), you would pay an 

appropriate  annual  rent  (based  upon  a  £/ft2)  for  the  property  and  an  additional  up‐front premium payment  for  the business.   C‐store rateable values are  therefore based upon  rental transactions of the property excluding the value of the business. 

 1.6                The VOA  argue  that  all  inherent  qualities  of  a  c‐store  property  are  reflected  in  the  rent, 

therefore if a premium payment is made for an operational c‐store business, it is to reflect the personal goodwill of the business.   However, some of the major c‐store retailers confirm that they will  (and do) pay goodwill  for an operational business, but  strictly on  the basis  that  this payment  should  reflect  the  locational  qualities  of  the property  and  its potential  to  trade,  as opposed to any personal goodwill. 

 1.7         The  VOA  *Patrick  Bond’s  letter  dated  17  February  2010+  even  remark  that  it  is  a  little 

surprising  that  standalone  c‐store  rents  “do  not  seem  to  show  a  strong  relationship  with turnover or profitability”.    This  is because the rent  that a c‐store operator  is prepared  to pay only needs  to marginally out‐bid  the general market rental  value, which  is  set by a  range of different retailers as opposed  to  just c‐store operators.   The profitability of  the unit, which  is largely driven by locational qualities, is therefore reflected in the premium payment. 

 1.8         An  industry  ‘rule  of  thumb’  is  that  the  premium  should  equate  to  ten  times weekly  shop 

sales  (exclusive  of  VAT,  lottery  and  E‐Pay).     This  multiplier  will,  however,  vary  dependent upon the lease terms and rental levels, as well as the future trading potential of the unit. 

 1.9                 The  following  transaction of a  standalone  c‐store demonstrates  the principle of a premium 

payment on top of the rent: 

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Standalone C‐Store  

• Standalone c‐store achieving weekly sales of circa £30,000 (exclusive of VAT, lottery and E‐Pay).   The property  is  let on a 10‐year  lease  from  January 2005 at a  rent of £25,000 per annum. 

 • The  leasehold  business  was  acquired  in  August  2005  for  £230,000  and  we  have  been 

advised    by    the    purchaser    that    this    premium    reflected    the    very    strong    locational qualities.   Indeed, the business had, up to the date of purchase, been run poorly therefore no scope to attribute value to personal goodwill. 

 • If  this premium  is  decapitalised over  the  term of  the  lease,  the  additional  property  cost 

would be £32,000 per annum, therefore the total property cost (rent and premium) would be £57,000 per annum.  The 2010 Rateable Value for the property has, however, been set at £21,750. 

 In contrast, a PFS will be let at a rent that incorporates this goodwill element, as the example below demonstrates:  

Petrol Filling Station  

• 2010 Rateable Value: £107,000  

• Barber Wadlow  is  acting  for  the  owner‐operator  of  the  business,  who  is  retiring  and wished  to  let  the property. We have  recently agreed a new  lease at circa 10% below  the proposed rateable value. This is an FRI lease for a term of 20 years. 

 • It  should  be  noted  that  we  have  had  to  accept  a  discounted  rent  to  reflect  a  high 

proportion  of  account  trade,  as  well  as  discount  for  age  and  type  of  pumps  (circa  10 years old and not stage 2 vapour recovery) – cost of replacement: £60,000. 

 • No premium  is being paid  for  the business on  top of  the agreed  rent  –  the  rent  reflects 

the  value  of  the  property  (including  all  fixtures  and  fittings  (including  the  office  chair)) and the “business” or business potential. 

 1.10       A   standalone   c‐store   is   therefore  benefitting   from   a   considerable  saving   in   rates   (by 

comparison  to  a  petrol  retailer)  because  the  goodwill  element,  despite  being  inherent  and transferable goodwill, is excluded from the assessment. 

 1.11      We would  expect  the  above  to  be  challenged  by  the VOA  on  the basis  that no  goodwill  is 

paid when an operator takes a lease on a shop unit that has not previously been operated as a c‐store, whereas  the rent of a  ‘new  to  industry’ petrol station will still be based off a ren t in relation  to  turnover  (therefore  inclusive  of  goodwill).  An  ingoing  tenant  to  a  new  PFS will, however, base  rent on  significantly discounted  trading  figures  in  order  to  reflect  the  trading uncertainty,  thereby discounting  the  rent.   Moreover,  the  reality  is  that  there  are extremely few ‘new to industry’ PFS sites because of these trading risks and the substantial development costs.  Experian Catalist report that there were only 54 newly‐developed sites in  the  last  three years, but many of  these are  site  redevelopments,  therefore not  strictly ‘new to industry’. 

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  1.12         Whilst  we  can   appreciate  that  the  VOA   want  to  try  and   mirror  market  practices  when 

assessing  rents  of  petrol  stations   for  rating  purposes,  one  must  question  the  logic  of adopting  the market  approach  when  it  creates  such  inequality  with  other  property  types, particularly such similar property types as c‐stores.  Indeed, in a lot of cases, petrol stations and standalone c‐stores are now very similar businesses ‐ the shop is now the key profit driver of a petrol station and  its profit margins are more or  less  identical to  that of a standalone c‐store. There is also only marginal enhancement in turn‐over potential for a petrol station shop, as the section below demonstrates. 

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   2.  PROFITABILITY OF STANDALONE C‐STORES & PETROL FILLING 

STATIONS   2.1         It would  be  acceptable  to  charge higher  business  rates  on  a  petrol  station  if  it was more 

profitable or the turnover potential far superior, but this is not the case.  2.2                A  product  of  the  proposed  VOA  valuation  framework  for  petrol  filling  stations  and  its 

assessment   of    incorporating   goodwill    (as   highlighted    in   Section   1),    is    the   huge inconsistencies in rateable values attributed to the shop element of a petrol filling station by comparison to a standalone c‐store. 

 2.3         As we have highlighted in previous letters to the VOA, there are examples of rateable values 

allocated  to  shop elements equating  to £50/ft2    ‐ £100/ft2    in  locations where  standalone  c‐ stores  are  paying  rates  that  are  as  little  as  10%‐20% of  these  levels.   This  pattern would suggest that a petrol station shop has the scope to be proportionally more profitable than a standalone c‐store. 

 2.4         The VOA  in  Practice Note  1:2010: Revaluation 2010: Petrol  Filling  Stations ,  state  that  this 

huge  difference  is  because  “turnovers  achieved  at  forecourt  shops  are  understood  to substantially  out‐perform  the  convenience  store  industry  average,  in  terms  of  sales  per square metre  per  sales  area.    Although  an  element  of  this  “over‐trading” may  be  due  to generally   longer   opening   hours,   it   is   unquestionable   that   a   well‐located   forecourt convenience  store  will  trade  from  both  forecourt  users  and  destination  shoppers  and  will generally  trade  at  a  level  above  comparable  convenience  stores  in  the  locality.      It  will therefore  not  be  unusual  for  the  value  of  the  forecourt  shop  to  show  a  premium,  often substantial, over the local shop tone to reflect: 

 a)    the level of over‐trading; and, as importantly, b)    that  shop operating costs  (heating,  lighting,  insurance,  repairs and,  to an extent,  staff 

costs) are  relatively  less as  they are  spread across not only  the  shop  income, but also forecourt sales” 

 2.5        We do  not  consider  this  statement  to be  accurate  as  the  following  research  in  respect of 

trading  performance of  both  standalone  c‐stores  and  petrol  filling  station  shops  highlights. This   evidence    is   from   a   supermarket   retailer’s   network   of   c‐stores   (for   confidentiality reasons we  cannot  identify  the  retailer),  some  of which  are  standalone, whilst  others  are incorporated within a petrol filling station. 

   

Description of Evidence Average Weekly Shop Tu(£/ft2 – Net Sales Are

Rateable Value (£/ft2

Gross Area)Ratio ‐ Turnover to

Rateable Value

Standalone c‐store: 140 stolocated nationally

£17.75 £9.75 1.8

C‐store ancillary to petrol filling station: 34 sites locatnationally

£19.50 £23.75 0.8

10% increase in sales fPFS shop

150% increase in ratefor PFS shop

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2.5                According  to  these  figures,  a  c‐store with  PFS will  only  achieve  10%  greater  sales  than  a 

standalone  store,  but  the  rateable  value  is  nearly  150% more.    This  research  is  interesting because all  shop  retail units  are directly comparable being more or  less  identical  in  terms of size and fitout, whether standalone or part of a forecourt development.  Additional evidence is provided  at  Appendix  A,  albeit  not  for  directly  comparable  units,  but  the  pattern  and ratios are still evident. 

 2.6         Given  that  profit margins  for  both  shop  businesses  are more or  less  identical,  there  is  no 

opportunity  to  significantly  enhance  profitability  of  a  petrol  station  shop  and,  as  a consequence,  it  creates  a hugely  anti‐competitive  situation, which  is  likely  to  result  in many petrol  retailers  taking  evasive  action  to  avoid  the  rates  increase,  including  closure  of  the forecourt so that  the shop can be  reassessed as a  standalone c‐store (see Section 3  for more information). 

 2.7         In  addition,  the  following  data provided by  IGD  indicates  that petrol  station  shop  sales  do 

not “substantially outperform the convenience store industry average”.  

  

C‐store Type Number oOutlets

Outlet Share Sector Value Sector Share Annual Salesoutlet

Co‐operatives 2416 5% £3,300m 11% £1,365,000Forecourts 8641 17% £4,105m 14% £475,000Multiples 2812 5.5% £4,338m 15% £1,540,000Symbols 14630 29% £10,430m 36% £713,000Non affiliated Independents

21950 43.5% £6,911m 24% £315,000

TOTAL 50,449 £29,084m £575,000[Source – IGD, The Food and Grocery Experts, 2009] 

  2.8                The  convenience  sector has  changed  considerably over  the  last 10  years with  the arrival of 

supermarkets.    Previously  it was  the  non  affiliated  independent  (i.e.  the  corner  shop)  that dominated  the market and by  comparison, petrol  station  shops did  (and  still do)  outperform this outlet type.   However, co‐operatives and supermarkets have now created a much stronger business model that can outperform the average petrol station shop. 

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   3.  VOA PROPOSED VALUATION FRAMEWORK – 

IMPACT ON PETROL FILLING STATION MARKET   3.1                 The  proposed  valuation  framework  for  petrol  stations  is  likely  to  result  in  fundamental 

changes to the network.  3.2         Petrol  retailers  will   look  to  close  forecourts  so  that  the  shop  can  be  reassessed  as  a 

standalone c‐store which, as the above evidence demonstrates, can represent a significant rate saving.   For retailers with  low volume forecourts, but comparatively strong shops, this will be an easy decision  to make.   According to Experian Catalist,  in 2008 there were 435 PFSs achieving fuel sales below the average dealer volume of 2.25 million litres per annum, but achieving  shop  sales  above  the  dealer  average,  which  was  circa  £400,000  per  annum. Indeed,  the  ‘average’  of  these  sites  was  achieving  fuel  sales  of  1.4 million  litres  and  shop sales of £775,000 per annum, and with fuel sales at this particularly low level, there is a logic in removing the forecourt to significantly reduce the rateable value. 

 3.3              The argument  for closure  is stronger again  if  the  forecourt  is old and equipment  in need of 

replacement  (which  invariably  is  the  case with  the  low  volume  sites).    The  cost of  replacing tanks  and  re‐pumping  the  forecourt  can  be  circa  £200,000  and,  with  fuel margins  at  only circa 3%, there may be more merit in putting this  investment into the shop where margins of 20% plus can be achieved – see calculation below. 

 Petrol Station with Shop Rateable Value: Fuel: 1,400,000 litres @ 2.75ppl £4,235Shop: £775,000 @ 4.5%@ 76% £26,505

TOTAL £30,740 Gross Profit: Gross Profit (less rates, excluding transitional relief)

£180,774

Less annual cost of equipment (Financed @ 6% over 10 years)

£27,000

£153,774 Rates ‐ % of Gross Profit: 20%

Closed Forecourt with Shop (Assumed shop size @ 1,000ft2 + 500ft2 ancillary, assumed rent rate @ £7/ft2 ‐ 10/ft2)

Rateable Value: 1,500ft2 @ £7/ft2 ‐ £10/ft2 £10,500 ‐ £15,000

TOTAL £10,500 ‐ £15,000 Gross Profit: Gross Profit (less rates, excluding transitional relief)

£149,800 ‐ £150,653

Rates ‐ % of Gross Profit: 7% ‐ 10% 3.4         The suggestion that shop sales will be adversely affected by the closure of the fuel forecourt is 

only partial.   The  fuel market has changed, with supermarket operators now dominating with aggressive  pricing  policies,  therefore  petrol  retailers  are  already  using  the  shop  to  pull  in customers, as opposed  to  relying on  fuel.   Indeed,  for sites achieving  fuel sales of circa 1,400,000 litres, the forecourt will only be generating a small proportion of shop sales. The 

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shop  is  therefore outperforming  ‘core’  shop  sales  and what would  be  typical  of  a  forecourt generating volumes at this level. 

 3.5  Supported by MUA research, we would expect ‘core’ shop sales to equate to circa 7%‐15% 

of  fuel volume, which  in  this scenario would be £100,000 ‐ £200,000. If one assumes  that 50% of ‘core’ sales would be lost if the forecourt closed, the gross profit (less rates) would drop  to £130,000  ‐ £140,000,  therefore rateable value would  still only equate  to 10.5%  ‐ 11.5% of profit, and  there would only be a circa 10% reduction  in profit  to  the petrol station and  shop,  without  any   investment  incurred.      That  said,  an  operator  could  (and  most probably would) invest in the shop to protect / enhance sales. 

 3.6         These  435  PFSs  (circa  5%  of  UK  network)  are  therefore  highly  vulnerable  to  closure  as  a 

result  of  the  proposed  rating  valuation  framework,  but  it  is  likely  that  any  site  with disproportionately high shop sales by comparison  to  fuel will be seriously considering closing the  forecourt  if  there  is an opportunity  to  reduce  their rates  liability, particularly  if  there  is a need  to  invest  in  the  forecourt.    We would  therefore  expect  the  number  of  forecourts  ‘at risk’  of  closure  to  be  considerably  higher,  potentially  10%  of  the  network.  Given  that  we have  already  lost  one  in  three  PFS  sites  since  the millennium,  a  further  decline would  be particularly damaging to UK infrastructure. 

 3.7         Transitional relief is not going to assist retailers; it will only delay the decision of closure for a 

year or  two. And with no  transitional  relief  in Wales  and  Scotland,  these  retailers  are being forced  to make  the  decision  now. Moreover,  all  PFS  businesses  will  be  devalued  to  some extent  because of  the  reduced  profit  potential  going  forward  ‐  a  prospective purchaser will need to factor in the rates increase even if there is some relief in the first couple of years. 

 3.8         Whilst  closure of  the  forecourt  (or  even  the  entire  site  in  certain  cases)  is  a  decision  that 

retailers  located  throughout  the country will be  faced with,  it  is  likely  that a  large number of these sites will be  in  rural  locations where the  loss of yet another  forecourt could be hugely detrimental  to  local  economies.    Interestingly,  the  VOA  would  appear  to  be  aware  of  this issue as  it has  come  to our  attention  that a  2010  rateable value  for a  rural  site has  already been  more  than  halved  prior  to  1  April  2010.     We  understand  that  this  adjustment  was made because at the originally proposed rateable value, there was a serious possibility that the business (or at the very least the forecourt), which  is vital to the  local rural community, could be  lost.    The VOA do appreciate  that  the site  in question  is a  lifeline  to  the rural community and, without it, many local residents would have been unable to get to another forecourt to fill up their vehicles this winter. 

 3.9                 The  VOA  is  therefore  being  forced  to  make  adjustments  to  their  framework  to  protect 

certain  sites  that  are  supporting  a  local  community,  which  must  demonstrate  that  the proposed valuation framework is not workable. 

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4.  CONCLUSION   4.1                The  2010  rateable  values  for  PFSs  have  not  been  compared  with  other  property  sectors, 

hence  the  huge  distortion  in  values  between  standalone  c‐stores  and  PFSs.    Comparison between  property  sectors  is  not  standard  practice  for  the  VOA  which,  to  some  extent,  is understandable  for property  sectors  that bear no  similarities, but  for PFSs and  standalone  c‐ stores,  with  circa  30%  of  the  PFS  network  now  benefiting  from  a  c‐store,  if  this  is  not undertaken,  there  is  scope  for  two  similar  property  types  to  be  taxed  at  entirely  different levels. 

 4.2         The potential  impact that this valuation framework is expected to have on the PFS market  is 

substantial  (see  Section  3);  we  would  therefore  strongly  recommend  that  adjustments  are made.   It has been highlighted that a PFS rent incorporates goodwill, whereas a standalone c‐store does not. We would therefore propose to work with the VOA  to formulate a method of valuation that ensures that petrol retailers are not being taxed up to 500% ‐ 1000% more than standalone retailers. 

 4.3         In this respect, we consider the biggest area of concern relates to the way shops are treated, 

with particular reference to the shops that are achieving sales above what one would consider to be typical of a standard PFS.    Previously, this was only ever a  very small proportion of the network, but  the market has  changed  considerably  in  the  last 10  years and  there are now a substantial number of PFSs with c‐stores (achieving high shop sales) that are being assessed for rating purposes as if they were a standard PFS. 

 4.4                 Adjustments  should  therefore be made  so  that  c‐stores  incorporated within PFSs pay  rates 

that reflect the  turnover / profitability of  the unit by comparison to a standalone c‐store.   As shown  in Section 2.5,  if a PFS c‐store turnover  is 10% more than that of a standalone c‐store, then the rateable value should be 10% greater, as opposed to 150%. 

 4.5         In addition, an alternative approach would be to analyse the element of shop sales in excess of 

what  is deemed to be  ‘standard shop sales relative to  the fuel volume’, at a discounted level.  A  similar  approach  was  adopted  by  the  VOA  for  the  2005  assessment,  and  it  seems even more  relevant  in  2010  to  include  this  approach  given  the growth of  c‐stores on  PFSs  in  the intervening period. 

 4.6                Barber Wadlow would  like to offer the VOA assistance  in  formulating a valuation framework 

that  is  equitable  for  petrol  retailers  and  is  not  going  to  have  any  adverse  repercussions on the sector as a whole. 

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APPENDIX A   

Turnover Analysis of Petrol Filling Stations / Standalone C‐stores 

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Turnover Analysis of PFSs and Standalone C‐stores     

Description of Evidence Average Weekly Shop Tu(£/ft2 – Net Sales Are

Rateable Value (£/ft2

Gross Area)Ratio ‐ Turnover to

Rateable Value

Experian Catalist – average shop trading figureall UK PFS sites according toCatalist research

£14.00 ‐ ‐

Barber Wadlow schedule ofevidence for circa 50 PFSs

£18.25 £29.75 0.6

Network of circa 50 standalstores

£9.00 £6.75 1.3

 

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Appendix 5  

Gaps in information in Distribution, Storage, Retailing and use of Bio-fuels

Many of the problems incurred through storage and sale of bio-fuels have either been caused or at the least exacerbated by a lack of essential information. Such information could have enabled measures to be taken to avoid or minimise the risk of damage from storing or using bio-fuels. Fuel distributors, retailers, equipment manufacturers and maintenance companies all report the same concerns about the lack of information. More recently, motorists are suffering the damaging effects of bio-fuels and make wrong assumptions of how or who caused the problem. Contaminated fuel is often used as the cause of breakdown, when the repairer is unable to correctly diagnose the vehicle fault.

Distribution

It is recognised that unless Suppliers provide information to the fuel distributors, it is impossible for them to provide that information to customers receiving their products. Distributors stocking bio-fuels have themselves suffered damage to their infrastructure, which could have been avoided if sufficient information had been provided to them.

The issue for the Distributor is the lack of confirmation from the Supplier, on the percentage and type of bio-fuel added. Without this information, sensible, accurate information cannot be passed on to the retail site/end user. This information should be required on the delivery documentation from the Supplier.

Fuel Retailers

Technical guidance on the storage of bio-fuels was produced by the Service Station Panel of the Energy Institute, which is represented by the stakeholder groups. This guidance advised retailers to carry out preparatory work immediately before receiving bio-fuels. In the event, however, many retailers were not given prior warning, nor did their delivery notes convey the necessary information, neither that the fuel contained a bio element nor the percentage of such bio element. Many retailers only became aware that they were storing bio-fuel when problems began emerging. It then became costly to rectify and also incurred problems for purchasing motorists.

Storage of bio-diesel has caused numerous problems for retailers, through filter blockage, nozzle cut-outs failing, leading to compensation for soiled clothing or damaged footwear, and microbial growths occurring in storage tanks. Left untreated, this can lead to microbial corrosion, tank failure and contamination of soil and groundwater.

In the case of ethanol blends, retailers have suffered high costs as a result of being supplied with fuel that has suffered phase separation prior to delivery, resulting in vehicle breakdowns for which compensation has had to be paid and the costs associated with uplift and disposal of contaminated fuel, all borne by the retailer. Notwithstanding the fact that the site operators had carried out the necessary preparation, suppliers have frequently disclaimed all responsibility by stating ‘its nothing to do with us’. The inability for retailers to check fuel quality before it is offloaded from the road

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tanker and the total lack of transparency in measurement and fuel quality has left retailers very vulnerable and exposed to high costs to rectify problems frequently caused by others.

Retailers are not given adequate information on the delivery notes about the fuel delivered. In spite of industry guidance advising not to mix an ethanol blend with standard petrol, on more than one occasion suppliers have advised that the ‘next load’ will not contain ethanol. This has left retailers exposed to high risk of phase separation occurring as a result of reducing the percentage of ethanol in their storage tanks.

Motorists

Through numerous breakdowns, Motorists and Motoring Associations have become aware that bio-fuels come with a risk of problems and the potential to cause breakdowns. Not unreasonably, Motorists assume that this was caused by the fuel most recently purchased, which is rarely the case. This has led to high costs for the retailer who has had to call in specialist contractors to give third party verification that no contaminated fuel was found on site. We give a number of case examples below.

Case 1.

A Motorist contacted a fuel retailer to complain that he had received water in the diesel recently purchased from his site. The Retailer carried out water checks on the tank and found no water. The Motorist was not satisfied with this assertion and so third party verification was paid for by the retailer. The Motorist then threatened court action and the Retailer’s insurer stated that they would pay out as it was cheaper to do that than pay for his defence in a court action. The Retailer worried about his local reputation refused the offer and contacted RMIP who provided a technical report, showing that if water had been dispensed, everything below the suction pipe in the storage tank would still be water. The Retailer won the case and was awarded costs. He did however; have to stand the cost of third party verification of the lack of contamination on site.

Case 2

A Motorist topped up the fuel tank of her car before boarding the channel ferry at Dover. Shortly after disembarking in France, the vehicle broke down and was towed to the Volvo dealership. Water mixtures were discovered in the fuel system and the Motorist was advised to contact the garage where she refuelled. As in case 1 above, no water was discovered in the storage tank and no other vehicles refuelled on the same day, suffered the same failure. This Retailer could confirm that as at that moment in time he had not received any ethanol blended fuel. Under threats of litigation and with the advice of his Trade Association, RMIP, he carried out further enquiries, which discovered that the vehicle had been filled up on the previous day at a petrol station in Chester, in the area where many petrol stations had suffered water contamination by receiving ethanol blends which had been separated. Whilst in transit from Chester to Dover and with vehicle movement, the fuel had not separated in the vehicle until it had refuelled in Dover and then remained stationery on the ferry for several hours. Having topped up with pure fossil fuel at Dover,

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the ethanol percentage in the vehicle tank had also fallen to an unstable level, rendering it more likely to separate.

Case 3

A motorist refuelled his new vehicle at a Supermarket petrol station, which subsequently lost power. As the vehicle was still in the warranty period, he took it to the Dealership where he had purchased the car. No faults were discovered by the diagnostic testing system and so it was decided to drain the fuel tank and replenish it with new fuel. The car then ran normally and the motorist was presented with an invoice for the work carried out, having been told that his warranty did not cover such an incident. He contacted the Supermarket who advised him that no other complaints had been received and asked him to show what the contaminant was, which he could not do. As he had retained the original fuel which looked and smelled normal, he was advised to pay a laboratory to analyse the fuel, in order to determine whether the fuel was contaminated, for which he could pursue a claim from the Supermarket, or whether the replacement of fuel was coincidental to another fault being rectified at the same time and therefore eligible under warranty.

These are just three examples of many such cases which were either caused by or exacerbated by a lack of adequate information.

Motorists need to be provided with essential information that could minimise the risk of mixing fossil fuels with bio blends, prevent them from making costly assumptions about who or what caused the problem if it occurs and advise them of essential housekeeping matters and risk areas

Forecourt Contractors

Forecourt contractors and equipment repairers frequently report a complete lack of adequate information, regarding the fuel which they are handling in respect of its affect on equipment or its detrimental affect on the engineers exposed to the risk from handling.

Calibration of dispenser meters is crucial to the accuracy of measurement, fairness to the motorist and the ability of retailers to use stock reconciliation to determine the integrity of the storage system and early detection of leaks occurring. The type of fuel metered is an essential factor of the calibration process and varying levels of biomass used, affect the accuracy of measurement, and must be taken into account when calibrating the meter. When meters are calibrated in the factory on new equipment, it is essential to calibrate the meter to the type of fuel for which the dispenser is to be used. Unless that information is readily available errors will occur.

Summary

If the current problems are to be resolved and not escalate, certain changes need to be made. Unless these changes are made, small and particularly rural petrol stations will be under financial pressure to close. Those that will close will be in locations where the local community is totally dependent

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33 

 

on the petrol station for most of its commodities. Problems incurred by motorists will grow, and focus media attention on the problems caused by bio-fuels rather than any perceived benefits. We recommend the following.

1. Delivery documentation provided to fuel distributors must contain sufficient information as to the type and percentage of bio-fuel being received. This should be required for every delivery.

2. Clear concise information needs to be provided to retailers on each delivery note showing whether it contains bio-fuel and not only the maximum, but also the minimum percentage.

3. Practical and possibly, financial support for rural petrol stations, in order that they can accommodate bio-fuels without incurring unsustainable costs or taking the risk of damage to their storage facilities.

4. A simple explanatory leaflet needs to be provided to motorists, which in simple terms, explains the reasons for changing to bio-fuels, the benefits of doing so and some practical advice on how to avoid problems. This will avoid assumptions being made as to the source of problems, if they occur.

End

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Memorandum submitted by Gazprom Marketing & Trading Ltd (UKES 41) Gazprom Marketing & Trading Limited (“GM&T”) welcomes the opportunity to comment upon the Energy and Climate Change Committee's inquiry into the UK's energy security. GM&T is a UK-based, wholly-owned subsidiary of the wider Gazprom group. GM&T has interests across the energy sector, trading commodities and retailing to 21,000 sites in the UK and Ireland ranging from SME’s to large manufacturing companies. The company also provides services such as automated meter readings and energy management to help its customers to become more energy efficient. GM&T’s head office is in London, with subsidiary offices in Manchester and around the world in Houston, Paris, Berlin and Singapore. Further information on GM&T can be found at our website, www.gazprom-mt.com.

Summary GM&T firmly agrees with the UK Government on the imperative of moving to a low-carbon economy. Ensuring that our energy sources are as environmentally efficient is a priority, alongside efforts to reduce our energy usage. Security of supply for energy is important from an economic, as well as political point of view. Central to this concept is a balanced energy mix - ensuring the UK has the capacity to provide sufficient energy in sufficient quantity at the right time.

GM&T is of the view that gas will be crucial in the transition to a low-carbon economy. In the longer-term it will provide the security of supply to ensure our energy needs are consistently met. Gas provides the UK with 39% of its energy supply1, coming from a variety of sources and locations around the world. Natural gas is affordable, clean, plentiful and reliable, and we should not be afraid of drawing on it to fill the impending energy gap. Once the switch from coal-fired power stations is made in accordance with EU directives, gas will be the main source of the UK’s energy for electricity. This will have a positive effect on the UK’s carbon emissions. In the longer-term, however, this looks set to change.

The Government’s own predictions show the role of gas in the energy mix declining, with large-scale renewables and new nuclear taking over the bulk of the capacity. Gas will still be needed however, and will also be useful as a means of providing back-up capacity to account for fluctuations in renewables generation, especially wind. Gas-fired power is expected to play an important role in this respect, but there is a significant risk that the Government’s proposals under the EMR fail to incentivise this necessary investment in the gas sector. The consequent risks to the UK’s energy security are considerable, leaving us overexposed to intermittent sources of energy and with little flexibility to respond to peaks in demand.

Our high level comments in response to the Energy and Climate Change Committee's questions are as follows:

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

Gas storage

2.1. Investment in energy infrastructure is extremely important in order to cope with seasonal fluctuations or interruptions in supply alongside declining gas production from the UK continental shelf (UKCS). Gas storage facilities allow companies to guard against sudden shortfalls or failures in supply, and also to take advantage of reduced prices during the low season.

2.2. The issue of gas storage in the UK has been highlighted as a key issue by politicians and Ofgem as the UK has around 16 days of supply based on average demand, significantly lower than

1 2009 figures. Digest of UK Energy Statistics.

326

other European countries. In comparison, Germany has enough storage to meet 73 days of gas consumption, whilst in France the figure is 91 days. This leaves the UK vulnerable to short-term supply disruptions during times of peak demand.

2.3. Developers previously held off making investments in building gas storage facilities due to the difficulties of the planning regime. However, the current Government is rightly taking steps to remove barriers to investment in new capacity. In September 2010 the government approved plans for the conversion of WINGAS Storage’s onshore gas field into a gas storage facility in Saltfleetby, Lincolnshire. This will increase the UK’s gas storage capacity by 15 per cent. WINGAS GmbH is a joint venture between Wintershall (65%) and OAO Gazprom (35%), which is the parent company of GM&T.

2.4. The government and regulators can take further actions to encourage investment in gas storage facilities. This includes ensuring appropriate rules to enable storage facilities to connect to the grid and avoid inappropriate charges on gas which is injected or withdrawn from storage. In the event that the government decides it should have “strategic” gas storage, it must ensure that this is structured in such a way that it does not crowd out normal commercial investment in storage (for example by being used to “manage” gas prices rather than as a true emergency backup facility.)

2.5. As well as having gas storage facilities in the UK, it is important for the UK to access gas storage facilities via interconnections with Europe. For example, Gazprom is investing in a number of underground gas storage facilities in Europe. This is to guarantee the reliability and the continuity of Russian gas deliveries to Europe, and the projects are now at various stages of implementation. Gazprom Export has signed an agreement with the Bergermeer Gas Storage project in the Netherlands which will be Europe's largest third party gas storage facility with a working gas capacity of 4.1 bcm.

Gas quality

2.6. Closely tied to this is the issue of gas quality. Greater connection with continental European gas markets and storage facilities via pipelines such as the Bacton-Zeebrugge and Bacton-Balgzand interconnectors should enhance UK security of supply as UK indigenous production declines. The UK is part of an interconnected European gas market where gas can freely move between countries where is it is needed most. All countries benefit from a wider diversity of supply and spreading of risk, and if a key part of UKCS was to fail temporarily, replacement supplies could be imported from Europe.

2.7. However, in order for the UK to import gas from the continent, it will be necessary for the country to invest in further gas treatment facilities. One specific important problem is that the specifications for gas that can flow on the UK network are not aligned with those in Europe. Gas that can flow almost anywhere in Europe cannot necessarily enter the UK. As the European market is much larger than the UK, this means that in the long term, gas suppliers will choose to supply European markets until the price differential between the UK and European markets is sufficient to justify investment in facilities to treat the gas so it can meet UK specifications.

2.8. GM&T and other companies have previously raised this issue with both Ofgem and DECC asking them to take action. Unfortunately, there are differences of opinion as to when investment should be made, who should invest, and how the investment should be remunerated. Ofgem has failed to date to put in place a regulatory framework which would enable investment in such treatment facilities. Should this issue not be addressed, UK consumers could find themselves facing price spikes at times of increased demand.

2.9. GM&T believes that regulated investment by National Grid in gas quality treatment is required. Clearly further work is required to develop the detail as to what kind of approach should be taken to facilitate this investment and GM&T is ready and willing to work with all necessary actors to achieve these aims.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse

gas emissions reductions as well as increased penetration of renewables in the energy sector?

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5.1. GM&T supports the reduction of greenhouse gas emissions and believes that in order to do this, gas has an important role to play, as a less polluting fuel in regards to more traditional energy sources such as oil or coal. Once the switch away from coal-fired power stations is made, the increasing use of gas will have a positive effect on carbon emissions. Natural gas is the cleanest-burning fossil fuel and produces 44% less carbon dioxide emissions than coal and 22% less than fuel oil.

5.2. In order to reach its greenhouse gas targets, the UK should pursue a policy of security of energy supply through diversity of sources, including gas. Although renewable sources and nuclear should be part of the mix, there are currently limitations surrounding renewable energy sources and the country should not find itself in a situation where it is exposed to the unpredictability of ever-changing weather patterns or untested experimental technologies.

5.3. In particular, it is unclear whether renewables will be able to meet the UK’s growing energy needs or will be able to respond to peaks in energy demand. It has been well publicised that large-scale renewables such as offshore wind see sharp dips in their production capacity at the times of greatest energy demand. At such times, it is imperative that sufficient generation capacity exists to make up the shortfall as renewables do not equal energy security.

5.4. Moreover, much of the technology involved in large-scale renewables is currently in developmental stages, with more research required before there can be a widespread roll out. Equally important is the question of affordability and competitive price, which is an important pillar of energy security. New nuclear power stations currently being built in France and Finland are both considerably over-budget and behind schedule.

5.5. The principal means of backup generation is expected to be gas-fired power stations. It is therefore essential the Government puts in place a framework which enables investment in both generation capacity, as well as the gas to supply that capacity.

5.6. One concern is that the proposals for Feed in Tariffs under the Electricity Market Reforms and the associated carbon tax proposals could make the UK market “hostage” to nuclear and vulnerable to cost and time overruns for new nuclear plants. Essentially the two proposals will make the investment environment for generation technologies other than nuclear or renewables very unfavourable. Companies will be unwilling to invest in new gas-fired power generation because of doubts as to whether they will be commercially viable. Security of supply will be dependent on nuclear power stations coming on stream on time and on budget. Neither can be taken for granted given recent experience. This would ultimately leave the government with a significant energy generation gap until the new nuclear comes on stream.

6. What would be the implications for energy security of a second dash-for-gas?

6.1. GM&T notes that gas has a key role to play in the UK’s energy mix and sustained investment in the sector will ensure reliable supplies into the future, whether this be infrastructure projects, storage or in upstream development.

6.2. GM&T believes that with the right policy framework in place (e.g. enabling diversity of supply and investment in storage) the UK can still enjoy security of supply.

6.3. Furthermore in the longer term use of Carbon Capture and Storage (CCS) will enable gas to generate electricity with ultra low emissions.

6.4. It is not necessarily the case that reliance on coal fired power with CCS is better for UK energy security of supply than reliance on gas. In 2009 78% of UK steam coal supplies were imported.2

7. How exposed is the UK’s energy security of supply to international events?

7.1. The UK needs to recognise that it is no longer an island when it comes to energy supply. The market approach means that as indigenous production declines we can buy and sell according to the principles of supply and demand. A diversity of suppliers and supplies will reduce the exposure of the UK’s energy security of supply to international events

7.2. As an importer in an international market, events will clearly have an impact. However, these can be addressed by ensuring that we have access to a variety of sources of supply (e.g. LNG,

2 Digest of UK Energy Statistics.

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different pipelines), that we are integrated into the North West European market via adequate pipeline interconnection, and by enabling investment in storage.

7.3. By being able to access the North West European gas market, we are able to access a potential greater pool of supply. For example, the Nord Stream pipeline constructed by Gazprom in partnership with EU companies will be connecting gas directly to Germany, and will go live in 2011.

7.4. The UK is connected to sources of supply by a variety of pipelines. These include pipelines connecting to North Sea production directly, pipelines connecting to Norwegian supplies and interconnectors with Belgium and the Netherlands (the Interconnector and BBL respectively).

7.5. This means that should problems arise with one source of supply the UK can access other sources of supply via these different pipelines. For example, when there were short-term problems with one of the pipelines from Norway in 2010, the UK was able to import gas via the Interconnector to meet demand.

7.6. The UK is potentially able to source LNG from a wide variety of sources, as it has invested heavily in new LNG terminals at Milford Haven and Isle of Grain.

7.7. In the past the UK has imported LNG from sources such as Qatar, Trinidad, Norway, Egypt and Algeria, but the import capacity means it can ultimately access it from any LNG-supplying country.

7.8. LNG cargoes are flexible, responding to market processes, and can be diverted at short notice according to demand. This has been the case in Japan which sought additional LNG supplies to meet the shortfall in electricity generation cause by the shutdown of nuclear power stations.

7.9. GM&T has been working with its LNG arm (Gazprom Global LNG) since 2005 to extend the reach of Russian gas to international markets. Gazprom is already producing LNG from Sakhalin-II in the Far East and at full capacity will supply about 5% of the world’s LNG. Gazprom has also devoted over $45bn investments for LNG projects by 2030, when we plan to supply about 90 million metric tons of LNG to the world market – providing for around a quarter of the entire market.

8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and

risks inherent in all of the above areas? If not, how could this be improved?

8.1. Further investment in gas infrastructure and storage systems will be required if the UK is to meet its increasing energy demands into the future.

8.2. Development of a regulatory framework to enable appropriate investment in gas quality treatment plant. This will enable the UK to access gas storage and gas supplies in continental Europe.

9. Are there any other issues relating to the security of the UK’s energy supply that you think the

Committee should be aware of?

9.1. Yes, market reforms have big implications on the security of the UK’s energy supply but they do not receive the attention which they merit. The Government’s proposed Electricity Market Reforms will impact on the security of the UK’s energy supply in the long run and have not gone far enough in addressing the need for investing in the UK’s gas sector. Also the proposals provide windfall profits for nuclear generators long before any new nuclear generation will be on stream, raising costs for consumers unnecessarily.

9.2. Security of supply is not simply a question of volume, but also of price. EU proposals for further regulation of financial and wholesale energy markets could have the effect of making it more expensive for companies to manage their price risk, the costs of which will ultimately be borne by end consumers.

9.3. Proposals by the Commission and EU regulators to change the way the gas market works will undermine the market’s ability to react to changes in gas supply and demand, and make it more difficult to move gas between markets.

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Memorandum submitted by Scottish Renewables (UKES 42)

Scottish Renewables is Scotland’s leading renewables trade body. We represent over 300 organisations involved in renewable energy in Scotland. Further information on our work and membership can be found on our website www.scottishrenewables.com. Firstly, many thanks for the opportunity to respond on what is an important issue for the renewables industry in Scotland. This industry is playing a crucial role in the Scottish and UK Governments’ efforts to tackle climate change and increase Scotland’s energy security, and must continue to do so in order to meet our carbon emissions reduction target of 42% by 2020. Scotland has ambitious targets to source 80% of our electricity demand and a fifth of all energy consumption from renewables by 2020. The main points we make in supplying evidence to the committee are as follows:

• We welcome inquiry to explore the nature and extent of UK energy security. • We welcome the ambition to increasing the percentage of renewables in the energy demand

mix which will make our energy supply more secure. • Renewables should be the focus of significant capital investment to create energy sources

with clean, safe and limitless fuel supplies. Therefore, government must work to create an attractive political and regulatory landscape to encourage investment in renewables.

• We welcome the review of transmission charging and see that a beneficial outcome for renewables projects will be crucial to improvements in security of supply.

• Investment in grid infrastructure is critical to increase the efficiency and output from renewables projects, contributing to security.

• We support the view that a range of technologies will make up the UK’s energy mix but urge the UK Government to recognise that there is no alternative to investing in renewables and associated demand management and storage solutions which will provide increase security of supply coupled with clean, safe power.

I trust that you find Scottish Renewables’ comments helpful in this call for evidence. If you would like clarification on any of the detail in this correspondence please do not hesitate to get in touch. The Committee invited responses to address each of the following questions. Scottish Renewables’ response is included below each question:

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? Renewable energy technologies are contributing an increasing proportion of electricity and energy to the UK. Scottish Renewables recently called for an increase in the renewable energy target for Scotland to 30% of all energy demand, given the recent increase in the electricity target to 80% and better than expected progress in renewable heat, coupled with the introduction of the Renewable Heat Incentive (RHI).

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Scottish Renewables (2011) 1

Furthermore, a Garrad Hassan report of 2010 indicates that renewables can play a major role in securing supply. It is seen that even in the most conservative scenario (low renewables growth; demand growth), renewables production could be 81% of gross consumption, thereby greatly exceeding the 2020 target of 50%. In the other scenarios, renewables production is close to or exceeds 100% of gross consumption. If Scotland meets 30% of all energy consumption from renewables in 2020 (48.1TWh), this would equate to 20% of the UK (15%) renewable energy target (239TWh), and 3% of the whole UK energy consumption in 2020 (1590TWh)2. However, we recognise fossil fuels are still part of the energy mix at this stage and thus that the UK is not immune to changes in the price of fuel. Given the unpredictability of fuel prices in future, securing investment in renewables and associated infrastructure, storage solutions and demand management systems can help to increase the UK’s resilience to such changes and bring with it the benefits of clean and safe power. There is no alternative option that offers this unique set of benefits. Indeed, Ofgem has stated that a growing proportion of renewables in the system is the best option for both energy security and energy costs for consumers in the medium term. With this in mind, we welcome the recommendation from the UK Committee on Climate Change that, beyond 2020, electricity generation should be largely decarbonised by 2030. This has to be the case if the UK is to meet its commitments under the Climate Change Act 2008 of an 80% reduction in greenhouse gas emissions by 2050.

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

1 Scottish Renewables’ Heat Policy Paper, page 15 - http://www.scottishrenewables.com/static/uploads/110320_sr_-_renewable_heat_report_final.pdf 2 UK Renewable Energy Strategy (DECC, 2009) – Chapter 2, p37 – http://www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/renewable/res/res.aspx

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Renewables can offer greater security of supply with more investment in energy infrastructure. In order to smooth out variability of renewable electricity supply to match demand, greater investment is required in the transmission and distribution network, demand management technologies and storage solutions. Grid upgrades in both the transmission and distribution networks can improve the efficiency of renewables technologies by allowing energy generated to be distributed to centres of demand at any point. However, the location of our renewable resources is often at a greater distance from the centre of electricity demand, and therefore, under the current model of transmission charging, Scottish renewable energy generators are required to pay significantly higher costs for use of the transmission system than those further to the south. In fact, some generators located in Southern England are paid to use the system. This system clearly disadvantages those renewables generators based in Scotland, significantly hampers the exploitation of the UK’s vast renewable energy resources. The announcement in September 2010 that Ofgem were to undertake a review of the transmission charging regime (Project TransmiT) was welcomed across Scotland. Obtaining a positive outcome for renewable generators from this review is a crucial step towards securing safe, clean, sustainable supplies of energy to meet the country’s needs. Renewables can be made more efficient with the introduction of a European Supergrid and the NorthConnect link to Norway. These connections could export excess renewables generation at periods of low demand in the UK to Europe. It would also allow us to import renewable energy whenever required, substituting imports of more volatile and less secure fossil fuels and creating a more consistent demand curve for renewables. The scale of development required highlights the need for investment to be made in order to realise the sector’s potential in providing enhanced security. For example, as well as renewables developments, a recent Scottish Government report identified the need for significant investment to implement appropriate storage solutions3. In addition, infrastructure must be improved. National Grid has indicated that they have investment plans of £4.7bn4 of proposed reinforcements with a programme of extra investment planned for March 2012. However, criticisms of the capital costs of renewables can be short sighted. They often ignore the huge strategic importance of these natural sources of energy and their ability to provide clean, secure energy for the people and communities across the UK. They also often ignore the alternative reality in the absence of renewable energy. Oil prices are currently hitting multi-year highs, against a backdrop of instability in the regions from which much of the world’s oil supplies are sourced. Furthermore, renewable energy plants do not suffer from the costs of decommissioning and clean-up associated with nuclear power plants. The ability of renewables to give the UK a secure energy future is therefore dependent on acquiring appropriate finance for the sector, in order to invest in the necessary storage and infrastructure solutions.

3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

3 Scottish Government Energy Storage and Management Study (2010) http://www.scotland.gov.uk/Publications/2010/10/28091356/0 4 National Grid presentation at the Scottish Renewables Annual Conference (2011) - http://www.scottishrenewables.com/static/uploads/events/ac11downloads/ac2011_train.pdf

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By increasing electrification of transport and heat, these sectors can be de-carbonised and become more secure by realising the benefits of using renewable fuels and the protection this brings from unstable fossil fuel prices in future. Renewable heat is likely to see an accelerated uptake with the introduction of the RHI. As outlined earlier, this was one of the reasons for Scottish Renewables calling for an increase in the renewable heat target and thus the overall renewable energy target in Scotland from 20% to 30%. We envisage that the heat sector will utilise renewable electricity solutions to some extent, coupled with a significant increase in projects utilising other renewables technologies which are supported through the RHI such as bioenergy, biogas, anaerobic digestion and solar thermal. As heat accounts for 50% of energy use in Scotland, some electrification of the sector, coupled with other renewable technologies can have a substantial impact on energy security. Electrifying the transport network can also offer another method of smoothing demand from the grid by charging vehicles in periods where demand is low, such as during the night. They could also operate a battery swapping system, where highly flexible chargers are designed to match grid production and demand. Surplus batteries would act as energy storage during periods of low power generation.

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

Energy demand reduction and efficiency are the cheapest, simplest ways of increasing energy security as well as reducing carbon emissions and the cost of energy. The government should have a strong programme of investment in implementing energy efficiency measures, along with educating the public about the benefits of saving energy. Energy efficiency can also be improved with the introduction of smart meters. Ofgem recently indicated that Smart meters will play a key role in their energy and environmental policies to ensure secure supply, moving to a low-carbon economy and keeping prices affordable. Approximately 53 million meters will need to be replaced, involving visits to over 30 million households and businesses. The Government's impact assessments estimate that the total cost of the rollout programme will be £11.3 billion – further investment required by the sector to realise a more secure and affordable future. Reducing our energy consumption means we will be less susceptible to fluctuations in prices of fossil fuels. However, with predicted increases in energy consumption from now until 2020, it is essential that investment is also made in renewables technologies and their associated infrastructure alongside energy efficiency measures.

5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

This is a win-win situation. A mixed portfolio of renewable energy provides low to zero carbon emissions and sustainable and safe supplies of infinite, indigenous energy that are free from the effects of rising and unstable fuel costs and the uncertainty of foreign imports. By displacing imported electricity, gas and fuels, renewable energy maximises the UK’s energy security and shields the public from fluctuations in fuel prices. Provided that there is timely investment in renewables and appropriate storage and demand management measures, the UK’s energy security should increase

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as we tackle targets for greenhouse gas emissions and increase deployment of renewable energy technologies. To secure this timely investment, the government must ensure that foreign investors see the UK as an attractive marketplace. Scottish Renewables wants the Scottish and UK Governments to move quickly to establish a Green Investment Bank in Scotland and also to clarify the plans for Electricity Market Reforms as soon as possible to create certainty in the market. Scotland is rapidly establishing itself as the UK’s low carbon research and development hub, with the University of Strathclyde and the Energy Technology Partnership leading on academic and company research and development. Major companies such as Mitsubishi, Scottish and Southern Energy, Scottish Power and Gamesa are making significant commitments to Scotland for renewables and Iberdrola has announced Scotland as its world headquarters on CCS. Furthermore, Doosan Power Systems announced a significant initiative earlier this year to enter into the Scottish wind power business and locate its R&D Centre of Excellence for Renewables in Renfrew. This strong base of activity, coupled with Edinburgh being the fourth biggest financial centre in Europe, with particular strengths in asset management, makes it clear that Scotland would make an ideal home for the Green Investment Bank. To realise this burgeoning potential enhance the UK’s security of supply, the UK Government must move quickly to clarify plans for Electricity Market Reform and Project TransmiT to ensure that renewable energy projects will not be penalised in the market and the appropriate and necessary investment in upgrading infrastructure in Scotland can be made.

6. What would be the implications for energy security of a second dash-for-gas? The UK partly relies on gas fuelled power stations as part of the overall energy mix. Therefore, any second ‘dash-for-gas’ which results in significant price rises would have an effect on the UK’s energy security to some extent, depending on its severity. Scottish Renewables recognises that decreasing reliance on fossil fuels and substituting them for renewables technologies which are protected from fluctuations in fuel price, can offer greatly increased security, provided they are implemented with appropriate storage and demand management measures and upgrades to existing infrastructure.

7. How exposed is the UK’s energy security of supply to international events? As we currently rely on imported fossil fuels and uranium as part of our energy mix it is clear that the security of supply is, to a certain extent, exposed to international events. Renewable energy is less susceptible to international events as the fuel required is free, limitless and does not need to be imported. Bioenergy is the exception whereby the fuel does have a cost. Even so, the ability for renewables to offer this security is still affected by international events to a certain degree, for example, the current global economic crisis. Breaking the investment barriers opens the door to clean, safe power that is cheap to operate and protected from future fuel price fluctuations. The UK, and Scotland in particular, has set ambitious targets for renewables and shown political support for the sector. To ensure that investment is made, government should work to make the economic, regulatory and political landscape of the renewable energy sector as attractive as possible for investors. Scotland has a comparative and competitive advantage across a range of technologies. By being a market leader we will not only experience the benefits of increased energy security and clean power but we also have the opportunity to export our technologies and expertise to the rest of the world.

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8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

By continuing to invest in and support clean, low carbon technologies, we will not only provide greater security of supply but will also insulate consumers from the greater price hikes and volatility associated with reliance on fossil fuels. The selling point to secure this investment and subsequent increased security is the economic potential of the industry. According to a report by the Scottish Government, Scotland’s low carbon environmental goods and services sector (LCEGS) could form more than 10% of the value of the Scottish economy by 2015. This sector includes Renewable Energy; Environmental Management and Low Carbon Technologies. Currently the Scottish GDP is around £100 billion with a LCEGS market of around £8.8 billion, predicted to grow to £12 billion by 2015-16. An energy security policy which operates in tandem with increasing deployment of renewables can offer long term benefits to our economy which in turn offers further protection and security of supply. March 2011

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Memorandum submitted by the Sussex Energy Group (UKES 43)

Sussex Energy Group1, SPRU, University of Sussex

Introduction

1. The Sussex Energy Group undertakes academically rigorous, policy-relevant inter-disciplinary research that engages with policy-makers and wider interested parties. The aim of our research is to identify ways of achieving the transition to sustainable, low carbon energy systems whilst addressing other important policy objectives such as energy security and fuel poverty. We are a group of 15 social scientists, with diverse disciplinary backgrounds, including engineering and natural science. We are funded from a range of sources, primarily UK Research Councils, Government Departments, and the European Commission. Through the Group, the University of Sussex is a core partner of the Tyndall Centre for Climate Change Research and part of the UK Energy Research Centre.

2. We welcome this opportunity to provide evidence to the Committee’s inquiry into the security of UK energy supplies. In our view this topic requires more attention in policy debates. There is a particular need to assess how the risks to UK energy security are likely to change as a result of the planned transition to a low carbon economy – and what the implications are for policies and strategies to respond to these risks. Our research team conducts a significant amount of research on energy security issues which we have used to inform this response. Notable examples include Steve Sorrell’s review of the evidence for an imminent peak in conventional oil supplies for the UK Energy Research Centre (UKERC 2009a); Andrew Stirling’s research on energy system diversity which has been applied in the UK and Japan (Stirling 2010); and research by Jim Watson on risks to UK gas supplies (Watson 2010) and, with Alister Scott, on the security implications of new investments in nuclear power (Watson and Scott 2009). In addition, Professor Watson is co-leader of a UK research cluster: Energy Security in a Multipolar World2.

Responses to the Committee’s questions

Q1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? 3. Price security is an important component of energy security. This means that energy

supplies do not necessarily need to be physically disrupted for consumers’ energy security to be affected. Along with most other industrialised countries, the UK remains heavily dependent on fossil fuels (coal, oil and gas) for its energy supplies. Fossil fuels supply well over 80% of the UK’s primary energy needs. We have commented on potential constraints on conventional oil resources that have significant implications for global oil prices in response to question 9 below.

1 This response was prepared by Professor Jim Watson, Professor Andrew Stirling and Steve Sorrell, Sussex Energy Group, SPRU, University of Sussex; http://www.sussex.ac.uk/sussexenergygroup. 2 The cluster is led by Professor Catherine Mitchell, Exeter University. See; http://www.exeter.ac.uk/energysecurity/index.shtml

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4. The overall resilience of the UK energy system to increases in the price of fossil fuels and uranium3 partly depends on the energy intensity of the economy. The impact of high or volatile oil prices on major economies has been well documented (Awerbuch and Sauter 2006). These impacts range from a loss of GDP to higher unemployment and inflation. Whilst the UK is less energy intensive than it used to be due to a long term structural shift away from energy-intensive manufacturing and towards service industries, such impacts still matter. In a recent speech, Chris Huhne cited DECC analysis which found that a doubling of oil prices could mean a loss of UK GDP of £45 billion over 2 years4.

5. Increases in the price of oil and other fossil fuels also have more specific impacts on particular energy consumers. Those households in fuel poverty are particularly prone to energy price insecurity. This is illustrated by the recent rise in the numbers of households in fuel poverty following several years in which numbers fell. Modest gains in household energy efficiency were not enough to outweigh the impact of sharp increases in energy prices. Rapid price increases also have a disproportionate effect on energy intensive industries since energy accounts for a relatively high share of their costs.

6. As noted in our response to question 9, the depletion of oil resources, and the potential for this to drive further price increases and/or volatility, requires particularly urgent attention. There are promising opportunities for mitigation of the impacts of high prices on the demand side, including improving vehicle fuel efficiency, developing electric vehicles and investing in public transport. Such changes are underway in the UK, but may need to proceed faster than is currently envisaged. At the very least, the risks posed by oil depletion deserve more careful scrutiny that has been evidenced to date.

7. The impact of uranium price increases needs to be analysed separately from those of fossil fuels. The price of uranium accounts for a relatively small proportion of nuclear generating costs (typically 3-6%) whilst the cost of fossil fuels can be over 50% of the generating costs of fossil fuel plants. So in principle, the UK energy system is significantly more resilient to rises in uranium prices than it is to similar rises in fossil fuel prices. It is very difficult to forecast prices into the future with any degree of accuracy due to the number of factors involved which are political, technological, geological and commercial. Whilst an increase in the deployment of nuclear power globally might be expected to increase uranium prices, this may in turn drive investment in new sources of supply – and thereby bring prices back down again.

Q2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage? 8. Like energy prices, levels of investment are an important factor that contributes to energy

security (or risks to energy security). Much of the discussion of energy security focuses on investment in new assets to generate electricity. This is understandable – and it is important that such investment takes place quickly, particularly given the need to reduce carbon emissions rapidly in the electricity sector in the period to 2030. Some of the claims made about imminent ‘gaps’ in electricity investment to prevent ‘the lights going

3 Fuel price risks are not the only security-related risks to the economics of energy technologies and systems. Events that impact on energy security such as the nuclear accident at Fukushima have, in the past, led to increasing technology costs as a result of a shift towards tighter regulations. 4 Chris Huhne MP, Speech to the Royal Geographical Society conference: "The Perfect Storm", 17th February 2011

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out’ are often exaggerated. There is significant investment underway, largely in gas fired capacity (see question 6 below). We would argue that there is not necessarily a problem with investment per se within the electricity generation sector – but there is a problem in securing enough low carbon investment to meet the UK’s climate change targets. For this reason, we support the government’s proposals as part of the Electricity Market Reform process to implement a new system of long-term contracts to incentivise this investment.

9. As the Committee’s question implies, electricity generation is not the only investment challenge. There is also a need for investment to maintain the security of electricity networks. When disruptions to electricity supplies, this is often due to a network fault. Investment is needed to renew existing assets that are reaching the end of their design lives, to extend the grid (for example to integrate the growth in offshore wind power), and to reinforce it (if decentralised generation and/or vehicle charging become significant).

10. A particularly important – and sometimes neglected – investment issue concerns gas storage. The amount of gas storage in the UK has historically been low compared to levels in other comparable European countries (Watson 2010). During the period in which the UK was a net exporter of oil, storage was not thought to be a particular priority. But given the shift towards greater interdependence in gas between the UK and other countries, there is a need to revisit this. The question is whether investors, left to their own devices, will build enough storage capacity. Plans are being developed to significantly increase storage capacity at the moment (National Grid 2010). However, questions remain about whether government needs to provide greater incentives to ensure that enough of this planned capacity is constructed quickly.

Q3. What impact could increased levels of electrification of the transport and heat sectors have on energy security? 11. This is an important question, which emphasises the need to analyse UK energy security

in a dynamic way. It is plausible that the decarbonisation of the UK economy will diminish some risks to energy security while introducing new ones (Watson 2009). For example, if fossil fuels become a much smaller contributor to UK primary energy demand, the exposure of the UK to price volatility and/or disruptions will also decrease. However, if the electrification of the UK energy system means a much larger contribution from intermittent low carbon technologies such as wind power, this will lead to new challenges for grid operators charged with maintaining reliability of supplies to consumers. The key issue in analysing these dynamics is to assess the security of the energy (or electricity) system as a whole rather than solely focusing on the security implications of particular generating technologies or networks.

12. The electrification of heat and transport has some potential implications for energy security. One generic issue is that it will mean more reliance across the board on one energy infrastructure – that for electricity generation, transmission and distribution. At present, this infrastructure is just one part of the broader energy system and it exists alongside the gas network (which has a large role in meeting demand for heating in homes), and the oil refining and distribution system (which meets the vast majority of transport demand). If a major disruption occurs to a future electricity system that meets all of these elements of energy demand, the impact could be more far reaching than a similar disruption today. It will therefore be more important to consider the potential risks to security, and to implement strategies to improve electricity system resilience.

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13. If it becomes a reality, this all electric future is likely to incorporate a greater contribution from information, communication and control technologies than we have now. Smart meters will be installed in consumers’ homes over the next few years and smart grids are being trialled. Electric vehicles and more decentralised sources of electricity generation could significantly add to complexity and need for such smart technologies. This prospect has already led to questions about the vulnerability of electricity systems to cyber attack due to the greater interdependence of these two infrastructure systems.

14. The risks of electrification clearly depend on the risks that are specific to the particular generating technologies and network configurations deployed. They also depend on what combination of technologies is used to generate and distribute electricity - and with what relative contributions. In energy security debates that focus on the electricity system, diversity is often mentioned as a strategy to minimise risks. Diversity is an important system property, and should not therefore be used to analyse or advocate particular generating options (like nuclear or wind). Electricity system diversity depends not only on balancing reliance across a variety of different technologies, but also on the degree to which these are different from each other. This factor is not usually taken into account. This crucial property, known as disparity (Stirling 2010), is intrinsically multidimensional and judgemental. Low carbon electricity generating options are often divided into three categories: nuclear, renewables and fossil with carbon capture and storage. But these categories do not adequately capture disparity. In particular, ‘renewables’ as a category seriously understates the large differences between renewable technologies. This means that the diversity benefits of including different combinations of renewables (and to some extent different types of fossil fuel technology) are undervalued in diversity indices that neglect disparity. This is the case for the diversity indicators currently used by DECC.

Q4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 15. Energy efficiency is an important strategy for strengthening energy security. Whilst it is

not possible to say definitively that efficiency is good for energy security in all possible circumstances, efficiency schemes have far fewer security downsides than other strategies. This is because successful energy efficiency schemes reduce the amount of energy required for a given level of energy service. Less supply and distribution infrastructure is therefore needed - and the demand for fuels and/or electricity is lower than would otherwise have been the case. A more efficient economy will be more resilient to the economic impacts of fossil fuel price shocks that were noted earlier.

Q5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? 16. The specific impacts on energy security from meeting the UK’s targets for greenhouse

gas reductions and renewables are uncertain. As noted above, the nature of the risks to UK energy security will change as investments are made to reduce emissions. Some risks will reduce in magnitude (such as risks due to fossil fuel price volatility) whilst others might increase (such as the security risks stemming from an increase in nuclear power). As noted in our answer to question 3 above, the important issue when assessing the impacts on energy security is to examine them at an ‘energy system’ level. Whilst

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particular low carbon technologies may have specific security risks associated with them, it is the security of the energy system as a whole that matters.

17. There is comparatively little detailed analysis of the security implications of the UK’s planned low carbon transition that takes such a ‘system’ perspective. One notable exception is the UK Energy Research Centre Energy 2050 project which did this for some potential scenarios for the UK’s low carbon transition (UKERC 2009b).

Q6. What would be the implications for energy security of a second dash-for-gas? 18. It is often argued that a second dash for gas is undesirable from an energy security point

of view because this could increase UK gas demand, and would exacerbate the trend towards increasing gas imports5. Whilst this may be the case, National Grid’s most recent future scenarios for gas demand foresee demand remaining flat or falling due to the impact of government climate change and energy policies. Whether or not demand rises in future as a result of a renewed dash for gas, it is important to analyse the security implications of a second dash for gas with some care.

19. There are three factors that we think are particularly important to bear in mind. First, as we argue in answer to question 7, dependence on imported energy is not necessarily a recipe for decreasing levels of energy security. In the case of gas, past experience shows that domestic resources and infrastructures can also be vulnerable to disruptions (Watson 2010). Second, the outlook for global and regional gas supplies has changed in the last few years. The advent of shale gas, particularly in North America, has added significantly to global supplies. When coupled with falling demand in many OECD countries due to the recession, this led to some reductions in gas prices – particularly in 2009/10. More recently, the impact of the Fukushima nuclear accident may partly counter this trend. It is plausible that Japan (and perhaps some other countries) will use more gas in future because of nuclear plant closures and / or delays to new nuclear investment.

20. The third factor is the rapid changes to UK gas import infrastructure. The UK has recently developed a diverse portfolio of gas import sources and supply routes. According to National Grid’s most recent 10 year statement, the UK imported 50 billion cubic metres (bcm) of gas in 2009/10 including 24bcm from Norway, 9bcm from the continent via pipelines and 17bcm as liquefied natural gas (LNG) – mainly from Qatar (National Grid 2010). The UK’s own production in 2009 was around 63bcm, some of which was exported. This diversity has already helped to mitigate the impacts on the UK of international risks to gas security such as the disputes between Russia and neighbouring countries in 2009 and 2010 – though clearly there have still been price effects from these disputes. As noted above, an increase in the UK’s gas storage capacity is long overdue. It would strengthen the ability of the UK gas supply infrastructure to withstand the impacts of such security threats.

21. Perhaps a more important implication of a renewed dash for gas is for the UK’s climate change policy objectives. As we argued in our evidence to the Committee’s inquiry into Emissions Performance Standards, there is a need to phase out the use of unabated coal- and gas-fired power plants well before 2030 in order to remain within the UK’s medium term emissions reduction targets. A second dash for gas would make this more

5 According to DECC statistics, net imports accounted for 31% of UK gas demand in 2009.

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challenging and would add to the pressure for the successful demonstration and deployment of carbon capture and storage technologies.

Q7. How exposed is the UK’s energy security of supply to international events? 22. As with many of the questions posed by the committee, the extent of UK exposure to

international risks to energy security depends on which risks are being considered. An important contextual point is that energy from international sources is not necessarily less secure than energy that originates from within the UK. As the 2002 Energy Review by the Cabinet Office argued: ‘[I]mports are regarded as inherently more unreliable than domestic sources. However, as in other markets, energy imports allow us to access more diverse, and cheaper, resources, than if energy sources were produced solely at home. Experience with coal in the 1970s and 1980s, and the fuel protests of 2000 suggest that the equation of “domestic” and “secure” does not always apply.’ (Performance and Innovation Unit 2002: 57).

23. Having said this, the UK does have significant exposure to energy security risks that originate abroad. This is especially the case now that we are a net importer of energy – a position the UK returned to in the mid-2000s. Recent experience illustrates this, particularly how international events can impact on the price of energy paid by UK consumers. Examples include the disputes about gas supplies between Russia and neighbouring countries which, in some cases, led to short term increases in UK gas prices. During the past few months, the political turmoil in the Middle East and North Africa has affected some oil producing states – and has led directly to increases in oil prices which have been felt directly by motorists.

Q8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved? 24. UK energy policy has placed progressively greater weight on energy security since the

mid-2000s. Key reasons for this have been the aforementioned return of the UK to ‘net importer’ status and a general rise in energy prices. Although the analysis of energy security has improved within government, and some policies have been put in place to deal with energy security risks, gaps still remain.

25. There is a tendency within policy responses to focus on some security risks, but not others. Risks due to lack of investment in electricity generation and geopolitical risks to fossil fuel supplies tend to receive most of the attention for understandable reasons. What is less clear is whether the government has developed an understanding of how resilient the UK energy system is to a range of risks – some of which may not be known and/or quantifiable at the present time. This leads to a need for a policy strategy that focuses on resilience rather than an approach that tries to identify and deal with each risk individually. Of course, some risks can be mitigated directly (e.g. risks of power cuts due to poorly maintained electricity networks). However, the UK government and the energy industry need to take account of risks they cannot control or mitigate directly.

26. In addition to this, there are some more specific areas in which policy may need to be strengthened, many of which we have already mentioned. Examples include the need for more UK gas storage capacity, the need to accelerate the rate at which energy efficiency measures are implemented, and the need to explore alternatives to fossil fuels for road transport.

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Q9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of? 27. We consider the future supply and demand of oil to be an important issue for UK energy

security and one which has received insufficient attention to date. In summer 2010, David Mackay invited a number of groups and individuals (including ourselves) to provide evidence on this topic as part of an internal review by DECC. Since the results of this study have yet to be published, we recommend that the Committee seek to identify what conclusions were drawn.

28. As current events in the Middle East demonstrate, threats to oil supply can derive from a wide range of economic, political and geopolitical factors, even in the absence of any ‘below-ground’ constraints on physical resources. But as is increasingly acknowledged by bodies such as the IEA (IEA 2008a), the depletion of conventional oil resources appears relatively advanced and seems likely to contribute to rising oil prices even if economic and political conditions prove favourable.

29. In our view, the evidence on the near-term risks posed by the physical depletion of conventional oil resources has grown considerably stronger over the last few years. In addition to the comprehensive study we led for UKERC (UKERC 2009a), there have been recent publications by the UK Industry Task Force (ITFPOES 2010), Deutsche Bank (Deutsche Bank 2009), Chatham House (Froggart and Lahn 2010), and Uppsala University (Aleklett, Höök et al. 2009), together with a Wikileaks controversy over Saudi reserves.6 The Uppsala study was one of several to criticise the assumptions underlying the IEA World Energy Outlook and to argue that their reference scenario for global oil supply was excessively optimistic (Sorrell, Miller et al. 2010)7 – despite repeated downward revisions over the last few years.

30. Forecasting oil supply is a hazardous business and the track record of both optimists and pessimists is fairly poor. But two physical features of conventional oil resources make a peak in global production inevitable. First, the rate of production from individual fields tends to rise to a peak or plateau relatively early in a fields’ life and then decline, largely as a result of falling pressure. As a result, some 4% of global production capacity needs to be replaced each year, simply to maintain production at current levels - equivalent to a new Saudi Arabia coming on stream every three years. With demand rising and decline rates increasing, production is becoming progressively more difficult to maintain. Around half of global production capacity will need to be replaced before 2020.

31. Second, most of the world's conventional oil is located in a small number of large fields. Although there are some 70,000 fields worldwide, around half of global production derives from only 110 fields and as much as one fifth from only 10 fields. Around 500 ‘giant’ fields account for two thirds of all the oil that has ever been discovered. Most of these giants are relatively old, many are well past their peak of production, most of the rest will begin to decline within the next decade or so and few new giants are expected to be found.

6 http://www.guardian.co.uk/business/2011/feb/08/oil-saudiarabia?intcmp=239 7 In particular, the IEA reference scenario implies average global depletion rates for ‘fallow’ and undiscovered resources that are several times greater than the maximum depletion rate previously achieved in any oil-producing region, anywhere in the world.

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32. This combination of features will ultimately lead to a global peak in production. At some point, the additional production from the newer, smaller fields will be insufficient to compensate for the decline in production from the ageing giants. This process has been observed in over a hundred regions worldwide, with the peak typically occurring well before half of the resources have been produced. Economic and political circumstances profoundly influence the timing and at the global level the complex interactions between supply and demand make a ‘bumpy plateau’ much more likely than a sharp peak. But at some point, decline becomes inevitable.

33. The timing of the global peak remains uncertain, but the window is rapidly narrowing. Since 1993, the world has produced half as much oil as was produced in the preceding century and now uses as much oil as the UK has ever produced in only ten months. On current estimates, we have used between 28% and 56% of recoverable conventional oil – with much of what remains being located in smaller fields in less accessible locations, or requiring ‘enhanced recovery’ techniques to extract. These resources will be slow and expensive to produce and are frequently controlled by National Oil Companies who may lack either the incentive or ability to invest. Moreover, it is straightforward to demonstrate that a global peak before 2030 appears likely, even under optimistic assumptions about the size and future development of global oil resources. Under more realistic assumptions, a decline in production seems likely to occur much earlier (Sorrell, Miller et al. 2010).

34. Given the scale of investment required and the associated lead times, there are reasons to doubt whether non-conventional resources can substitute at the scale and speed that could be required. For example, the most bullish forecasters expect the Canadian oil sands to provide 6 million barrels/day by 2030 which is less than the conventional capacity lost every two years as a result of physical depletion. Developing such resources will also make it more difficult to avoid dangerous climate change.

References Aleklett, K., M. Höök, et al. (2009). The peak of the oil age: analysing the world oil production reference scenario in World Energy Outlook 2008. Energy Policy 38(3): 1398-1414.

Awerbuch, S. and R. Sauter (2006). Exploiting the Oil-GDP Effect to Support Renewables Deployment. Energy Policy 34(17): 2805-2819.

Deutsche Bank (2009). The peak oil market: price dynamics at the end of the oil age. Deutsche Bank Securities Inc.

Froggart, A. and G. Lahn (2010). Sustainable Energy Security: J Risks and Opportunities for Business. London, Royal Institute of International Affairs, Chatham House.

IEA (2008a). World Energy Outlook 2008. Paris, OECD/International Energy Agency.

ITFPOES (2010). The Oil Crunch:: Securing the U.K.'s energy future. UK Industry Task Force on Peak Oil and Energy Security.

National Grid (2010). Gas Transportation Ten Year Statement 2010. Warwick, National Grid.

Performance and Innovation Unit (2002). The Energy Review. London, Cabinet Office.

Sorrell, S., R. Miller, et al. (2010). Oil futures: A comparison of global supply forecasts. Energy Policy 38(9): 4990-5003.

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Stirling, A. (2010). Multi-criteria diversity analysis: a novel heuristic framework for appraising energy portfolios. Energy Policy 38(4): 1622-1634.

UKERC (2009a). Global Oil Depletion: An Assessment of the Evidence for a Near Term Peak in Global Oil Production. London, UKERC.

UKERC (2009b). Making the transition to a secure and low-carbon energy system: synthesis report. London, UKERC.

Watson, J. (2009). Is the move toward energy security at odds with a low-carbon society? in A. Giddens, S. Latham and R. Liddle, Eds. Building a low-carbon future: the politics of climate change. London, Policy Network.

Watson, J. (2010). UK Gas Security: Threats and Strategies. Paper for Greenpeace UK. Brighton, SPRU, University of Sussex.

Watson, J. and A. Scott (2009). New nuclear power in the UK: A strategy for energy security? Energy Policy 37: 5094-5104. March 2011

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Memorandum submitted by the Geological Society of London (UKES 44) 1. The Geological Society is the national learned and professional body for Earth sciences,

with 10,000 Fellows (members) worldwide. The Fellowship encompasses those working in industry, academia and government, with a wide range of perspectives and views on policy-relevant science, and the Society is a leading communicator of this science to government bodies and other non-technical audiences.

2. To address directly many of the specific questions which the committee has set out in its call for evidence is outside the competence of the Geological Society. However, geological considerations inform many of the issues raised. In particular, Earth science expertise and industry are fundamental to understanding the nature and geographic location of most of the natural resources on which we depend for our energy, and to their efficient and least environmentally damaging extraction. Earth science will also be essential to mitigating the impacts of natural hazards on energy security. With this in mind, we offer here some general comments which may be helpful in setting the scene for the committee’s discussions. If the committee is interested in pursuing any of the issues raised below, we would be pleased to offer more detailed evidence, or to discuss other ways in which the Earth science community might help.

3. Implicit in the call for evidence is the observation that energy security is broader than

simple energy independence. In considering the current security of UK energy supplies, and their future resilience, it is therefore important to consider not only domestic resources, but also those from other countries and regions, and the possible risks to supply of various resources from these regions. (Such risks are generally much lower within the EU, for instance.) There is a balance to be struck in mitigating these risks, in the context of uncertainty about future market conditions, between developing domestic production (where there is significant but limited potential) and shaping the mix of imported energy. Diversity of supply, both in terms of resource type and its provenance, will tend to reduce the potential impact of interruption to any one resource stream. Security of energy supply can thus be seen as reflecting the interplay between geology (and other physical factors, e.g. levels of insolation with respect to solar energy), economics and geopolitics. The well established sub-discipline of economic geology has an important role to play in understanding these interactions. A key concept is the distinction between resources (the total amount in the ground) and reserves (the amount of a resource which can economically be extracted with current technology and under current regulatory regimes) – measures of which are dynamic, and depend crucially on prices. In practice, reserves are only viable if they can be exploited in an environmentally and socially acceptable way.

4. Most of the resources on which we rely for energy come from the ground, and their discovery and production depend on Earth science. The majority of our energy needs are currently met by fossil fuels, and despite the recognised need to move to a low carbon economy, we will continue to rely on them for many years. Nuclear energy depends on the supply of uranium. Geothermal energy in its strict sense, as well as

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energy from ground source heat pumps, also depends on geological phenomena and understanding.

5. Domestic UK resources can make a significant contribution to our energy mix. The main

resources available to us are hydrocarbons, particularly coal (surface and underground mining, as well as in situ underground gasification) and gas (including coal bed methane and shale gas – see the Geological Society’s submission on the latter for further details). There is considerable potential for further extraction of North Sea oil and gas, with EOR (Enhanced Oil Recovery) a potentially attractive option especially if deployed in conjunction with CCS (Carbon Capture and Storage) (see below), though development of these resources will depend in part on stability of the tax regime, and may be jeopardised by the £2bn levy on North Sea producers announced in the budget. Further exploration of deep water areas of the UK continental shelf may yield significant new resources – a field in which BP is a world leader, notwithstanding the Deepwater Horizon explosion and oil spill in 2010. Ground source heat pumps might make a noticeable contribution, as might geothermal energy sensu stricto in a few locations. Whether particular resources can in practice be exploited depends not only on geology, but also on economic factors, and on environmental and societal acceptability (which has historically prevented the extraction of significant uranium resources in Orkney, for instance).

6. The need to move to a low-carbon economy, and to meet other environmental and

societal requirements, should not be seen as being in tension with energy security. Rather, they are inseparable aspects of sustainable energy supply and usage. To assess the contribution which a resource stream might make to meeting our energy needs without considering its impact on carbon emissions is meaningless. Given our inevitable continuing reliance on fossil fuels, the rapid deployment of CCS at commercial scale is a critical national need. The UK is well positioned to be a world leader in the development and deployment of CCS, thanks to the outstanding fusion of our academic and industrial petroleum geoscience, not least through the meetings and publications of the Geological Society. The skills, capacity and infrastructure inherent in the North Sea oil and gas industry are extraordinarily valuable assets in this regard. The Earth science community is confident in its abilities to meet the challenges of the injection and long-term storage of carbon dioxide, and with the right regulatory framework to develop a UK CCS industry on the scale of the North Sea hydrocarbons extraction industry of the past four decades.

7. Globally, coal is far more abundant than gas, and is also more evenly distributed round the planet. Crucially, coal is not concentrated in the Middle East. Together with known domestic resources, this makes coal a particularly attractive energy source for UK energy security, given rapid and widespread CCS deployment. Gas is considerably cleaner than coal, with carbon emissions typically 40-50% lower, but it will still be impossible to meet future carbon emission reduction targets if gas is widely used without CCS in place. As noted above, EOR has the potential to extend the productivity of North Sea oil fields – one means of enhancing recovery is in combination with CCS, essentially displacing the oil with injected CO2 captured from fossil fuel combustion, which would then be stored in the reservoir.

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8. The concept of energy security at a local (sub-national) level may be helpful in

addressing public concerns over the environmental and societal acceptability of energy projects. As noted in our supplementary evidence to the committee’s Shale Gas inquiry, following the oral evidence session, there is a tendency for communities to see such projects as delivering ‘someone else’s energy’. If they are seen instead as supplying local needs, and as contributing to the energy security of an area, they are more likely to gain acceptance.

9. The secure supply of energy, whether from UK or overseas resources, depends on an

understanding of the geosphere in a number of other important respects. These include infrastructure planning, particularly in the coastal zone (for instance with regard to the development of nuclear power stations, where predicted sea-level rise associated with climate change must be taken into account in their design for use and subsequent decommissioning), and construction of onshore and offshore facilities including wind turbines.

10. An important aspect of ensuring energy security is to consider and mitigate possible

impacts of natural hazards on the supply of energy. The March 2011 earthquake and tsunami in Japan have highlighted this concern. While the UK is not vulnerable to earthquakes of such magnitude, it might be affected by tsunamis triggered by events elsewhere in the world. We can quantify tsunami effects in the recent British geological record. For instance, that which hit Scotland 8000 years ago, triggered by the Storegga landslide off Norway, was around 25 metres high. More recently, the tsunami following the Lisbon earthquake of 1755 was several metres high when it reached the southwest of England. Independent of the means of electricity generation, the national grid is vulnerable to geomagnetic storms, which are expected to become more frequent as the sun enters a more active phase of its cycle. The prediction of these storms, and possible means of mitigating their effects, are the subject of active research.

11. We would be pleased to discuss further any of the points raised in this submission, to

provide more detailed information, or to suggest oral witnesses and other specialist contacts.

April 2011

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Memorandum submitted by Juwi (UKES 45) 

 

juwi  is one of the world’s  leading enterprises  in the renewable energy sector. Since 1996  juwi has 

been designing, building, financing and operating plants that harness renewable energy. 

 

The company’s headquarters are  in Wörrstadt, Germany and we have recently established a 100% 

subsidiary  in  the UK.  The  company  currently has  9  employees based  in  Solihull  and has plans  to 

create a further 50 jobs within the UK solar PV industry. Investment of more than £1 million into the 

UK subsidiary in 2010 and 2011 has been allocated, of which more than three quarters have already 

been  spent  to cater  to  the market  segment above 250kWp. Over  the next  two years  the planned 

investment  into solar generation capacity of various sizes would  lead to 50 new direct  jobs at  juwi 

with around 150 to 200 people working as contractors in construction and operation of these plants.  

 

Although  in  its  infancy  in the UK, Solar PV  is an established and growing part of the energy mix  in 

other European countries such as Germany, Belgium and Italy, and juwi brings significant experience 

and competence into the UK from activities in these other markets.  

 

We would  like  to  extend  an  invitation  to  the  Committee  to  visit  our  headquarters  in Wörrstadt, 

Germany  as part of  the  Inquiry.  The  visit would  allow  committee members  to  see  first‐hand  the 

contribution  that  solar  PV  can  deliver  to meeting  the  UK’s  targets  for  greenhouse  gas  emission 

emissions  and  its  benefits  as  an  energy  source  that  is  not  affected  by  the  ebb  and  flow  of 

international events.  

 

The visit would include a visit our to Solar PV power plant (5.4 MWp), together with an explanation 

of the associated project economics of large‐scale PV installations. A meeting with nearby SMA Solar 

Technology,  the  world’s  leading  inverter  manufacturer  could  also  be  incorporated  into  the 

programme if time allows.   

 

We appreciate  the high demands on  the member’s  time and arrangements  for  the visit would be 

designed to fit in as seamlessly as possible with your other diary commitments.  

 

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Should you wish to accept our invitation, I would be very grateful if your office could contact me to 

discuss potential arrangements for the visit.   

 

Jan Sisson        Lars Falck 

Managing Director        Managing Director 

Juwi Renewable Energies Limited    juwi Solar GmbH 

 

 

March 2011

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Company Biography 

 

Juwi 

 

juwi  is  one  of  the world’s  leading  enterprises  in  the  renewable  energy  sector.  Since  1996  juwi  has  been 

designing, building, financing and operating plants that harness renewable energy.  

The CEOs and  founders Matthias Willenbacher and Fred  Jung  transformed  the company  from a  two‐person 

operation  into  a  worldwide  active  group  with  more  than  1,000  employees  and  annual  revenue  of 

approximately USD 1.3 billion.  

The juwi group wants to contribute to a power supply generated entirely regenerative with the most modern 

wind turbines and photovoltaic plants, with sustainable bio energy projects and  innovative technologies that 

increase efficiency.  

juwi  has  built  approx.  1,500  PV  systems worldwide with  an  overall  capacity  of more  than  700 MWp.  The 

company also plays a leading role in the global wind power market ‐ to date, juwi has installed more than 430 

wind  turbines producing a  total output of approximately 700 megawatts  (MW). Other activities  include  the 

areas of bio‐energy, hydro and thermal power, electric mobility and sustainable construction.  

 juwi  is  headquartered  in Wörrstadt, Germany  and  operates  internationally with  subsidiaries  in  the United 

States, France, Italy, Spain, the Czech Republic, Greece, Poland, and Costa Rica. In July 2008, juwi constructed 

the  world’s  most  energy‐efficient  office  building  at  their  headquarters  in  Germany.    juwi  has  received 

numerous  awards  for  its  commitment  to  renewable  energy:  the  German  Solar  Award  2007;  the  German 

Climate Protection Award 2008; and  in 2009 the Clean Tech Media Award, the Entrepreneur of the Year and 

the Greentech Manager Award.  juwi is especially proud of the “Great Place to Work” seal of quality, received 

in February 2010. 

juwi UK 

Juwi owns a 100% subsidiary in Solihull with 9 current UK employees and plans to create another 50 jobs.  

The company has planned a long term presence in the UK and an investment of over £1 million in the UK for 

the coming two years. 

A number of  signed  contracts with various partners  in  the project acquisition and project development are 

currently on hold given the current Fast Track Review of the Feed‐in Tariff.  

 

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Memorandum submitted by the Russia Foundation (UKES 46)

RUSSIA AND ENERGY SECURITY – ISSUES FOR THE UK AND THE EU Introduction 1. Russia is one of the world’s most important producers and suppliers of energy resources. In 2008 it was the world’s largest producer of natural gas (21.3% of all production) and the second largest producer of oil (11.5% of all production). It holds the largest known reserves of gas (27% of world total) and the eighth largest known reserves of oil (4.5% of world total).1 It also has some of the largest deposits of coal and uranium. 2. Russia is the largest supplier of energy to the European Union, accounting for 31% of gas imports, 27% of oil imports, 24% of coal imports and 30% of uranium imports.2 Of these, gas is the most sensitive and strategically important. Whereas all the other commodities are mobile and traded globally, gas is still mainly supplied to the European market via fixed pipelines and recipient countries often lack alternative supply options. Dependence on Russian gas is particularly acute for countries in eastern and south-eastern Europe. Ten EU member states depend on Russia for more than 50% of domestic gas consumption, with four of them 100% dependent. 3. The UK meets a relatively small proportion of its energy requirements from Russian imports, accounting for only 2% of gas consumption. But, like the rest of the EU, the UK’s import requirement is rising fast as domestic production declines and long-term demand rises. The European Commission estimates that the proportion of EU gas consumption met from imports is set to rise from 60% to 73-79% by 2020 and 81-89% by 2030.3 The Department of Energy and Climate Change says the UK’s gas import requirement may rise from 32% to as much as 70% by 2020.4 4. Against a background of rising external dependency for the EU as a whole, unpredictable or disruptive behaviour by a major energy supplier like Russia could have unwelcome consequences for the UK. Excessive market dominance or attempts to use energy resources as a tool of foreign policy could adversely affect prices and security of supply as countries more directly dependent on Russian energy seek alternative sources, including from countries currently supplying the UK market. The Politicisation of Russian Energy 5. Although Russian leaders are careful to avoid describing their country as an “energy superpower”, it is clear that they regard oil and gas as strategic resources of vital importance to Russia’s national strength. A willingness to use energy for political purposes was apparent from the earliest days of the post-Soviet era when 1 Data from the US Energy Information Administration. 2 EU-Russia Energy Dialogue, Joint Report, November 2010. 3 European Commission, Energy Infrastructure Priorities for 2020 and Beyond, November 2010, p21. 4 DECC, Annual Energy Statement, July 2010, p8.

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the need to compensate for declining military and economic power was most acutely felt. President Yeltsin was willing to use supply cut-offs as a form of coercive diplomacy against the Baltic States in particular. But the politicisation of energy was non-systematic and sat alongside measures to liberalise the Russian energy sector and open it up to foreign investment. 6. A systematic process of politicisation was not attempted until near the end of Vladimir Putin’s first term as President. Putin had set out his personal belief in the strategic function of energy policy in an article published in 1999 when he was still head of the state security service, the FSB. He argued that “the natural resources complex” should become a decisive factor in “the strategy for Russia’s exit from its deep crisis and restoration of its former might on a qualitatively new basis”. Energy policy should be designed to meet more than commercial and civilian objectives alone and should be “aimed at furthering the geopolitical interests and maintaining the national security of Russia”.5 This would be achieved by creating strong, vertically integrated energy companies answerable to the state. 7. The same message has been carried in numerous Russian government statements since around 2003.6 The National Security Strategy of the Russian Federation to 2020 sets out the broad role of energy policy in official doctrine: "The change from bloc confrontation to the principles of multi-vector diplomacy and the [natural] resources potential of Russia, along with the pragmatic policies of using them has expanded the possibilities of the Russian Federation to strengthen its influence on the world arena". Furthermore, the strategy identifies competition for the control of energy resources as a major potential trigger for military confrontation: "In case of a competitive struggle for resources it is not impossible to discount that it might be resolved by a decision to use military might. The existing balance of forces on the borders of the Russian Federation and its allies can be changed." 8. Putin’s politicised vision of Russian energy has provided the blueprint for state policy for most of the last decade. The subordination of the energy sector to state control became a major plank of Putin’s strategy for strengthening the “power vertical” starting with the dismantling and expropriation of Yukos Oil, at the time Russia’s largest private energy company. Imprisoning or exiling independent oligarchs and seizing their assets removed rival centres of power and provided the new ruling elite with additional sources of revenue, patronage and political control. Action was also taken to diminish the role of foreign investors with regulatory harassment used to marginalise Shell and BP in the lucrative Sakhalin 2 and Kovykta projects. New restrictions on foreign ownership of strategic energy projects have been included in Russia’s Subsoil Law. 9. The trend towards greater state control has been accompanied by an increase in the use of energy supplies as a tool of foreign policy. A number of countries heavily dependent on Russian energy sources have experienced price rises or supply interruptions widely seen as political in motivation. Two distinct sets of objectives have been evident: firstly, to strengthen Russian influence over what President 5 English translation published in Problems of Post-Communism, vol.53, no.1, January-February 2006. 6 Energy and the Russian National Security Strategy, Eurasia Daily Monitor, Volume 6, Issue 95, 18 May 2009.

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Medvedev has described as its “zone of privileged interests” by punishing neighbouring countries that pursue friendly relations with the west independent of Moscow; and secondly, to enforce the takeover of energy infrastructure beyond Russia’s borders in order to cement its position as a dominant energy supplier. Ukraine, Georgia and Belarus have been the principal victims, but at least one EU member state, Lithuania, has also been targeted. Russian Energy Policy Priorities 10. Consistent with its strategic vision of energy policy as a means of strengthening the Russian state and advancing its geopolitical interests, the Russian government pursues a number of priority objectives. The most important of these are as follows: 11. Maintaining supply dominance – The Russian government is anxious to retain its role as a leading international supplier of energy and its dominance over the strategically important European gas market in particular. Its public justification for countering perceived threats to that position is the need to guarantee security of demand for its primary export and source of revenue, but the underlying motivation is political. Its dominant position within the European market allows it to use energy relations as a carrot to encourage friendly attitudes on the part of leading EU countries like Germany and Italy, and as a stick to use against post-Soviet countries that defy it. 12. Controlling the infrastructure of transit countries – A major element of Russian energy diplomacy is focussed on controlling the infrastructure of supply beyond its own borders. Attempts at infrastructure takeover have been a feature of supply interruptions and other forms of energy pressure against transit countries like Belarus and Ukraine. Lithuania became the target of an undeclared oil embargo after it refused to sell its Mazeikiu Nafta oil refinery to a Russian company. Pressure is currently being applied to Ukraine to merge Naftogaz with Gazprom. 13. Controlling new pipeline development – The Russian government seeks to dominate the geopolitics of pipeline supply to entrench its position within the European market. The Nordstream gas pipeline, connecting Russia to Germany through the Baltic Sea, is designed to segment the European market and marginalise existing transit countries in Eastern Europe. Likewise, Russian diplomacy in Central Asia, the Caucasus and the Black Sea region is aimed at preventing European countries from developing the infrastructure and relationships needed to access alternative sources of oil and gas. The South Stream pipeline, as a rival to the EU’s Nabucco project, is another element of this strategy. 14. Increasing strategic export options – Russian officials regularly warn that the adoption of European energy policies that conflict with its interests will force Russia to divert supplies to new markets and to China in particular. Until recently that option has been limited by the absence of the pipeline connections needed for Russia to export oil and gas to China in volume. That is beginning to change. The first Sino-Russian oil pipeline opened at the start of 2011 and is intended to supply fifteen million tons of crude oil per year. Construction of the Altai gas pipeline is currently on hold because of disagreement between the Russian and Chinese governments over price. But the intention is still to complete the project by 2015.

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15. Preventing European energy market integration – The EU’s third energy package, by requiring the unbundling of energy production and transmission, represents a particular challenge to the Gazprom model of vertical integration and Russia’s efforts to become a leading player in the downstream European energy market. Considerable efforts have been made to discourage or stop real energy market integration that threatens to undermine strategies of monopoly and market segmentation that have worked to Russia’s advantage in the past. 16. Limiting the growth of unconventional gas supply – Russia has become a leading sceptic on the development of unconventional gas, such as shale gas and coal bed methane. Russia cites environmental and other criticisms as a way of undermining the idea that unconventional gas could become a major source of energy supply for the European market, but it is really concerned to minimise competition to its own conventional supplies. The growth of unconventional gas saw the US out produce Russia in 2009. The consequent increase in gas supply in the Atlantic basin in the form of LNG threatens to change the European market to Russia’s disadvantage. 17. Cartelising gas supply – Although Russia has observer status at OPEC, it has refrained from joining because technical factors give it less flexibility to vary oil production and because it is reluctant to accept the policy constraints of full membership. But it has taken the lead in trying to promote cartel-type arrangements between gas producing countries through the Gas Exporting Countries Forum. The Forum has been institutionalised and its agenda has become more ambitious. Although the nature of gas as a commodity makes it harder for producers to emulate the OPEC model, proposals to cooperate on price formation, market allocation, investment and new technology, like LNG, are clearly aimed at achieving cartel-like results. 18. Minimising rules-based international commitments – The Russian government aims to avoid binding international rules that restrict its behaviour as a producer and provider of energy. Although Russia signed the Energy Charter Treaty in 1994 and was bound by its terms pending ratification, its rules concerning protection of investment and the transit of third country supplies conflicted with the Putin vision of energy as a strategic asset to be controlled by the state. The Russian government refused to ratify the ECT and eventually withdrew from provisional application in 2009. It is also resisting the inclusion of ECT rules and other binding provisions on energy in the EU-Russia agreement that is currently under negotiation. 19. Attracting foreign investment and technology – Despite its suspicion of foreign involvement in its energy sector, the Russian government needs inward investment to develop new production. Its exiting gas fields in western Siberia are past peak production and new fields in the Arctic north can only be developed with western capital and technology. The capital investment requirement for the Russian energy sector over the next twenty years has been put at $2 trillion.7 The already heavily indebted state energy companies, Gazprom and Rosneft, cannot generate the

7 ‘Russia unveils $2trln energy growth plan to 2030’, Reuters, 26th November 2009 - http://uk.reuters.com/article/idUKGEE5AP25J20091126.

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required funds, nor do they have the technology needed to drill or lay pipeline in the icy waters and permafrost of the Arctic north where the future of Russian energy production lies. This requirement conflicts with other Russian objectives, but the government hopes to attract foreign companies as junior partners in its major energy projects. Policy Responses 20. The UK and its EU partners have a range of policy options at their disposal to encourage Russia to behave as a responsible energy supplier. These should be aimed at increasing competition and diversity of supply, strengthening the EU’s collective energy diplomacy, countering monopolistic behaviour and discouraging the use of energy supply as an instrument of foreign policy. Policy options include the following: 21. A stronger EU external energy policy – The EU is formally committed to strengthening the energy dimension of its external policy, but there is still a tendency for individual member states to behave unilaterally in the field of energy diplomacy. This makes it easier for Russia to increase its leverage through a policy of active bilateralism. Investment deals, new pipeline projects and long-term supply contracts are often negotiated without consideration for the common European interest. The energy diplomacy of the EU and its member states should be based on solidarity and a commitment to consult on issues of common concern. 22. A single EU energy market – The removal of technical and regulatory barriers to a competitive European energy market is one of the best ways to prevent suppliers establishing and exploiting a dominant position. The EU’s third energy package has now been passed and requires the separation of production and transmission activities. The EU needs to ensure its strict implementation and insist that third country companies are held to the same rules as EU companies. Steps should also be taken to accelerate the construction of the interconnectors required to create a genuine single market in which gas and electricity supplies can be transferred easily across borders to meet demand. 23. Closer energy ties in the Eastern Neighbourhood – Closer ties with transit countries in Eastern Europe should be aimed at promoting competition, infrastructure modernisation and greater energy independence. Ukraine, which recently joined the European Energy Community, is particularly important to the security of European gas supply. With EU help, the government of Ukraine should be encouraged to carry out market reforms, modernise and maintain national control of it supply network, diversify its supply options and develop its own oil and gas reserves. 24. Adoption of ECT commitments in a new EU-Russia agreement – Negotiations on a new agreement to replace the EU-Russia Partnership and Cooperation Agreement have stalled over Russia’s refusal to accept binding commitments on energy. The EU’s negotiating mandate is for an agreement that enshrines the principles of the ECT, such as investor protection, third county transit and binding and enforceable international arbitration. Whether these principles are accepted as part of a new EU-Russia Agreement or through Russia’s acceptance of a revised

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ECT, it is essential that the EU holds firm for a rules-based relationship that is at least as strong as existing ECT provisions. 25. Reciprocity of investment rights – Russian companies investing in the European energy sector enjoy the full protection of European commercial law, whereas property rights in Russia remain weak for foreign and domestic investors alike. EU governments should insist that energy cooperation must be based on reciprocal rights and obligations. Russia is seeking European support as part of Partnership for Modernisation and needs access to foreign capital and technology to modernise it energy sector in particular. The EU should be seeking a binding commitment from Russia to strengthen investor protection and the rule of law in return. 26. The development of unconventional gas – The rise in gas production from unconventional sources has already transformed the European market with LNG imports from the US increasing supply options. The International Energy Agency recently described the exploitation of unconventional sources as a “game changer” that could double global gas reserves.8 European countries with significant deposits of unconventional gas include some, like Poland and Ukraine, which are currently heavily dependent on Russian supplies. The growth of unconventional gas production and supply in Europe and beyond could significantly alter the terms of trade with Russia. 27. Opening up the southern energy corridor – In the absence of Russia accepting third country transit rights, creating direct pipeline access to gas supplies from Central Asia and the Middle East is another means of strengthening Europe’s energy security. The Nabucco gas pipeline project has been delayed by doubts over its commercial viability and the availability of sufficient gas to fill it. But supplier countries are unlikely to commit without a clear sign that Europe intends to build the pipeline. Like Russia, the EU needs to conceive of pipeline projects in strategic rather than purely commercial terms. Conclusion 28. The energy relationship between Russian and the EU ought to be based on a recognition of their interdependence. Russia needs access to the European market just as much as the EU needs Russia to behave as a responsible energy supplier. But the relationship has become unbalanced by the failure of the EU to take a coherent and collective view of its interests. The consequences for the UK are indirect, but real. The EU has the tools needed to create a more balanced partnership with Russia and strengthen the energy security of its member states. UK policy should be aimed at galvanising that sense of common purpose. March 2011

8 International Energy Agency, Global surge of activity follows successful production of ‘unconventional’ gas in US, 13th January 2011 - http://www.iea.org/index_info.asp?id=1762.

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Memorandum submitted by Oil & Gas UK (UKES 47)  

 Introduction Oil  &  Gas  UK  is  the  principal  trade  association  representing  the  offshore  oil  and  gas exploration and production (E&P)  industry within the United Kingdom, with more than 100 members ranging  from the  largest,  integrated oil and gas companies through  independent E&P operators to an extensive supply chain.    Much of this response was drafted before the Chancellor of the Exchequer made his Budget statement on 23rd March.  We would like to thank the Committee for allowing us some extra time  in which to make this submission, given the tax changes  introduced by the Chancellor which directly affect the E&P industry in this country and have caused us to insert some new paragraphs and alter a number of our comments.  The  industry has  consistently been  the  largest  investor  among  the UK’s  industrial  sectors over  the past 30 years, with  some £6 billion of  capital  spent  in 2010 and up  to £8 billion forecast to be spent in 2011, when the results of our Annual Activity survey were published in  late February.   The  industry currently  supports about 450,000  jobs across  the economy through  its activities on  the UK’s continental shelf  (UKCS) and  in  the export of oil and gas goods and services to various parts of the world which are estimated to be worth more than £5 billion a year, with the prospect of an  increase of the order of 10‐15,000  jobs resulting from increasing UKCS investment.  However, we are now re‐consulting our members so that we may understand the potential consequences of the latest change in tax.  Currently,  oil  and  gas  comprise  75%  of  the  country’s  primary  energy  supplies  and  this  is forecast  to  decline  only  slowly  during  the  next  20  years,  e.g.  to  about  70%  in  2020  (ref DECC).  In 2010, production from the UKCS accounted for more than 90% of oil and 60% of gas demand by volume,  i.e. after netting  imports and exports.   While UKCS production will continue  to  decline  slowly  (it  peaked  in  1999  for  oil  and  2000  for  gas),  with  the  right investment climate, we had expected that  it could still satisfy some 60% of our oil and gas demand  in  2020  and  that we would  continue  producing  into  the  2040s.    Therefore, we believed that the UKCS had the potential to continue to be a major contributor to the future security of energy supplies, but the latest measures have cast some doubt on the extent of this  role.   Nonetheless, we  are  pleased  to  be  able  contribute  to  the  Energy  and  Climate Change Committee’s new inquiry into this important subject.   General Before  addressing  the  Committee’s  specific  questions,  it  is  perhaps  worth  noting  some broader policy points at the outset.  As is evidenced by the Committee’s introductory words in its press release of 11th February 2011, they provide the context for this inquiry.  Government has three over‐arching policy objectives: reduced emissions of GHGs, security of energy  supplies and affordability.   We  fully  support  the government’s desire  to  reduce emissions  of GHGs  in  economically  efficient ways  and  to  encourage  investment  that will achieve  this  objective,  coupled with  securing  the  country’s  energy  supplies  in  a manner which is both affordable for consumers and keeps the economy competitive.  It is also worth noting that long established policy, agreed between government and the industry, has been that the United Kingdom should recover as much of its oil and gas resources from the UKCS 

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as it economically can.  A necessary part of achieving this desirable goal is that there should be fiscal and regulatory predictability.  We understand the government’s desire to end some of the investment uncertainties which are currently evident in the electricity generating market, in particular.  It is probably worth noting  that  such  uncertainties  have  not  so  far  been  evident  in  gas  (but  please  see  our paragraphs below concerning 2011’s Budget), with perhaps the exception of storage where the economics  is currently difficult.   Gas has  seen multi‐billion pound  investments  in new supplies and infrastructure in the past five years which have stood the country in good stead during  the  severe weather  conditions  experienced  last winter  (2009‐10),  the  coldest  for more than 30 years, and during the early part of  the recent winter  (in  late November and through December 2010),  the coldest  start  to any winter  for which detailed  records exist.  According  to National Grid, of  the  ten days of highest demand  for gas ever  seen  in Great Britain, nine occurred  in 2010, with three  in January and six  in December.    In other words, the  gas  market  has  worked,  so  there  may  be  lessons  from  it  which  are  applicable  to electricity.  The Budget 2011 Until the Chancellor’s statement on 23rd March, Oil & Gas UK and its members had come to understand, as a result of various discussions with the coalition since it came into office last May, that the need to retain investors’ confidence in the fiscal regime for the UKCS was fully understood by the government, following a period of almost ten years of repeated changes.  The tax increase in the Budget which came without any warning has completely undermined that returning confidence; the statement is of immense disappointment to the industry.  In late February, Oil & Gas UK published the results of its latest Annual Survey of members’ investment  intentions  and  oil  and  gas  production  forecasts.    These  demonstrated  this returning  confidence,  with  investment  intentions  recovering  strongly  after  the  fiscal uncertainties of previous years and the downturn caused by the recession, and a forecast of up to £8 billion being  invested  in 2011 (£6 billion  in 2010,  itself an  increase from 2009).   In particular, the changes made towards the end of the previous administration with regard to the taxation of small fields, heavy oil fields, deep water gas and very high temperature, high pressure (HP‐HT) fields, endorsed by the coalition government, were seen by the industry as representing a growing understanding within government that a mature oil and gas province such as the UKCS needs well tuned taxation in order to stimulate the necessary investment and  ensure  the maximum  economic  recovery  of  its  remaining  reserves.    But  instead,  a perception of political risk, through fiscal instability, has been rekindled.    As a result, the growing optimism portrayed by our survey  is now under threat.   Members are  reconsidering  their plans and  it  is almost  inevitable  that some new  investment will be put  on  hold  or  even  cancelled.    Indeed,  there  have  been  announcements  to  this  effect already.  None of this will enhance the UK’s future security of energy supplies.  Furthermore, the Budget statement ties the new tax increase to the price of Brent crude oil, overlooking the facts that heavier grades of oil trade at a discount of up to $12 per barrel and, more significantly, that 45% of UKCS production is gas which is priced independently of and at a  large discount to oil (e.g. 35‐50%  less  in energy equivalent terms).   The Treasury’s blunt instrument is, therefore, doubly damaging.   We now turn to the individual questions posed by the E&CC Committee. 

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 1. How resilient is the UK’s energy system to future changes in fossil fuel and uranium 

prices?  The energy system  in the UK has shown  itself to be very resilient to changes  in the prices of fuels during the past 20 years, mainly on account of having open markets which adapt to such changes as no other mechanism can do.  As long as markets are allowed to continue to operate, there is no reason to believe that this should change in future.  Furthermore, no one should underestimate the benefits which open energy markets have brought to Britain, above all security of supply combined with generally lower prices than  in the rest of western Europe.   It  is almost paradoxical that, at the very time  when  the  European  Commission  has  at  last  enabled  the  opening  of  the electricity and gas markets across the EU, by way of its Third Package of liberalising measures for which the British government has  lobbied  long and hard, we  in Great Britain seem to be having doubts about the benefits of markets and are proposing internal  reforms which will  involve much more  intervention by  government.   This runs a serious risk of undoing the good which has been done and of moving Great Britain back in the direction of “picking winners” with all the adverse consequences that that will entail.  The Advantages of UKCS Production As well as  the advantages  for  security of oil and gas  supply, UKCS production has provided  the  country with  a  shield  from  the  full  effects  of  changes  in  prices,  by virtue  of  the  tax  revenues  derived,  the  investment1  and  jobs  created  and  the benefits  to  the  balance  of  payments.    In  addition,  the  widespread  use  of  gas throughout  the economy, as heat  in homes, shops, offices and  industry and, since the 1990s, as a fuel for power generation, resulting from having our own production, has had immeasurable economic, environmental, social and health benefits.  With the right policies in place, these advantages can continue to flow in future.  

2. How sensitive  is the UK’s energy security to  investment (or  lack of  investment)  in energy infrastructure, including transmission, distribution and storage?  As mentioned  in  the  Introduction,  the offshore oil and gas  sector has consistently been  for several decades and continues  to be  the  largest  industrial  investor  in  the country.  This has not only ensured that the UK has been and remains a substantial oil and gas producer, but the UK and Norway have dominated European production of  oil  and  gas  for  the  past  30  years2.    The  continued  investment  by  the  industry throughout  the north‐west  European  continental  shelf has played  a major  role  in securing our energy supplies.    At  the  time of publishing  the  results of our Activity  Survey3  in  late  February,  the investment outlook for the UKCS was very encouraging.  It is most unfortunate that 

                                                            1 More than £280 billion of tax paid and £440 billion of capital invested, since production began (in 2010 money). 2 The Netherlands is the third, large producer in the EU‐EEA, but only of gas, not oil. 3 Oil & Gas UK’s recently published Activity Survey for 2011 refers: http://www.oilandgasuk.co.uk/news/news.cfm/newsid/584  

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the  Treasury  has  decided  to  allow  short  term  considerations,  however understandable, to over‐ride the need  in an  industry such as ours, with  its  lengthy investment  timeframes,  for  fiscal and  regulatory predictability.   Confidence  in  the regime which investors face is an integral part of their decision making.  The Gas Market The market for gas in GB has become an international model, respected for its open‐ness, good liquidity and competitive pricing.  As mentioned under “General” above, gas has seen multi‐billion pound  investments  in new supplies and  infrastructure  in recent  years;  investment  on  such  a  scale  would  probably  not  have  happened without an open and liquid market.  The only exception to this has perhaps been in gas  storage where  there  have  been many  projects  being  promoted,  but  various obstacles to their achievement  in recent years,  including poor economics currently.  As Ilex Energy Consulting, now part of Poyry, stated  in a report for ourselves a few years ago, there is a paradox about storage: “When gas prices are low, no one wants storage; when gas prices are high, no one can afford storage.”  Nonetheless, the scale of the gas infrastructure which has been built, the variety of gas  sources  which  Great  Britain  now  has  (UKCS  production,  pipeline  and  LNG imports and storage) and an open market have jointly delivered security of supply.  As is widely known, there are very large amounts of power generation capacity to be renewed in the next 15 years.  There has, of course, been a substantial move to gas fired power generation  since  the early 1990s, with all  the benefits which  that has produced:  lower  costs  and  fewer  emissions of CO2, NOx,  SOx  and particle matter when compared with the coal fired plant which has been replaced.  Gas remains the technology of choice and, to the best of our knowledge, gas fired power generation is being built at a rate which will replace all of the coal and oil fired plant which has to be closed by the end of 2015 on account of the Large Combustion Plant Directive.  However,  DECC’s  2050  Pathways  document  published  in  July  2010  projects  gas demand to fall by about 30% by 2020 and nearer 90% by the mid‐2040s.  This offers no  encouragement  for  future  gas  investment, whether  in  new  supplies  as  UKCS production declines or  in  storage  (the main  infrastructure has been built already).  Not only do such projections discourage future investment, but they also discourage those who currently provide a wide variety of  international supplies to this country from including Great Britain in their longer term plans, other than occasionally.  By seeming to think of gas as little more than a short to medium term stop‐gap and then future back‐up for intermittent renewable energy, to be switched on and off at will, there is an appreciable risk to both security of supply and affordability.  To say the  least, Oil & Gas UK thinks that this approach  is short sighted, particularly when due consideration  is given to the renewal of power generating capacity referred to above and the need to replace this capacity with reliable power supplies.  It has, however, been encouraging to note that both the Secretary of State of DECC and the Energy Minister have stated that carbon capture and storage (CCS) with gas should form at  least one of the four demonstration projects.    If CCS can work with coal,  it can work with gas and probably at  lower cost4.   DECC’s  recently published 

                                                            4  Ref Mott Macdonald for DECC, June 2010. 

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response to its call for evidence regarding its 2050 Pathways does now recognise the possible use of CCS with gas, if somewhat belatedly.  

3. What  impact  could  increased  levels  of  electrification  of  the  transport  and  heat sectors have on energy security? 

4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes? 

5. What will be the  impact on energy security of trying to meet the UK’s targets for greenhouse  gas  emissions  reductions  as  well  as  increased  penetration  of renewables in the energy sector?  We believe  that questions 3, 4 and 5 are  inextricably  linked and  therefore we are taking the liberty of answering them together.  It is now clear that current policies which aim to de‐carbonise electricity generation by 2030 and electrify the economy are going to be very expensive.  Also, it must be doubtful  if the necessary capital can be raised within the timeframe contemplated, never mind spent to good effect, without straining the supply chain’s resources such that it leads to significant cost inflation, which would be the worst of all outcomes5.  Furthermore, current policies assume the simultaneous and successful  introduction of a wide range of new technologies and changes in the way we live:  

• 12‐15GW of new nuclear power plant • CCS becoming commercial • offshore wind  power  of  a  scale,  complexity  and  distance  from  shore 

never undertaken before • development of a smart and much expanded electricity grid • widespread introduction and use of electric vehicles • electrifying home heating (80% of homes currently use gas) • introduction of smart metering across the country • dramatic  improvements  in  energy  efficiency  and  the way  society uses 

energy.  

There  are,  therefore,  very  considerable  financial  and  practical  risks  with  today’s policies.  The likelihood of so many new technologies and such profound changes all coming  to  fruition  within  the  same,  comparatively  short  timeframe  and  at  an affordable cost is extremely small.  Given the difficulties of raising the necessary capital and the restraints in the supply chain, particularly of suitably qualified people, the current target for 15% of the UK’s energy needs coming from renewable sources by 2020 is, more realistically, a target for  2030,  a  point which we  have  heard wind  power  developers  acknowledge.    It would  greatly  help  if  government  were  to  recognise  this  reality  and  adjust  its policies  accordingly,  even  though  this will mean  having  to  re‐negotiate  the  UK’s commitments  within  the  EU.    This  will  be  less  damaging  to  the  economy  than attempting  to achieve  the  target  in 2020 which, according  to our  information,  the Commission is well aware the UK is likely to miss by a significant margin. 

                                                            5  As we pointed out in our response earlier in March to DECC’s consultation about Electricity Market Reform, it is worth noting that the much quoted £200 billion of energy infrastructure investment during 2010‐20 excludes our sector, where £50‐60 billion of capital investment is expected in the decade. 

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 The consequences of current policies were analysed  in two separate reports which were published  last autumn, the first by Poyry Energy Consulting for Oil & Gas UK6 and  the  second by Redpoint Energy  for  the Energy Networks Association7.   Poyry noted in its report that “There is a greater risk of the lights going out from a lack of power generation than there is of gas interruptions because of a shortage of gas.”  Although  approaching  the  subject  from  very  different  directions,  the  two  reports came to similar conclusions, namely that using more gas in the energy mix would be more affordable, less risky and, therefore, more likely to succeed.  Indeed, Redpoint estimated that it could save up to £700 billion over the years from 2010 to 2050.  More  recently, McKinsey  has  published  a  report  for  the  European Gas  Advocacy Forum which  came  to  similar  conclusions  looking  across  the whole  EU8.    Again, savings of hundreds of billions (€) are forecast for the power sector alone, between 2010 and 2030, with similar amounts possible although  less certain between 2030 and 2050.  There surely has to be merit in broadly similar findings by three separate consulting organisations of such considerable expertise and stature.  

6. What would be the implications for energy security of a second dash‐for‐gas?  A  so‐called “second dash  for gas”  in  the UK could only occur  in power generation where, as mentioned above, there is a very large amount of capacity to be renewed by 2025.   Under almost all of  its  future scenarios, DECC expects a reduction  in the demand for gas.  The only question would appear to be by how much and when, but it  seems unlikely  that annual demand would be higher  than  it has been  in  recent years, even if substantial amounts of new gas fired power generating capacity were commissioned.  Significantly, the main gas infrastructure has already been built and works well although, as the UK’s production declines, some further storage  is  likely to be required in due course.  In  terms  of  the  overall market,  the  International  Energy  Agency  (IEA)  foresees  a “golden age for gas” in the next 25 years.  By any measure, global gas resources are very  large  –  at  least  two  hundred  years  of  today’s  supply.    Nonetheless,  coal currently  provides  the  backbone  of  the world’s  power  generation  and,  although there  is  a  swing  towards  gas  expected with  its  lower  cost,  greater  efficiency  and lower  emissions,  coal  will  remain  the  world’s  leading  power  generation  fuel  for many years to come (ref IEA).  As well as higher demand worldwide, the IEA is also forecasting a significant increase in gas supplies, particularly  in  the  form of Liquefied Natural Gas  (LNG).   Exports of Australian LNG are expected to overtake Qatar’s during the current decade.  There is increasingly a world market for gas, driven by new supplies of LNG from Africa, the Middle East and the Far East, complementing traditional pipeline gas.  

                                                            6 See http://www.oilandgasuk.co.uk/Role_of_gas.cfm  7 See http://2010.energynetworks.org/reports/  8 See http://www.statoil.com/en/NewsAndMedia/News/2011/Pages/24Feb_EGAF.aspx  

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The  importance  of  an  open,  liquid  and  competitive  market  cannot  be  over‐emphasised  in maintaining  security  of  supply.    This  is  where,  at  present,  Great Britain has a considerable advantage over its competitors.  It is necessary to ensure that policies do not undermine the functioning of the market, otherwise security of supply would be threatened (ref our answer to Q.2 above).  The main  implication  of  a  “second  dash  for  gas”  is  that  it would  be  substantially cheaper  and  easier  to  deliver  than  present  policies  are;  it  would  be  much  less resource  intensive.    It would also be a more  secure way with which  to  renew  the large amounts of generating capacity which have  to be  replaced, whereas present policies with their  inherent risks and extremely high costs pose appreciable threats to security of electricity supply, affordability and economic competitiveness.  

7. How exposed is the UK’s energy security of supply to international events?  No  country  is  immune  from  international  events  in  the  supply  of  the  basic necessities  of  life,  such  as  food,  energy, water  and  clothing.    This  is why  it  is  so important to have open markets and free trade to provide variety and resilience  in the  supply  sources  and  routes  to market  of  such  essentials.    Furthermore,  open markets are necessary to ensure realistic price formation and appropriate responses to  pricing  signals.    Governments  both  here  and  in  the  EU  should  encourage  the opening of markets and the free flow of energy across international boundaries and should help to remove any barriers which hinder such trade.  The  long established policy of  recovering as much oil and gas  from  the UKCS as  is economically possible remains a crucial part of the UK’s energy security.   Although some 40 billion barrels of oil equivalent9  (boe) have been recovered since the  late 1960s, it is forecast that there are up to 24 billion boe still to be recovered from the UKCS during the next 30‐40, perhaps 50 years.  Government and industry should be continuing  to  work  together  to  ensure  that  this  comes  about,  instead  of  being diverted by  a need  to  try  and  repair  the damage done by  an  ill  considered  fiscal change.  The equivalent figures for Norway’s oil and gas resources are 35 billion boe already recovered, with 46 billion boe  forecast still  to be  recovered during  the next 50‐80 years, so Norway and the UK combined have 70 billion boe forecast to be recovered in the decades ahead.  To put this in perspective, 70 billion boe represent more than 60 years of the UK’s current annual consumption of oil and gas.  Norway currently is and will remain a very important supplier for this country.  

8. Is  the  UK’s  energy  security  policy  sufficiently  robust  to  be  able  to  deal  with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?  Current policies contain very considerable financial and practical risks, as  identified in  our  answers  to  questions  3,  4,  5  and  6  above.    There  seems  to  be  an  implicit assumption within DECC that all of these policies are deliverable at reasonable cost and in a manageable timeframe.  In our judgement, this is highly questionable. 

                                                            9  barrel of oil equivalent: this includes oil, gas and other hydrocarbons and equates all of these with oil, so that a common measure can be made of any one of them, or of two or more in combination (1 boe = 164 cubic metres or 5800 cubic feet of gas). 

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 Renewable or Low Carbon Energy Among the policies being  implemented, the one we believe  is the most mistaken  is the renewable energy target for 2020.   It would have been much more beneficial if it had been a  target  for  low carbon energy which would have opened  the way  for investment  in  a  wider  range  of  technologies.    Instead,  the  policy  represents  a commitment to offshore wind power on a very large scale that is not only extremely expensive  and,  therefore,  highly  resource  intensive,  but  the  effectiveness  of  this form  of  energy  is  of  dubious  value  at  times  of  greatest  need,  because  of  its intermittent nature, which has been brought sharply into focus by the coldest winter for more  than 30 years  in 2009‐10,  followed by  the coldest start  to any winter on record in late 2010.  In an analysis of the winter 2009‐10, we found that: 

 “Also worth noting in the context of security of supply is the fact that, over a 90 day period during the heart of the winter, actual output of wind generation connected to the electricity grid only averaged 21% of its nominal capacity and on 83 of the 90 days it did not exceed 50%, with one period of seven days during which it never rose above 10%.  The maximum achieved on any one day was 67% and the minimum was less than 1%.  While the proposed offshore wind projects mentioned above are likely to perform better because  it  is windier offshore,  these  figures  illustrate vividly  the need  for  other  means  of  reliable  and  flexible  generation  in  order  to  maintain electricity supplies.    It should be noted, though, that maintaining  large numbers of wind  turbines  in maritime  conditions  will  unquestionably  be more  difficult  than onshore.”  (ref p.17 of Oil & Gas UK’s Economic Report, 2010).  Some  simple  arithmetic  illustrates  the  point  vividly.    Peak,  winter  demand  for electricity from the national grid is currently some 60GW, requiring back‐up of about 12GW  to  guard  against  breakdowns  or  other  unpredictable  eventualities  and, therefore, a total generating capacity of 72GW (Great Britain temporarily has more than this: 80+GW).  As the economy becomes increasingly electrified, it is expected that peak demand will  rise  to 100‐120GW,  implying a back‐up  requirement of 20‐24GW  and  a  total  generating  capacity  of  120‐144GW,  based  on  the  usual assumptions.  However, if 40GW of the 100‐120GW are in intermittent wind power, this would  lead to some 52‐56GW of back‐up being required,  i.e. similar to current maximum  demand  on  a  typical  winter’s  day.   While  these  numbers  are  only  a simplified illustration, they are an indication of the excessive power generation and, as a result, grid capacity and concomitant cost which current policies will inevitably entail.  Therefore, it is our firm belief that the current commitment to renewable sources of energy  needs  to  be  re‐thought.    The  target  should  focus  on  low  carbon  sources, especially of electricity generation.    In the first  instance, this means more gas fired power plants which, even  if  large amounts of wind generation are built eventually, will still be required, albeit  in more of a back‐up role.   Gas fired power will reduce emissions  of  CO2,  NOx,  SOx  and  particle matter  substantially  (by  50+%  for  CO2), compared with the coal and oil fired plants to be replaced, and at an affordable cost.  Even  if they do not deliver the reductions  in emissions desired  in the much  longer term  (2040‐2050),  they will  create  the  time  and  space  in which  to  develop  and introduce some of the new technologies, one of which, CCS, may well be applicable to those selfsame gas fired power plants.  

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Such a way forward would pose much smaller and more manageable risks than the current  path  chosen  by  DECC which  is  being  determined  by  the  EU’s  renewable energy target for 2020.  

9. Are there any other  issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?  Japan It is worth commenting briefly on events in Japan and the possible consequences of the  nuclear  emergency which  has  ensued.    It  is  likely  that  this will  increase  the demand  for  gas  (and,  probably,  coal)  in  Japan  and  elsewhere  (e.g.  Germany)  in future.    This  happened  in  Japan  during  2007 when  the  country  suffered  another nuclear mishap.    The  scale  of  any  future  changes  in  overall  demand  cannot  be ascertained at this stage, but it is unlikely to be substantial.  However, it is equally likely that there will be a supply response, as those with large reserves  of  gas  offer  to  increase  their  production  by  bringing  forward  projects.  Russia has already responded in this way regarding supplies from its far east.  Given the size of the world’s gas resources, this should not be of concern to policy makers.  The reaction in the market thus far has been to increase the price of gas in GB by a few pence per therm.  Nord Stream Finally,  it  is worth noting that Nord Stream  is due to begin operations towards the end of this year.  It comprises twin pipelines being built by Gazprom and its German, Dutch and French partners  to bring gas directly  from Russia  to northern Germany  via  the Baltic  Sea, by‐passing Ukraine  and Belarus.    The  first  line, with  an  annual capacity of 27.5 billion cubic metres  (bcm),  is due  to be commissioned  in  time  for winter 2011‐12, with the second  line of the same capacity  in time for winter 2012‐13.   To put this  in perspective, the total capacity of 55 bcm/year  is about equal to 2/3rds of Germany’s annual consumption of gas (Germany is the second largest gas market  in the EU, just behind the UK).   This very  large  investment will considerably improve the security of Russian gas supplies to NW Europe.  

 April 2011  

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Memorandum submitted by Centrica (UKES 48) Summary of Response Centrica welcomes this inquiry that evaluates security of supply at a critical juncture for the UK. In terms of Gas security of supply, we are concerned that Budget 2011 significantly increased tax rates for companies investing, and producing oil and gas, in the North Sea. The UK’s upstream tax regime is at odds with the goal of maximising economic extraction of dwindling reserves. The proposed tax increases apply equally to gas and oil though the economics are very different, with the gas sector realising lower returns:

• Gas is trading at around $55 barrel oil equivalent, much less than the $75 trigger price for the increased levels of taxation, whereas oil is trading at over $115 per barrel.

The potential impact of the tax increase across the UK gas sector could lead to 47-95bcm of UKCS supply destruction, equivalent to two years of current UK continental shelf production. This will inevitably lead to increased reliance on higher priced imported gas. There will be reduced UK investment, jobs and tax receipts as projects are cancelled. There will be increases in gas and power costs for industry and consumers with increased imports heralding a potential move to oil price linkage:

• Higher oil taxes may not feed through to consumers as there is a deep liquid market for oil with a single global price. However, the material impact on UK supply from the tax increase will feed directly into higher UK gas prices. Gas markets are regional and shallow, with no single price for gas across the global market. We will also need to compete for additional gas imports with higher priced international markets such as the Far East.

Centrica strongly recommends the exclusion of gas from the tax increase:

• Oil prices have recently risen further and faster than UK gas prices • It is practical to split out oil and gas.

In terms of electricity security of supply, we support the Government’s analysis in the Electricity Market Reform (EMR) consultation that, without significant policy changes, there could be an issue with security of supply, both in terms of supply adequacy (ensuring enough low-carbon plant is built) and supply reliability (i.e. sufficient flexible plants to cover intermittent generation). Centrica broadly believes the UK is on the right track regarding electricity security of supply, provided the EMR programme, which will encourage low-carbon and flexible plant, continues apace. Though there are worrying signs of slippage to the timetable. We welcome the recent Carbon Price announcement in Budget 2011 of £30 by 2020. The planning regime is still causing significant delays for our renewables power projects hampering the UK’s ambitious wind programme and therefore undermining much of the work the Government has done on National Policy Statements.

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Questions

1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

The UK enjoys well-developed gas import infrastructure as well as competitive gas and power market arrangements. These help shield customers from volatile global commodity markets as well as enhancing the UK’s security of supply.

Nevertheless, as part of a global market, UK consumers will continue to be exposed to global movements in gas prices, which also feed into power prices. These are likely to follow a higher upward trend as global demand picks up.

Global gas markets are expected to tighten sometime in the period 2013-2015, at this time we might expect an upturn in UK gas prices towards global oil linked prices, though the offshore tax increases proposed in Budget 2011 could accelerate the UK’s move to gas-oil price linkage.

In terms of nuclear, the Massachusetts Institute of Technology (MIT) estimated in 2010 that the cost of uranium typically represents less than 2% of the cost of electricity from nuclear plant. Uranium prices are therefore of less of a concern to UK consumers than fossil fuel prices.

2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

Upstream Gas

Budget 2011 significantly increased tax rates for companies investing, and producing oil and gas, in the North Sea. The marginal tax rate increases from 75% to 81% for Petroleum Revenue Tax paying fields, and from 50% to 62% for other fields. The UK’s upstream tax regime is at odds with the goal of maximising economic extraction of dwindling reserves. UK hydrocarbon tax levels are amongst the highest in the world. UK finding and development costs are also high. This makes the monetisation of the UK’s undeveloped reserves, in what is a mature basin, very challenging. Budget 2011 Supplementary Charge Tax increase (from 20% to 32%) applies equally to gas and oil, even though the economics are very different, with the gas sector realising lower returns :

• Gas prices are around half oil prices in thermal equivalents; • Gas is trading at around $55 barrel oil equivalent, much less than the $75

trigger price for the increased levels of taxation, whereas oil is trading at over $115 per barrel;

• Gas returns are lower than for oil, these lower returns are pushed even lower by the tax increases.

The adverse effects of this tax increase on our gas project pipeline and exploration programme means a number of projects will no longer meet investment criteria. The

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potential impact of the tax increase across the UK gas sector could lead to 47-95bcm of UKCS supply destruction (2 years current UKCS production), leading to increased reliance on higher priced imported gas. There will be reduced UK investment, jobs and tax receipts as projects are cancelled. There will be also increases in gas and power costs for industry and consumers as increased imports could hearld a potential move to oil price linkage:

• Higher oil taxes may not feed through to consumers as there is a deep liquid market for oil with a single global price. However, the impact on UK supply from the tax increase will feed directly into higher UK gas prices (gas markets are regional and shallow, there is no single price for gas), as the impact on supply is material.

We strongly recommend the exclusion of gas from the tax increase:

• Whilst higher oil taxes may not feed through to consumers, higher gas prices will result from the tax increase as the impact on supply is material and gas prices are regional;

• It is practical to split out oil and gas.

Gas Storage

Centrica currently owns and operates Rough storage, Western Europe’s largest storage facility and over 70% of the UK’s existing storage capacity. The UK has 4.3 billion cubic metres of gas storage, equivalent to nearly 15% of demand on a peak winter’s day. Whilst estimates of how much new storage is required vary, National Grid believes that storage needs might need to double by 2020 as we continue to increase our import dependence, and as more intermittent renewables come on stream requiring flexible back up generation and therefore flexible gas supply. Storage provides flexibility to the market though it is not the only form of flexibility, it competes with demand side response and more recently LNG has also been meeting this role in the UK market. Centrica is evaluating plans for another 2.4bcm of storage capacity at the Baird facility in which we own a 70% interest. Baird is approximately 70% the size of Rough and would cost approximately £1.5n to develop. However, the economics are marginal at present, particularly against the backdrop of reduced summer/winter price differentials, a key driver of the value of these kinds of storage facilities. We continue to review the project design and the project economics and expect to make an investment decision in 2011.

Electricity

The electricity market in the UK has delivered a secure supply of power to Britain’s homes and businesses over the past decades. However, there are significant challenges ahead. One third of existing UK capacity will need to be replaced from 2015, when the Large Combustion Plant Directive (LCPD) will close many existing coal plant and when the UK’s current nuclear fleet will begin to move offline. This plant will need to be replaced with nuclear, renewables and some flexible gas in order to meet the UK’s binding carbon and renewables targets whilst ensure security of supply. Ofgem predicts this will require an investment of c. £200bn by 2020. Such investment is complicated by the fact that current market arrangements are not designed to meet the multiple goals of security of supply, decarbonisation and

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promoting renewables, all at least cost. We support the Government’s analysis in the Electricity Market Reform (EMR) consultation that, without significant policy changes, there could be an issue with security of supply, both in terms of supply adequacy (ensuring enough low-carbon plant is built) and supply reliability (i.e. sufficient flexible plants to cover intermittent generation). We are pleased with the announcement in Budget 2011 of a carbon price of £30 by 2020, providing greater financial certainty for the significant investment decisions being made in the next few years. However, while carbon price support is necessary, it is not sufficient on its own to deliver the scale of investment required to meet the UK’s carbon targets and secure energy supplies. It is therefore important that it is seen in the broader context of the forthcoming electricity market reform proposals The EMR consultation is promising but we note that the Government has an extremely short window of opportunity to reform these arrangements and influence investment decisions. There have been worrying recent signs of slippage to the Government’s timetable. Planning The planning regime is still causing significant delays for our renewables power projects, hampering the UK’s ambitious wind programme and therefore undermining much of the work the Government has done on National Policy Statements.

Electricity Transmission

Electricity network transmission investment can take many years. Centrica believes that “anticipatory” investment in the transmission system is essential to ensure the timely connection of the significant amounts of new generation capacity with only minimal risk of stranded investment. . Investing in transmission only after there is certainty that the generation will go ahead risks transmission capacity not being available in time. Underinvestment risks security of supply issues and / or rising transmission constraint costs which will result in increased electricity prices for consumers.

This anticipatory transmission investment should be based on a long-term investment study, for example, the Electricity Networks Strategy Group (ENSG), “Our Electricity Transmission Network: A Vision for 2020” with full stakeholder input.

See also our response to question 3

2. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

Extra capacity will undoubtedly be needed to ensure the complete electrification of transport. However, in the medium term, much of this increased demand is significant only if it falls during peak use. For example, the Climate Change Committee advises that to meet our climate-change targets, 16% of new cars (5% of all cars) should be electric by 2020, rising to 60% by 2030. This would mean a 4.4TWH increase in demand by 2020. As National Grid describes, if every tumble drier was put on at the same time, this would also equal 4TWH of extra demand. The key is therefore flexibility, which both electrified transport and heat can provide. Ofgem noted in July 2010 that: “Demand from electric cars and electric heating, which have the facility to

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store energy, could be relatively flexible and could therefore shift in response to supply conditions” Centrica agrees with Ofgem’s conclusion that, to facilitate this, “the electricity system will need to be able to intelligently integrate the actions of all users connected to it, including generators, consumers and those that generate and consume electricity. The development of a smart grid will facilitate this integration by providing improved information and allowing automation (e.g. electric cars recharging automatically during periods of low prices). This will allow consumers to manage their electricity use.” British Gas is involved in the largest Low Carbon Network Fund trial, fitting 14,000 homes in the North East with Smart Meters and modelling the effects that decentralised energy, microgeneration, electric cars and demand management (including time of use tariffs) will have upon the grid. Ensuring the roll-out of smart meters is a priority for managing both intermittent renewables and electrified heat and transport at the lowest cost (with the latter offsetting the former – provided the consumer receives clear price signals). We strongly believe that 2020 is the absolute latest for a full smart meter rollout, and have already begun our own go-early roll-out.

3. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

As DECC noted, in their response to this Committee on National Policy Statements, “DECC's central projection for UK gas demand in 2020 is now around 70 billion cubic metres (bcm) per annum compared with around 85 bcm in 2010.” This is as a result of energy efficiency measures. We support the general hypothesis that energy efficiency has an important role to play in energy security by reducing demand. In 2010, we asked the Centre for Economic and Business Research to evaluate 40 million British Gas meter readings, taken over a four year period - the largest ever independent analysis of natural gas use in the home. It found that British Gas customers have cut their gas consumption by an average of 22% in the past five years – and saved £322 a year by installing cavity walls, energy-efficient boilers and loft insulation. This 22% average figure masks large differences between homes. Some customers have cut their consumption by more than 44% - whilst some households have still to take up energy efficiency at all. British Gas estimates our customers could save a further £3.6 billion over the next five years if they invest in energy efficiency measures – and believes the Green Deal will be crucial in delivering this.

However, Centrica also notes that this reduction in the use of gas due to energy efficiency could be offset by an increase in demand due to the electrification of heat and cars. Of equal importance for overall UK energy demand is undoubtedly the rollout of smart meters, which will help to manage and smooth demand. In the near future, we believe smart meters will be able to interact with smart appliances in the home to e.g. charge a car when demand (and therefore prices) were low, smoothing out the demand curves which currently require significant excess capacity.

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4. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

As answered in Question 2, Centrica supports the Government’s analysis in the Electricity Market Reform (EMR) consultation that there could be an issue with security of supply, both in terms of supply adequacy (ensuring enough low-carbon plant is built) and supply reliability (i.e. sufficient flexible plants to cover intermittent generation). Ensuring policy support for both low-carbon plant and flexible capacity is essential, as is unblocking the planning system and facilitating a flexible smart grid, as discussed in Question 4.

5. What would be the implications for energy security of a second dash-for-gas?

The first “dash to gas” in the late 1980s / 1990s saw a huge shift in generation from coal to gas (which went from 2% of power generation in 1990 to a third by 2002).

A second “dash for gas” would not be nearly as significant. In most future scenarios, declining longer term gas use in other sectors would outweigh any increase in power generation volumes so that overall UK gas demand will still fall. For example, the Nov 2010 Redpoint report for ENA called “Gas Future Scenarios Project” showed 4 scenarios for UK gas demand to 2050 of which the highest (known as “green gas”) broadly flat at/around current level.

This suggests that UK plc should be able to cope, notwithstanding long term declines in UKCS production – providing we continue to ensure sufficient diversity of supply sources, import routes and provide government support for longer term import contracts where appropriate.

The core concern of any “dash to gas” would be ensuring the UK continues to meet its renewable and carbon targets. Gas can still have a role in this. For example, the European Gas Advocacy Forum, of which Centrica is a member, noted earlier this year that gas offers an economically attractive option to meet our climate change targets, including the UK’s ambitious 2020 renewables targets. Gas could be expected to displace coal (at half the carbon intensity), providing back up generation to renewables and, eventually, become a clean fuel via CCS.

At the overall EU level, the Forum suggested that: “Between 2010 – 2030 alone, total investment costs in the power sector could be €450-550n lower if between 2010 and 2030 we complement building Renewable Energy Sources with a mix of gas and nuclear. This equates to annual cost savings of €150-250 per household.”

Centrica therefore agrees with the Government that gas will continue to have an important role in the future, and that this must be planned for appropriately.

At the present time, the investment environment is looking difficult for new build gas CCGT particularly with plant margins at very high levels. As mentioned in response to Question 3, we look to the government’s EMR to provide the appropriate investment signals for flexible gas plant. With this in mind, Centrica believes that any

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move towards gas would be manageable provided regulatory risk regarding upstream investments is appropriately managed.

6. How exposed is the UK’s energy security of supply to international events? .

As Churchill argued, energy security lies in diversity of supply. 24 companies from 11 countries have invested over £10bn in UK energy markets in the past decade. New gas capacity has taken the form of new Norwegian pipelines, enhancements to existing interconnectors with continental Europe as well as new LNG import facilities. Such diversity is a testament to the success of the liberalised UK market with liquidity of the traded gas market at the national balancing point (NBP) giving confidence and clear price signals to investors.

Nevertheless, there is no room for complacency. Since 2004, the UK has been a net importer of gas. In 2010, the UK imported 40% of its gas needs and this is expected to rise to 55% by 2015. This is misleading, as UK production was equivalent to 59% of consumption in 2010 and this may fall to just over 45% by 2015. The UK gas market has become increasingly linked to the global gas market. Five factors influence the UK’s exposure to the global market (and to price movements as a result): 1. UK continental shelf (UKCS) production and pipeline capacity: as the UK’s

reserves decline, we are becoming more exposed to global events because we are buying from a global market. This can be seen, for example, in the way forward UK wholesale gas prices increased recently in response to the expectation of greater gas imports into Japan. Maximizing recovery from the UKCS is essential; Budget 2011 was unexpected and unhelpful.

2. EU and Norway pipeline imports and capacity: The UK imports most of its gas

from Norway, so Norwegian production is important, as are interconnector pipelines with Belgium and The Netherlands which supply the UK. Historically, Continental gas import contracts have been oil-indexed, whereas the UK moved away from oil-linked gas prices in its transition to liberalised markets a number of years ago. Recently we have seen the gas-oil link beginning to weaken in Continental markets and the continued move towards liberalised markets. A key question is whether this momentum is maintained in the coming years so that Europe genuinely becomes an added source of flexibility for the UK, rather than a problem for the UK market as it has been in the past.

3. LNG import capacity and Atlantic Basin LNG (linked to Pacific and US

markets): The onset of scale production of North American shale gas has fundamentally changed future outlooks. As recently as 2008, the world was predicting that North American imports would accelerate to satisfy demand. Now, North America is expected to be self-sufficient for at least a generation, resulting in an increased supply of LNG available for the rest of the world – at least in the short-term. European shale is not expected to be a game changer. Whilst considerable uncertainty remains, significant shale discoveries elsewhere in the world (e.g. China) could have knock on effects on the UK market, though not for a decade or more.

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4. Gas demand: The global recession resulted in a decline of global gas demand by c. 2.1% in 2009, leading to a more liquid market and increased availability of both pipeline gas and LNG. However, global gas markets recovered significantly in 2010 and are expected to tighten further sometime in the period 2013-15.

5. Gas storage capacity: As discussed in our response to Q2, whilst estimates of

how much new storage is required vary, National Grid believes that storage capacity might need to double by 2020 as we continue to increase our import dependence, and as more intermittent renewables come on stream requiring flexible back up generation and therefore flexible gas supply. Storage provides flexibility to the market though it is not the only form of flexibility as it competes with demand side response and more recently LNG and interconnectors to/from the Continent have also been meeting this role in the UK market.

The UK enjoys well-developed import infrastructure and competitive market arrangements which cope well in tight situations by sending the appropriate price signals needed to ensure new gas supply.

The strength of the liberalised model has been demonstrated repeatedly, not least how the market coped with record demand during the past two winters.

7. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

Provided the barriers identified in Question 2 are tackled, we believe UK energy security can be maintained. In particular, we welcome measures proposed by the Government to enable Ofgem to keep existing market mechanisms open for longer in the event of a gas emergency. The Energy Bill will give Ofgem the power to direct changes to the industry code (the Uniform Network Code) which governs how the gas market operates in order to sharpen the commercial incentives for energy supply companies to meet the needs of their customers before and during a Gas Supply Emergency (if one should ever arise). In turn, this should also sharpen incentives to avoid the occurrence of such an emergency. In particular, we believe that there is scope to provide greater encouragement for the forward commitment of demand-side response.

April 2011

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Annex - About Centrica plc Centrica plc is the parent company of British Gas

o British Gas is the UK’s largest energy supplier, with c. 16 million customer contacts in the domestic sector and around 1 million in the non-domestic sector.

o We are the leading supplier of energy efficiency in the UK, insulating 270,000 homes this year

o We are the UK’s largest supplier of micro-generation, including solar (via our subsidiary, Solar Technologies) Biomass / CHP (via a 19% share in Econergy, a leading biomass boiler producer; Micro-CHP (working with Ceres and Baxi) and Air and Ground Source Heat Pumps.

o British Gas is also committed to Smart Meters, rolling out 260,000 this year o Altogether, British Gas employs c. 10,500 people engineers who require

green skills, many of whom are trained in one of British Gas’ Six Energy Academies.

Centrica plc also owns upstream gas production and power generation assets through Centrica Energy to support our supply businesses:

o Centrica is the second largest producer of gas in the North Sea (the UK Continental Shelf, or UKCS), investing more than any other company in UK security of supply.

o We own 8 gas-fired power stations in GB including one in Langage, near Devon, that is one of the UK’s newest and most efficient generating sets.

o We are a leading developer of offshore wind and were recently awarded exclusive rights to develop the Irish Sea zone which provides us with the potential to develop up to an additional 4.2 gigawatts of renewable electricity.

o Centrica plans to play a role in the UK’s new nuclear renaissance. We own 20% of British Energy, through our Joint Venture with EDF Energy and are undertaking the pre-development activities for a planned nuclear new build programme

o Centrica also has a North American supply and generation business, Direct Energy, which is the largest competitive energy supplier in the USA.

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Memorandum submitted by Shell (UKES 49)

Executive Summary

• The greatest resilience in terms of energy security is achieved through diversity throughout the full supply chain, a key feature of current global oil and gas markets. The UK oil and gas industry has had a strong track record when it comes to delivering secure supplies and the investment needed to respond to the declining indigenous production.

• The UK and wider Europe benefit from abundance, accessibility and diversity of natural gas supplies. In particular, the game-changing effect of the development of unconventional gas globally means that there is now at least 250 years of global natural gas supply at current rates of production.

• Priority should be given to further strengthening gas infrastructure and interconnectors to ensure that the UK and Europe benefit from diversity and enhanced supply security from LNG.

• Concerns about gas price volatility and oil linkage are misplaced and overstated. For example, when oil prices averaged $130/barrel in summer of 2008, the gas price did not exceed the equivalent of $90/barrel. The structure of gas contracts tends to limit gas prices when oil prices are high by, for example, having fixed or variable pricing and other smoothing mechanisms.

• Maintaining investment in the UK Continental Shelf (UKCS) will be critical for realising the UK’s domestic oil and gas production potential and therefore ensuring that domestic supplies contribute to the UK’s energy security for several years. The recent Budget increase to the Supplementary Charge on North Sea production risks long lasting detrimental impacts on investment in the UKCS.

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Q1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices?

1. Oil price volatility is often cited as a threat to energy security. Prices tend to be set by the marginal cost of production. Short-term volatility however cannot be ruled out given the risks around geopolitical and supply disruptions. In addition, oil prices respond not only in cases of actual supply disruptions but also in cases of perceived threats to supplies, reflected for example in price premia at times of geopolitical instability. Improved vehicle efficiency, further use of biofuels, use of new technologies and electrification in transportation can all help mitigate then impact of oil price volatility on the UK economy. So can efforts to improve transparency in markets and promote dialogue between consuming and producing nations, reducing any barriers to timely supply development. 2. There have recently been concerns raised about gas price volatility, particularly in the context of the UK moving towards greater dependence on gas imports. However, the past few years have seen a spectacular improvement in gas supplies from two key sources: unconventional/tight gas and liquefied natural gas (LNG). The IEA now estimates around 380 tcm of unconventional gas reserves are recoverable, which in addition to conventional recoverable resources of 405 tcm, means there are now over 250 years of gas resources at current production rates. These effects have created a well supplied market and had a moderating impact on prices. 3. The projected rapid growth in upstream gas supplies over the next 10-20 years can probably be achieved at costs below $10/MMBtu on average. Given the resource base available, there is more than 100 years of current world consumption available at this cost level (see Figure 1).

Figure 1: Estimated long-term supply cost curve for recoverable natural gas resources

Source: IEA, World Energy Outlook 2009

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Despite the reasonable costs of producing gas there is a widespread perception that future gas prices will be very volatile. Gas price contract indexation to oil is often seen as the key problem. However, in reality:

• Gas prices have historically been competitive to oil prices (on a thermal parity basis). • Gas prices indexed to oil have been less volatile than gas prices linked to NBP1 or HH2.

4. Short-term volatility is best, and powerfully, avoided through having a diverse mix of gas supplies, sufficient storage capacity and an interconnected, reversible-flow pipeline network allowing gas to flow when and where required. Increased European gas market liberalisation will enhance all these characteristics. The UK is one of the best examples of a country with very diverse gas sources. For example, in 2009 the UK imported gas from 10 different countries: piped gas from Norway, the Netherlands and Belgium and LNG from Algeria, Trinidad and Tobago, Qatar, Egypt, Norway, the USA and Australia. 5. Moreover, there are many mechanisms in use in the gas market today to smooth price volatility for gas buyers and consumers such as a fixed priced deals (up to 3 years), flexible pricing (e.g. linked to the NBP or similar) or a variable price with the option to additionally hedge a proportion of the contract and other smoothing mechanisms such as S-curves or indexation to other commodities. So even if oil prices are high, gas prices do not necessarily follow. For example, when oil prices averaged $130/barrel in summer of 2008, the gas price did not exceed the equivalent of $90/barrel.

6. Long-term contracts can incorporate a mix of these mechanisms, where the supplier or intermediary is managing both supply risk and mitigating contract price volatility. Long-term contracts provide benefits in two ways: the buyer is assured of supply, and can negotiate on price and terms to reduce volatility. The supplier is committed to supply even if the price in that market is less favourable than achievable elsewhere.

7. Positive political messaging between supplying and consuming countries can support the development of long-term partnerships and contracts.

8. It should also be noted that greater reliance on intermittent renewable generation in the electricity market is very likely to increase electricity price volatility with prices even being negative when there is too much wind generation on the system. A greater role for gas in the generation mix would offer additional supply flexibility and therefore help to balance supply and demand.

9. The UK’s efforts to meet its 2020 and 2050 carbon targets will further diversify its energy mix in all sectors of the economy. Diversification will aid resilience and provide a hedge against cost and technical and political uncertainties. This applies to sources of primary energy, to energy conversion and to energy transmission, transportation and distribution. Within any primary energy source,                                                             1 NBP – National Balancing Point – the UK’s traded marker price. 2 HH – Henry Hub - the USA’s primary traded marker price. 

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diversification of sources of supply is also needed. Diversification is relevant both to geographic sources and to methods of transportation.

Q2. How sensitive is the UK’s energy security to investment (or lack of investment) in energy infrastructure, including transmission, distribution and storage?

10. Investment in energy infrastructure along the whole supply chain from production to distribution in all forms of energy is key to maintaining UK energy security. 11. Maintaining investment in the UKCS will be critical for maximising the UK’s domestic oil and gas production and therefore ensuring that domestic supplies contribute to the UK’s energy security for several years. In 2010 the industry invested £6 billion of capital and £6.9 billion in operating costs which contributed to the discovery of another 300-400 million barrels of oil equivalent and initiated the development of 13 new fields and four major incremental fields3. The increased investment plans for the UKCS could halve the decline rate of the UKCS over the next five years from 6.5% per annum seen over the last decade to around 3%. If maintained, the recent rise in investment, could have a significant impact on the contribution that domestic resources make to the UK’s future energy supply. However, the recent Budget announcement of the increase in the Supplementary Charge on North Sea production from 20% to 32% could put this at risk and hence as a consequence reduce longer term production. Prior to the new tax changes it was estimated that investment in oil and gas production would increase to £8 billion in 2011, but the recent rise is making companies re-assess their plans. If not mitigated, the tax rise could lead to a loss of planned investment and thus indigenous oil and gas production which increased imports may need to replace. 12. It is also important to note that energy infrastructure projects have a multi-decade lifespan often with very long pay-back periods. Uncertainty over the fiscal, regulatory and market environment could delay or deter such projects coming forward. 13. The UK and European markets have already begun to effectively address the inevitable long-term decline in domestic oil and gas supplies. Europe – including the UK - is within economic distance of 70% of global gas resources. Europe already has an extensive and well-established network of gas infrastructure including many LNG regasification terminals as well as various long-haul pipeline connections for the North, East and South. At the same time, the diversification of pipeline supplies into Europe continues, although the total amount of pipeline supplies is expected to remain fairly constant. This gradually reduces transit risk and the reliance on single pipelines. The majority of the projected European gas demand growth is therefore expected to be met by LNG. This has led many countries already to build their own regasification facilities, sourcing their gas

                                                            3 Oil and Gas UK – 2011 Activity Survey. 

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directly and thus avoiding any possible transit issues, while also gaining access to the international spot LNG market. The IEA’s projection of inter-regional trade flows clearly demonstrates the strongly growing degree of global interconnectivity, with new (mostly LNG) supply corridors opening up from Africa, the Middle East, the Caspian region and even South America. 14. In addition, political signals from consumer governments to major resource holders such as Russia and Qatar will also play a powerful role in encouraging continued investment and alleviating their concerns over demand security. Clear messages to these producing partners that, even as European countries transition to low carbon economies, gas will continue to play a key role in their future energy mixes both in the short to medium term and with CO2 mitigation as a long term option, will be helpful in this context. 15. In the UK, there has been accordingy to DECC figures a 500% increase in gas import capacity in the last decade, the majority of which has been built since the winter of 2005/06. UK infrastructure is now capable of importing around 125% of annual gross demand. Storage capacity in the UK has increased by 25% over the last decade and there are around 22 more storage projects planned, though the increase in LNG flows during the winter may jeopardise some of the storage economics. Increases in the UK’s re-gasification capacity as well as strong interconnection with Europe has widened the diversity and availability of sources of gas supply. The improving physical interconnection between European market regions is an essential factor for enhancing security of supply. As seen in the UK during winter 2009/2010 when there were technical supply constraints from Norway coinciding with record gas demand, and the UK relied on increased imports from the continent to successfully help make up the shortfall.

16. In terms of electricity markets, significant investment is needed to meet the UK’s 2020 and 2050 carbon targets both to decarbonise the generation sector but also potentially double the electricity supply by 2050 as the heat and transport sectors move towards electrification. Ofgem have estimated that at least £110 billion of investment is required in new generation and transmission assets in electricity – over double the rate of the last decade. Switching from coal to gas is the fastest and most cost-effective way of reducing carbon emissions in the power sector. Using gas also relies less on further development of emerging technologies and therefore presents less uncertainty around implementation. Having gas in the generation mix would also require less build out of transmission capacity. An EU level study4 showed that pursuing a future generation mix that has a strong role for gas would require 25-40% lower build up of transmission capacity across the EU over the period 2010-2030, in itself saving between €30-50bn.

                                                            4 EGAF (2011).‘Making the Green Journey Work : Optimised pathways to reach 2050 abatement targets with lower costs and improved feasibility’. 

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Q3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

17. The Department of Energy and Climate Change (DECC) has suggested that electricity generation may have to be close to zero-carbon by 2030. In addition to this challenge, power sector demand may double by 2050, as decarbonisation of the heat and transport sectors means increased use of electricity. 18. Energy security must not be defined solely on the level of reliance on imported fuels, but on the ability of the entire energy supply chain to balance supply and demand at a reasonable cost. Though increased electrification provides further diversity of fuel sources to the transport and heat sectors and as such will increase energy security in these sectors, there will be a challenge to overall security of supply if the electricity system is not resilient. 19. So developments in electrification in the heat and transport sector have to happen in parallel with the appropriate investment in the UK’s electricity generation and transmission capacity. The electricity capacity margin must remain sufficient to keep the lights on even in a situation with higher demand and greater renewable generation on the system. Though technological developments may enhance the ability of the electricity system to deal with greater intermittency, there will be a continued need for some form of flexible, reliable generation.

20. CCGTs as well as gas with Carbon Capture and Storage (CCS) could provide this flexibility, though there is concern that the future structure of the market may limit the periods when their flexibility is rewarded through peak prices. The role of capacity mechanisms should be considered in this context and we have provided further detail to this effect in our response to DECC’s consultation on Electricity Market Reform.

Q4. To what extent does the UK’s future energy security rely on the success of energy efficiency schemes?

21. Much improved energy efficiency is vital not just in tackling climate change but in supporting economic development and enhancing energy security. The European Commission, alongside its publication of the 2050 Roadmap highlighted that although the EU is making good progress on the 2020 carbon and renewables targets, the EU is currently only halfway towards the third goal for 2020 - improving energy efficiency by 20% and that much greater efforts will be needed to meet this target. 22. Energy efficiency will also help meet our climate and energy security targets at least cost. DECC’s estimates of the costs to the consumer of decarbonising the electricity sector for example rely heavily on assumptions made about the uptake of energy efficiency measures and the impact it

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23. In developing policy to promote energy efficiency, consideration needs to be given to the fact that the price signal for energy may be too muted to have sufficient impact on energy efficiency and using price alone to impact energy demand could be regressive. Standards and regulations in transport, buildings, industrial processes and appliances therefore have a critical role to play in encouraging efficiency.

Q5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector?

24. Diversification of energy sources and energy technologies will increase the resilience of the UK electricity sector, but there is a serious risk that an excessively target/volume driven focus on delivery of renewable technologies could create a much more expensive system than is necessary with the costs borne by the consumer and taxpayer. It is not clear that the intermediate 2020 target of 15% renewables for the UK economy is a cost effective or attainable way of meeting the 2050 carbon targets.

25. The increased use of renewable generation will require very large changes to both the operation of the current electricity market and to the generation and networks required to maintain a balanced system. With the increasing penetration of zero marginal cost generation (nuclear and renewables) there will be increasing periods when the electricity price will be zero (or even negative), which will not provide enough reward to generators building peaking capacity, potentially affecting investment in supply. In addition, gas-fired power can be sited close to demand centres whereas accessing electricity from renewable generation located in remote areas will require strengthening the transmission system. Further international interconnection may also be required to balance a more intermittent system. Building interconnectors is a costly and slow process.

26. Last December in the UK, during the three coldest days when temperatures were below zero degrees, wind generation output only averaged 3% of metered wind capacity. Significant back-up and system flexibility will be required to mitigate against these types of shortfalls in wind generation, especially as it becomes a growing proportion of the mix. As mentioned above, gas can be a good complementary technology to intermittent renewable generation. Gas fired power is also technologically proven, has a small footprint, fits into the existing infrastructure and is relatively cheap and quick to build and by replacing coal is the fastest and surest way of making significant CO2 emission reductions. There is a need to ensure in the new market arrangements that gas-fired peaking capacity is sufficiently rewarded.

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27. In the heat sector, all types of technology will be important in meeting the carbon reduction targets required. Renewables and electrification will have an important part to play in diversifying the energy sources used for heating. Conventional gas boilers will still be necessary however in areas where the other solutions are not appropriate or too costly. The benefits of Combined Heat and Power (CHP) plants should not be overlooked and a supportive policy environment must be implemented. CHP is an efficient method of producing both electricity and steam, thus leads to reductions in energy use and reduced carbon emissions.

28. Global transport fuel demand is set to rise by 45% between 2006 and 2030 therefore efforts to reduce greenhouse gas emissions and satisfy this growing demand will require all the sustainable transport fuel options available. These include efficiency improvements for internal combustion engines, progress on battery technology and plug-in hybrids, current and next generation biofuels and, in due course, hydrogen. Given the positive contribution biofuels can make to reducing emissions, Governments should encourage and reward biofuels that demonstrate good CO2 performance and are produced from more sustainable sources. To this end, Shell encourages the adoption of international standards for sustainable sourcing and participates in several initiatives that are working on voluntary guidelines for particular feedstocks.

29. As well as being sourced from a number of regions around the world, biofuels can also be grown domestically further enhancing UK energy diversity and supply security. For example, the Ensus wheat biorefinery, in northeast England turns 3000 tonnes per day of wheat into bioethanol, high protein animal feed, and CO2 for the food and beverage sector and saves around 1 million tonnes CO2 equivalent of global GHG emissions per annum.

Q6. What would be the implications for energy security of a second dash-for-gas?

30. The term ‘dash for gas’ is often unjustifiably used with negative connotations. History shows us that the reality is very different. The increase in the use of gas in the power sector in the 1990s helped the UK meet its Kyoto targets and led to a period of relatively low electricity prices in the UK while having supply security. Despite its very significant advantages, Shell is not advocating sole reliance on any one fuel in any one sector. As noted above, the key way of ensuring the UK’s energy security of supply is maintaining diversity throughout the supply chain. There are many benefits however to the UK energy sector and wider economy in maintaining an important role for gas in the UK energy mix. 31. The benefits that the use of gas can bring from a macro-economic perspective are often underestimated. With deficits and government debt at historically high levels, there is an acute need for strict budget discipline. Most countries will find that natural gas is far more affordable than any other source of electricity, especially in front-end (capital cost) investment terms. Shell estimates that the capital cost comparison of gas-fired power versus other power sources as approximately:

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gas 1; coal 2-3; nuclear 5; onshore wind 7-10; offshore wind 10-15. (NB These estimates are in line with other estimates, such as those produced by Mott MacDonald and included in Figure 2 below. Moreover these estimates do not include the additional balancing and network costs that renewables would incur).

0 50 100 150 200 250 300

CCGT

Coal

Nuclear

Wind Onshore

Wind Offshore (25km)

Wind Offshore (75 km)

USD/MWh

Total CostCapital Costs

Source: Mott MacDonald for DECC

Figure 2: Costs of different generating technologies5 6

32. A recent report by Redpoint for the UK Energy Networks Association7, found that pathways with greater ongoing gas use could offer a cost-effective solution for a low-carbon transition relative to scenarios with higher levels of electrification. Their baseline assumptions indicate potential savings to Great Britain of almost £700bn over the 2010 to 2050 period on a Net Present Value (NPV) basis – around £20,000 per household or £10,000 per person – with consequential benefits for consumers, the economy, and the competitiveness of GB industry. For the power sector the avoided costs are £244 billion over that same period. Moreover, the conclusion that more use of gas in the power sector is the lowest cost pathway is robust under different gas price sensitivities. In addition, this scenario requires the least interconnection with other countries, which can be costly and slow to build. And critically, with this pathway, the UK can still meet its CO2 emissions reduction AND renewable energy targets.

                                                            5 CCGT = Combine Cycle Gas Turbine 6 Total costs = Capital costs + Fuel Costs + Operating Costs 7 Redpoint (2010) – ‘Gas future scenarios project’. http://energynetworks.squarespace.com/storage/ena_publications/ena_gas_future_scenarios_report.pdf

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33. Similarly a study8 from the European Gas Advocacy Forum (a group of European gas companies)9 supported by McKinsey, shows that the EU can meet its 2020 targets10 and an 80% CO2 emissions reduction in 2050 by adopting a pathway that maintains a strong place for gas in the energy mix. Compared to the pathway with 60% renewables by 2050 presented in the European Climate Foundation (ECF) Roadmap 2050 work11, the pathway with a stronger gas component would reduce investment costs by €450-550 bln in the period to 2030. This translates into a €150-250 saving per household per year and will help preserve Europe’s economic competitiveness. In comparison, a 60% renewable pathway would have a direct impact on energy intensive industries in Europe, reducing their margins by 5-10% and putting 20-25 million jobs at risk. Adopting this optimised pathway leaves several technology options that can each deliver the 2050 reductions but does not lock Europe into reliance on a small set of costly technologies. 34. The major energy transformations that are required both in the UK and the rest of the Europe to meet both climate and energy security goals carry significant risks and uncertainties. A key way to mitigate these is to incorporate into the transition process the knowledge gained as sector learning curves develop and supply chains evolve. Growth in gas-fired power in the short to medium term enables a more measured transition to renewables and nuclear, allowing the optimisation of technology and driving down of cost. Some government policies at present effectively “over-subsidise” renewables, involving very substantial investment in early generation wind turbines and solar panels well beyond the pace needed to provide an efficient learning curve for the sector. A more calibrated approach could deliver the same capacity in 10-20 years time at significantly lower cost and with increased reliability and efficiency.

35. Similarly, the supply side of renewable and nuclear sectors risks being overextended as supply chain may not be able to track the growth in demand sufficiently fast, leading to significant cost inflation. Slower build-up in demand would enable significant cost savings as more capacity would be provided later by a deeper, more efficient and lower cost supply chain.

36. One of the main challenges to the case for growth or maintenance of gas in the power generation mix is the perceived likelihood of ‘lock-in’ of fossil fuel technology and their respective CO2 emissions, or the “stranded asset” problem – ie constructing plant which becomes redundant when more stringent CO2 regulation is implemented. Neither scenario need be the case. First, it is coal-fired power which is currently responsible for the fastest sector growth in CO2 emissions worldwide. Modern gas-fired plants emit between 50% and 70% less CO2 than coal plants per kilowatt hour of electricity generated. So replacing coal with natural gas is the surest, fastest and

                                                            8 EGAF (2011).‘Making the Green Journey Work : Optimised pathways to reach 2050 abatement targets with lower costs and improved feasibility’. 9 The European Gas Advocacy Forum (EGAF), is an industry group including Centrica, E.ON Ruhrgas, Eni, Gazprom Export, GDF SUEZ, Qatar Petroleum, Shell and Statoil.   10 EU targets for 2020 are: 20% improvement in Energy Efficiency; 20% Renewables Contribution and 20% CO2 Emissions Reduction from 1990 levels. 11 European Climate Foundation (ECF): ‘Roadmap 2050 – A practical guide to a prosperous, low-carbon Europe’. http://www.roadmap2050.eu/

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cheapest way to reduce CO2 emissions over the next ten vital years. For the UK, Shell analysis shows that, replacing existing coal with gas power plants would lead to a 24% cumulative reduction in UK CO2 emissions by 2050 (see Figure 3).

Source: Shell internal analysis

Figure 3: UK electricity CO2 emissions under different scenarios

0

50

100

150

200

250

300

1980  1990  2000  2010  2020 2030 2040 2050 2060 2070

Mt CO2 / year 

Year

UK - Electricity CO2 emissions

Replace coal with gas

Keep coal 

37. Longer-term, gas power plants should and can be retrofitted with CCS which reduces emissions by 90%. CCS is technically established (all elements are well proven) but the market still has to see scaled-up demonstration and then widespread application. There is very little reason to doubt this is achievable by 2020 and, provided the appropriate regulatory framework is established, we should see large scale CCS take off by 2030. Mott Macdonald (2010) predicts that the premium for CCS versus unabated plants is £32-38/MWh, although the carbon penalty on the unabated coal and gas plants will be in the order of £40/MWh and £15/MWh, respectively (for projects started in 2009). In the longer term, as these technologies move to “nth of a kind status” (or mature status), the levelised costs of CCS equipped plant are predicted to undercut those for unabated plant and CCS equipped plants will see levelised costs of £105-115/MWh with gas at the lower end, and coal at the upper end of the range12. 38. So over the long term, retrofitted gas CCS is cost-competitive with coal-CCS. Moreover, Shell estimates that at $60-120/tonne CO2, retrofitting CCS to modern CCGT power stations will be very cost competitive with new wind and solar – even post 2030 after allowing for their respective                                                             12 Assuming DECC’s carbon price projection which sees EUA prices rising to £70/tonne by 2040, and CO2 transport and storage charge of about £6/tCO2e. 

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learning curves. For example, it costs roughly three-and-a-half to five times as much to reduce CO2 emissions through offshore wind – at $275-$400 per tonne. Even if gas prices more than doubled from today’s levels, according to the Mott MacDonald report gas-CCS would still be cheaper than offshore wind (gas prices would have to be higher than $19/MMBtu for gas-CCS to be more expensive than offshore wind).

39. In addition to the ability to capture the emissions from gas-fired power stations through CCS, there is a vital long term role for gas in a low-carbon power sector as the natural complement to intermittent renewables which need back-up power. Figure 4 below simulates the variability of wind generation in the UK assuming 43 GW of wind capacity installed and real weather experienced in the winter of 2008/9. These facts clearly indicate the need for additional generation that can respond during the extended periods when the electricity output from wind decreases.

Source: Poyry Energy Consulting

Figure 4: Simulated wind generation assuming 43 GW installed

Q7. How exposed is the UK’s energy security of supply to international events?

40. The post-quake humanitarian emergency in Japan and current unrest in the Middle East and North Africa are stark reminders that the energy sector operates in a volatile world and the UK must be ready to respond to external events. But there are many factors which can help mitigate the impact on the supply of fossil fuels. 41. First, the growth in available gas resources – alongside continuing growth in global LNG production capacity - has radically changed the global gas market picture both in terms of supply security and diversity, and price outlook. The risks to the UK of negative gas market shocks are therefore much diminished given this additional global gas market resilience.

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42. Second, oil is easily transported and stored. In addition there are many sources of supply. Therefore, in normal circumstances, physical security of supply should not be a problem because supply is likely to be available at market price. International cooperation and an efficient market would ensure that in times of disruptions spare production and refining capacity in the oil market is made available. A robust global supply chain alongside the appropriate use of stocks can help mitigate most supply disruption scenarios. 43. Even with a successful transition in the UK to a low carbon economy by 2050, we are still likely to be increasingly reliant on imports of oil and in some scenarios gas as well over this period. The new DECC 2050 Pathways show that for most scenarios there is a significant increase in oil imports in the period to 2020, and even out to 2050 there are numerous scenarios under which oil imports continue to grow (see Figure 5). Hence, under most credible scenarios the UK will always need to participate in global energy markets and is very unlikely to ever be energy independent. Energy interdependence is a key driver in international relations and energy security will benefit from greater dialogue and a mutual recognition of demand and supply interests.

Source: DECC

Figure 5: Estimated UK oil imports under different possible pathways to 2050

Q8. Is the UK’s energy security policy sufficiently robust to be able to deal with uncertainties and risks inherent in all of the above areas? If not, how could this be improved?

44. The UK’s energy policy since market liberalisation has been very effective in delivering secure, affordable supplies and ensuring that the UK meets all its energy needs and broader energy sector objectives. There have been no interruptions to supplies in the recent past and the UK has enjoyed some of the most competitive energy prices in the EU.

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45. However, it is clear that with interventions in the market already underway with the introduction of a carbon price floor and proposals in the Electricity Market Reform Consultation, UK policy is shifting away from the fully liberalised model. Within this context Shell believes the following key actions and considerations are needed to underpin the resilience of the UK’s energy sector:

• Recognise the significance of oil and gas production within the UK for a secure energy

supply and generate a stable and supportive environment for continued investments in oil and gas production and infrastructure (see further detail in Question 9 below).

• Encourage investments in producer and transit countries by making clear and consistent statements about the important and continued role for gas in the UK and European energy mix.

• Resolve planning issues for gas infrastructure such as pipelines, regasification terminals, underground storage and CCS.

• Focus on harmonised implementation and effectiveness of existing European legislation/regulation.

• Strengthen the incentives for low-carbon investment, through a robust carbon price and targeted support for early-stage, non-commercial technologies. But take account of the risk that substantial support to nuclear and offshore wind may reduce the attractiveness of, and thus crowd out, investment in gas-fired generation.

• Strengthen the EU ETS in a multilateral way as the best approach to meeting the UK and Europe’s carbon targets and maintaining the market incentives to maintain secure supplies. We recommend that the Government urgently pursues two actions on the ETS with the EU and other Member States:  o A balanced reduction of available credits from Phase III of the ETS. o Early action on Phase IV, including the announcement of a reserve price on auctions.

• For CCS, ensure the four-project UK demonstration programme is delivered through effective funding/financing and with greater clarity on the relationship with the mechanisms proposed to support low-carbon technology.

• Introduce some form of capacity mechanism that offers appropriate incentives to maintain capacity on the system to ensure security of electricity supply. Under the envisaged market structure described in the latest electricity market reform proposals, flexible peaking plant may not be sufficiently remunerated.

• For biofuels, support the introduction of mandatory sustainability criteria and encourage the adoption of international standards for sustainable sourcing.

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Q9. Are there any other issues relating to the security of the UK’s energy supply that you think the Committee should be aware of?

46. The UK’s domestic oil and gas resources, even in decline, significantly contribute to greater energy security. Maximising remaining production must be a priority. The recent Budget increase to the Supplementary Charge on North Sea production could reduce future oil and gas production and increase the UK’s reliance on imports. In order to mitigate the impact of this tax on investment a number of key issues must be addressed. These include:

Gas: 45% of the North Sea’s output is gas, and current UK gas prices are an equivalent of about $60 a barrel - not much more than half of oil prices. Maximising recovery of the UK’s indigenous gas supplies is vital not only for our energy security at a time of concern over reliability of gas imports, but also because availability of lower carbon gas to replace coal for power generation is the quickest, biggest and cheapest route to meeting the UK’s carbon emission targets in the short term. The different status of, and particular threat to gas production by this rise in SCT should be addressed as a priority by the Government to ensure that investments in gas developments, in particular in “difficult” reservoirs, continue to be attractive. Lost investment opportunity: The market for most of the industry supply chain is global, and a one-off shock in one jurisdiction at a time of higher oil prices will lead to resources (rigs, vessels, people etc ) being redeployed in higher margin/more stable jurisdictions elsewhere. Moreover, the maturity of much of the infrastructure in the North Sea means that any hiatus in planned investment could hasten decommissioning of existing infrastructure. Much of the hitherto planned investment depends on this infrastructure, and will be irretrievably lost once decommissioning sets in. Field allowances: Investment in some of these categories (Deepwater West of Shetland; Heavy Oil and High Pressure, High Temperature gas and liquids) was partly incentivised by allowances in the pre-Budget 2011 fiscal regime. These special field allowances are at risk of being undermined by the SCT rise and a review is required to ensure that new developments will still proceed Decommissioning: Despite the current joint government-industry process to resolve continuing uncertainty around decommissioning costs, the Budget also restricted decommissioning tax relief to the previous SCT rate of 20% alongside the SCT increase to 32%. This creates additional uncertainty on the relief for PRT fields. Older PRT fields: These will also be hit particularly hard as the marginal tax rate increases to 81%. They are generally older, higher opex, lower unit margin fields requiring significant investments to maintain the facilities. Many of these fields have cessation of production dates looming, which may now be accelerated, bringing unnecessary loss of production and revenues. April 2011

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Memorandum submitted by the Nuclear Industry Association (UKES 50) The Nuclear Industry Association (NIA) welcomes this opportunity to submit evidence to the Select Committee’s inquiry. Modern developed industrial societies require constant, reliable and secure supplies of energy, so this is a very important topic. NIA is the trade association and information and representative body for the civil nuclear industry in the UK. It represents over 250 companies operating in all aspects of the nuclear fuel cycle, including the current and prospective operators of the nuclear power stations, the international designers and vendors of nuclear power stations, and those engaged in decommissioning, waste management and nuclear liabilities management. Members also include nuclear equipment suppliers, engineering and construction firms, nuclear research organisations, and legal, financial and consultancy companies. Since the NIA’s main focus is the electricity sector it is not in a position to provide detailed responses to all the Committee’s questions. We have therefore concentrated on those where we believe we believe we have most to contribute. 1. How resilient is the UK energy system to future changes in fossil fuel and uranium prices? So far as the electricity sector is concerned this will depend on what new capacity is built to replace the power stations that are retiring. Over the next decade and a half all but one of our existing nuclear stations could close, along with much of our coal fired capacity. Urgent investment in replacement generating capacity and associated infrastructure will therefore be required to ensure the reliability and security of Britain’s future electricity supply. We agree with Government that a start must be made soon on building low carbon technology – new nuclear as well as renewables and coal with CCS. Delays in taking decisions now could result in the UK becoming locked into a high carbon scenario. New nuclear stations will help to maintain the diversity – and hence the security – of energy supply. Global experience shows that nuclear stations operate reliably, and their operational and refuelling characteristics mean that they can continue to generate electricity at or close to maximum output even if refuelling were delayed beyond the typical 12-18 month schedule. Conversely fossil fuel plant would soon have to shut down if their fuel supplies were interrupted. With regard to uranium there are sufficient supplies in the UK to fuel the UK’s current fleet of nuclear plant for many years to come. Uranium can also be stockpiled if necessary. Moreover because the price of uranium is not directly correlated to global oil and gas prices, and because the fuel and operating costs are a low proportion of the overall costs, nuclear generation is relatively unaffected by uranium price fluctuations. If global demand significantly affected the price of uranium, it would only have a limited effect on the cost of generation. Against this background nuclear plant is in a position to act as a stabilising influence on UK wholesale electricity prices. It can also provide large scale reliable and secure generation that would maintain electricity supplies in the event of disruptions to other fuel supplies. 3. What impact could increased levels of electrification of the transport and heat sectors have on energy security?

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Increased levels of electrification of the transport and heat sectors is likely to lead to greater electricity demand, and thus the need for further electricity generation. It is important that this additional requirement should be provided by a diverse range of generating options, including new nuclear and renewable generation. If this additional generation were to be met from new gas plant the UK would become even more dependant on imported energy sources than it is now. 5. What will be the impact on energy security of trying to meet the UK’s targets for greenhouse gas emissions reductions as well as increased penetration of renewables in the energy sector? As discussed in our response to Question 1 above we believe that new nuclear stations can make a major contribution to achieving both the Government’s carbon reduction and security of supply targets. 6. What will be the implications for energy security of a second dash for gas? In our view it is in the national interest to avoid a second uncontrolled ‘dash for gas’ for replacement capacity because it increases dependence on a single imported fuel source from potentially unstable parts of the world, increases emissions, and exposes the country to the risks of price volatility. 7. How exposed is the UK’s energy security of supply to international events? Whilst this is more an issue for energy analysts it is clear that as North Sea oil and gas reserves run out Britain will become increasingly reliant on imported supplies of both oil and gas, and that foreign developments will determine UK gas – and therefore – electricity prices. A more diverse generation mix, by avoiding overdependence on a single fuel source, would help mitigate these risks. Although it might not necessarily lead to the lowest prices at any given time, a diverse mix of generating plant using a variety of fuels would contribute to stability in electricity prices over the longer term by enabling plant whose fuel costs had risen significantly to be displaced by plant which is cheaper to operate. April 2011

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