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New Generation

6 October 2014

The UK needs a secure, affordable and low carbon energy supply, but a combination of ageing infrastructure and slow policy progress means it’s in danger of not producing enough power of its own. So what are energy firms doing to stop the lights going out? By Pip Brooking.

"Britain on the brink of running out of gas." "Industry asked to curb peak power use"

…Just a couple of the newspaper headlines over recent months highlighting that the UK’s energy future is not secure. Not to mention the furore caused by Ed Miliband’s promise to freeze power prices if Labour wins the next election.

At the end of June, the energy regulator Ofgem warned in its latest capacity assessment that, while it does not consider supply disruptions’ imminent or likely, “risks to electricity supply could increase during the middle of this decade faster than expected” without government reforms to encourage more investment in generation. It went on to state that the probability of a supply disruption would increase from the current one in 47 years to one in 12 years (or lower) for 2015/16.

It’s a threat that energy minister Michael Fallon recognises. “There is an increasing risk of the lights going out if nothing is done,” he agrees. “But plenty is being done now. We are racing to catch up on a decade of underinvestment.”

He points to the Energy Bill, expected to reach the statute books by the end of the year, which offers the framework for electricity market reform, a capacity market and contracts for difference (CfDs) that will encourage the £110bn investment needed to replace ageing assets by setting predictable revenue streams for new projects. “Investors have more certainty, more clarity than they had a year ago,” he says.

It has been slow progress until now though, which means that confidence hasn’t reached the ordinary businessman yet. In the CBI’s latest infrastructure survey, only 23 per cent of respondents said they were confident that energy infrastructure would improve over the next five years – down from 33 per cent last year.

But there are significant new projects under way designed to explore and exploit the UK’s available resources. In the North Sea, a new wave of investment will exploit new fields in the West of Shetlands area, while new technology is helping firms extract in more challenging situations. And developments in wind and tidal energy, new nuclear and shale gas could make significant contributions to the UK’s future energy mix.

Fallon appears confident. “We’re on the brink of a new energy revolution, led by the private sector,” he says. But the companies involved all face challenges to make that a reality. Here, speaking to Business Voice before Miliband’s comments, major companies explain what they’re doing to avoid the plug being pulled on UK growth.

 

The potential for fracking
Francis Egan, chief executive, Cuadrilla

Some people call shale gas a short-term opportunity, but the British Geological Survey estimates that there are 1,300 trillion cubic feet in the ground in northern England alone. The total UK gas demand is three trillion cubic feet per year so we’ve got up to 400 years’ worth of supply.

Not all of that can be recovered of course, and assessing what percentage may be recoverable is one of the main objectives of Cuadrilla’s current exploration programme.

We need to drill a relatively small number of wells to assess the opportunity – as a country we’d be crazy not to. But using our conservative estimate, if you could only get 10 per cent out of the ground, that’s still 40 to 50 years’ gas supply. It’s not forever, but it will potentially play a very important role in the UK’s energy supply.

Comparisons with the US at this stage are often misplaced. On one side people say that the US has transformed its energy supply, lowered gas prices dramatically and created hundreds of thousands of jobs. On the other, people say that it has polluted the water supply in the US. I think the UK will forge its own path, learning where it needs to from the US and making sure that we explore and extract shale gas safely and sensibly here.

In Lancashire we have drilled three shale gas wells. The government took a cautious approach after the seismic tremors in 2011, but at the moment we’re finalising site selection for a number of further exploration wells which we’ll announce within the next few months. We’re completing planning applications and environmental impact assessments for those – that’s quite a lengthy process, so it will likely be the second half of next year before we are able to start activities back on the ground again.

There’s obviously been a lot of media attention around our well in Sussex, which ironically is not a shale well at all, it’s an oil exploration well – there’s no fracturing going on.

There will always be some protests. You see that against all energy developments: wind farms, solar, nuclear, coal stations, gas. But the fear and myths can best be addressed through rigorous independent academic studies.

The most recent study from the UK’s scientific advisor at DECC for example, shows that methane emissions from shale gas wells were expected to be comparable to conventional gas and lower than gas imported to the UK by ship or pipeline. There’s no data to support the myth that shale gas is more harmful to the environment than coal – the reverse is actually the case.

We need to get the facts out into the open and as we develop a few sites people should see it for what it is. It helps that Centrica has joined us in the licence in Lancashire, committing significant funds and contributing a lot of expertise. Seeing a company like Centrica put their brand behind this is important for public confidence.

The government has certainly been supportive of shale gas exploration but we need to translate policy into action on the ground. The UK economy needs energy and employment – and here’s an industry that could potentially provide a lot of both. The UK’s businesses also desperately need secure and cost-effective energy sources – if we outsource all our energy supply, we’ll end up outsourcing all our manufacturing and the associated jobs as well. 

 

Wind brings opportunity

Brent Cheshire, UK chairman, Dong Energy

Dong Energy has invested more than £4bn in the UK over the past few years. Originally we were very much an exploration and production (E&P) player – and there’s still a very good future for us in the new fields, West of Shetland – but now 75 per cent of our investment is in offshore wind.

With the addition of London Array, completed over the summer, we have installed enough offshore wind in the UK to power a million homes. We’re aiming to generate three times as much by 2020. We’ve also set ourselves the target of reducing the cost of current generation by 40 per cent by that point.

The only way we can drive the cost of wind down is if we have a full pipeline of projects, where we can commit to things and learn as we go. This gives us the opportunity to develop a more efficient process, bigger turbines and more modular foundations as we go into deeper water. Our pipeline is dependent on the new regime – coming off the back of electricity market reform – giving us the clarity that we need to ensure that we want to continue to invest.

We’re starting to get that now, but we also need the supply industry, such as turbine manufacturers, to come with us. And there still isn’t a clear carbon target after 2020, making it difficult to build the case for people to develop skills, the workforce and manufacturing in the UK. We risk losing a subsidy for not procuring enough in the UK [the government has set a 50 per cent target], but we can’t actually buy it here. If that becomes the rule, we’ll go and do this somewhere else.

Saying that, we recently underwrote a £50m investment in Belfast Harbour, where we transport our components and assemble them before installing the turbines in the Irish Sea. This has created a lot of jobs and will hopefully seed local industry. As a company, we’re trying to do more things like this, but we can’t do it on our own.

Politicians need to deliver what the industry needs. People look to industry to find the solutions, but try telling our investors that.

The predictability of the regime is particularly important as we have to spend tens of millions of pounds to determine whether we’re going to develop a site or not. And our experience on the E&P side has made us nervous – our West of Shetland development was affected very badly by the tax raid when the coalition came to power. When we arrived there was no infrastructure in that area whatsoever. 

For the Laggan–Tormore fields we’ve built the necessary pipelines – bigger than we needed, at the government’s request. Hopefully other gas fields will come into production and use that infrastructure, but we essentially lost the tax allowance that helped pay for it. It made the project more challenging that it needed to be.

 

Leashing the tide

Mark Shorrock, CEO, Tidal Lagoon Power

The UK has the second highest tidal range in the world so it’s an obvious source when looking to fill our energy gap. We think there’s an opportunity to build five or more tidal lagoons around the UK, with 10,000MW installed capacity.

The first is planned for Swansea Bay – a £650m-plus project, scheduled to go live in 2018, delivering 240MW (enough to power 120,000 homes) in an environmentally benign way.

You don’t often get the chance for an energy plant to also become an amenity that can be loved – a tidal lagoon creates a sea reef, allowing the reintroduction of oysters or a mariculture farm; you can run around it and swim in it.

We’ve been working hard to engage local people and to date we have 86 per cent support. And as we’re aiming to see 65 per cent UK content [in the procurement of components] for the project, local people recognise that there is an industry to be created – with the potential to export our expertise.

Renewable energy sources can be criticised on two fronts: the predictability of the generation and cost. You never know when the wind is going to blow, for instance. But we know the size of the lagoon, the volume of water in it and the rate of water flow through our draft tubes – so we know with 99.9 per cent accuracy how much power we’re going to make in any one stint. And with different tide times for different locations around the UK, you are never not going to be generating.

Power generated by the first lagoon will be relatively expensive – the first will be competitive with offshore wind. But by the third lagoon, economies of scale will apply and we will be competitive with the price of nuclear.

The cost of power will be two-thirds of that generated by the first. What’s more, the lagoons will last for 120 years and there won’t be any decommissioning costs. In 30 years’ time, you’re looking at a cost of 1.8p/MWh.

We now need to build that narrative and make the case to Treasury that a greater subsidy for the first is worth it – DECC is willing to negotiate a bespoke CfD with us. Politicians are starting to see that we are serious. They are recognising that there’s good capital behind this and there’s some very strong UK companies interested in seeing it achieved.

Although tidal lagoons are not yet included in the Renewables Roadmap 2020, I’d like to think it will be firmly on it in a year’s time. And although we’ve been advised we’re unlikely to get funding from the Green Investment Bank before 2015, we’re already on their radar. As with any new project, it’s all about gaining acceptance.

 

Nuclear progress

Humphry Cadoux-Hudson, head of new nuclear, EDF

A new nuclear power station hasn’t been built in the UK since 1995, but now new plants are planned to provide the country with the reliable, low-carbon energy it needs for the future. That has happened with strong cross-party political backing and a fundamental reform of the energy market, providing the right conditions to attract investment.

The economic benefits and opportunities for the UK are considerable. It means re-starting the industry and the supply chain that will support new-build projects. That will strengthen the UK’s industrial stamina and allow businesses here to compete around the world for nuclear contracts.

Safety continues to be our priority. Although the European Pressurised Reactor (EPR) is already being built elsewhere in the world, the UK regulator has gone through its own rigorous process to satisfy itself that the design meets UK standards. This has involved 850,000 hours of engineering design work and assessment.

To win planning permission, we carried out one of the largest consultations of its kind over three years. We heard directly from 6,500 consultees, held 34 public exhibitions and 67 meetings with local authorities and other stakeholder groups. There were 109,000 visitors to our project website. We also held a number of focus groups targeted at people such as the elderly and hard-to-reach groups, to ensure no one was overlooked.

We’re now in the process of finalising the main supply chain contracts and we’re working to reach an agreement with the government over the price of electricity to be produced from Hinkley Point C. This must be a balanced deal, good value for consumers and offering a fair return for investors. For the first time, decommissioning and waste costs will be paid for as part of the agreement, so the total cost of the plant is taken into account.

The size of the project is immense – there will be an estimated 50 million hours of construction work on site. All that work has to be planned in detail so that it comes together at the right time. Our philosophy is that we’ll only start construction when we are sure we won’t have to stop.

Although Hinkley Point C is our first new nuclear project in the UK, we’ve also been moving ahead with our plans for Sizewell C in Suffolk. If all goes well at Hinkley, we’ll go on to develop another two reactors at Sizewell.

The impact on skills and training for the UK will be profound. We will be training a new generation capable of taking on big infrastructure projects as well as working in new nuclear development around the world. We have assembled a world-class team to make that happen with experience of successful projects such as the Olympics and Terminal Five. We will demonstrate again that we can build on time and on budget in the UK.

Our new nuclear programme will play a key role in meeting the country’s future energy needs and will rebuild an industry. Once we’ve set the framework, I will be very proud to see others building nuclear power stations alongside us, hopefully benefitting from the work we’ve done to bring savings in time and cost.