Alexander Temerko is a Ukrainian-born businessman and deputy chairman of OGN Group.
Discussions about a looming energy crisis in the UK have grown increasingly urgent in recent years. A large number of coal-fired power stations, once the backbone of the UK’s generation capacity, are due to close next year to meet ambitious EU targets on carbon emissions. In addition, several nuclear power plants are scheduled to be decommissioned by 2018. The crisis in Ukraine and the resulting deterioration of relations between Russia and the West, along with the chaos in the Middle East, have added to the concerns.
The question is this: how are we going to fill the widening supply gap without becoming completely dependent on hostile regimes?
The UK needs new generation, but in these uncertain times it also needs energy security. How can we have both?
According to the Department for Energy and Climate Change, the UK’s current electricity mix is roughly 40 per cent coal, 27 per cent gas, 21 per cent nuclear and 12 per cent renewables – of which, despite huge subsidies, only seven per cent is wind. Coal’s share has actually been rising since 2009 as companies run stations marked for closure at full tilt on cheap exports from an increasingly shale-powered US. The recent growth in renewables has been remarkable, helped considerably by the government, but their contribution is intermittent. In the urgent push to replace coal, gas must be the primary source, supported by new nuclear capacity.
The government seems to have heard the case for gas, having initiated the construction of more than 30 new, cleaner gas-fired stations, and betted on a US-style shale boom to deliver greater energy independence. But, unlike traditional gas production, shale resources are by nature uncertain. Producers need to drill constantly to assess availability, and once invested they have to keep going. This is perfectly possible in the vast open spaces of Texas, but not so easy in Sussex or Lancashire. In the densely populated UK, local opposition to fracking is intense and politically charged – and in any case there are serious question marks over how much of the UK’s shale reserves can be viably extracted.
So what indigenous source can fuel these new gas turbines?
The answer – and this may come as a surprise – lies in the North Sea. The consensus is that the North Sea story is all but over, with production steadily falling and supermajors like BP and Exxon winding down and heading east to Russia.
But recent studies suggest new reserves which, if proved, could alter the picture significantly. Niche operators such as Apache and Enquest are already showing that with the right technology, the huge potential in areas like West of Shetland can be realised. OGN Group, the Newcastle-based supplier of platforms for North Sea rigs of which I have been deputy chairman for six years, is regularly winning major new contracts from these firms and is itself proof that the North Sea isn’t dying.
However, long term investment is imperative, and the government must do its bit by implementing stable and predictable tax regulation. We have seen seven energy ministers in ten years and the policy environment has been dire. If Big Oil shareholders were to see this turned around and the optimists proved right, however, a North Sea renaissance would be entirely possible.
Nuclear’s share of UK power generation has faltered since its peak of 26 per cent in the late 1990s. Early last year, Centrica withdrew from plans to build four new plants due to rising costs and construction delays. EDF eventually forged a deal with two Chinese state-owned companies to build two new reactors at Hinkley Point, with further plans for a new project at Sizewell.
The Coalition was criticised for effectively subsidising EDF’s new commitment despite previous promises not to subsidise nuclear, but this is where a longer term view has to be taken. EDF has eight nuclear plants in the UK, accounting for almost nine gigawatts, of which only Sizewell is scheduled to stay online past 2023. New nuclear capacity is essential if we are to meet EU climate change targets without crippling consumers with ever-higher prices. The Hinkley Point deal is a start; there has to be more.
Just as giant multinationals such as EDF bestride national borders in an increasingly integrated European market, so too do the transmission networks themselves. Alongside new power stations there is another, highly efficient way of bolstering new generation while facilitating intra-EU trade and shielding individual member states from supply shocks. Interconnectors – large cables that allow power to be traded across market boundaries – offer a cheap, quick and clean third option for increasing capacity.
There are already four of these giant cables connecting the UK with France, the Netherlands and Ireland, and I am currently leading a consortium of investors to build a fifth from the nuclear power station at Flamanville, in northwest France, to Portsmouth.
Our project has the capacity to provide enough electricity to power 1.4 million UK homes. Advocates rightly point to the potential of interconnectors to boost competition and exert downward pressure on prices. Plugging the UK into the so-called pan-European ‘super grid’ will take time, and there is much more to do on the continent before a complete physical integration of national markets is a reality, but the benefit to our overall security, and to consumers, is beyond doubt. The immediate hurdles in the UK are to upgrade our connection capacity and to remove policy barriers. With decarbonisation the main culprit for higher prices, new interconnector projects are a no-brainer and should be pursued with urgency.
The important lesson to learn from our European neighbours, and indeed from the US, is that security and stable prices are best achieved by concentrating on one or two areas and doing them well. Shale gas production in the US has grown rapidly since 2005, and now accounts for two thirds of its natural gas. In France, the predominance of nuclear dates right back to the 1973 oil crisis. Germany, through a huge programme of public spending, has pulled off a remarkable revolution in renewables. Italy, where nuclear power is banned, has focused on gas.
The UK, too, must focus on conventional gas and, alongside it, new nuclear capacity and a reorientation of policy towards interconnectors as the only feasible strategy for mitigating rising prices while meeting emissions targets.
That’s not to say there isn’t room for shale or renewables; these industries have a role to play provided they are subject to the same tax and regulation as the rest of the energy sector. If on a level playing field such operations are commercially viable, then they are a welcome addition to a diverse energy mix, but to cosset industries that cannot possibly replace coal as the primary source of power generation is a waste of time and money – and both of those are in short supply.