Clive Moffatt has over 30 years of experience as an energy market analyst. He founded and chaired the UK Gas Security Group (UKGSG) from 2017-19.
As the start of the energy decarbonisation programme in 2013, various participants in the gas to power chain warned the Government that the UK was especially vulnerable to supply and price fluctuations in the global gas market – because of our growing dependency on imported gas for heat and power.
In the harsh winter (2018) and now, these predictions have proven correct.
This problem will not go away and consumers, industry and infrastructure investors need to be reassured by government that the need to underpin energy security and affordability will not be ignored in the pursuit of Net Zero.
The following announcements from No 10 would go some way towards restoring consumer and market confidence:
Commit to energy security and affordabilty
Neither Parliament nor the electorate voted for Net Zero and the Government needs send a clear message that for very good reasons – such as technological constraints, security of supply, industrial competitiveness and affordability – reaching the Net Zero target by 2050 may not be possible.
There is very little credibility to be gained at COP26 by the Prime Minister seeking to lead the world on reducing emissions when his own energy policy is in a shambles.
Abolish retail energy price caps
There is no economic sense in capping retail energy prices when you have no influence over wholesale market prices. All that happens is that weaker suppliers go bust and Ofgem ends up having to raise the cap.
Caps may benefit larger better resourced suppliers by making it quicker and easier for them to grow market share but there is a little benefit to the consumer. Better to let the market work and instruct Ofgem to tighten the financial tests it uses to judge the credibility of existing and potential suppliers.
Encourage investment in UK gas storage.
The UK will be almost totally dependent on imported gas from 2025 and with storage capacity at less than two per cent of annual gas demand, policies are urgently required to encourage new investment.
This could be achieved via an obligation on suppliers and shippers to keep a proportion of their annual gas demand in annual storage or via a capacity market auction to award capacity payments to winning bids to underpin new investment in seasonal and flexible storage capacity.
This should include an allowance for the planned growth in hydrogen production to fuel heat and transport and the need for related hydrogen gas storage.
This new investment will mitigate wholesale gas and electricity price volatility and help pave the way for a more secure and affordable transition to Net Zero.
In addition, more needs to be done to increase short-term liquidity in the gas market via a system of Demand Side Reduction (DSR) (as with electricity) which rewards industrial users (on an auction least – cost basis) for voluntarily curtailing their demand at times of system stress.
Use gas to bridge the generation gap
With the demise of coal and retirement of existing nuclear capacity the UK is very short of both regular baseload and reliable flexible power generation to compensate for the planned expansion in intermittent renewable energy.
Natural gas is the only cost effective and reliable solution.
In the medium term some 10GW of new baseload generation is required and this should be provided by unabated gas via a new capacity market auction.
Carbon capture and storage (CCS) to remove the CO2 is still an expensive prototype – requiring more gas, raising electricity costs – and so initially all new large- scale gas plant should be CCS compatible but not compulsory – additional capex and opex incentives and preferential despatch could be available later when CCS proven.
In addition, a separate auction should be run to procure smaller scale (eg 300mw units) via a separate auction for flexible generation with unabated small -scale gas being allowed to compete with batteries and Demand-Side Reduction (DSR) on the basis of strict criteria relating to network locality, reliability and costs with penalties for non-delivery.
Establish an Independent Energy Authority
Finally, more consistency and long-term coherence are needed in how energy policy is designed and implemented. The current fragmentation and politicisation of energy would be removed with the creation of an independent Strategic Energy Authority (SEA), with an independent chair and expert management board.
This would reduce the policy burden on BEIS, remove the need for the Climate Change Committee, allow Ofgem to focus exclusively on retail market competition and remove potential conflicts within National Grid as grid investor/owner and system operator.
Such an authority could:
- set long term investment targets for generation transmission and distribution based on the need to balance emissions reduction against security and affordability;
- create a consistent and cost-effective policy framework (eg long-term gradual price trajectory for carbon and capacity auctions) to ensure fair competition between different forms of energy supply;
- oversee the system operation of the electricity and gas market and facilitate greater liquidity in the short term balancing markets eg gas storage and DSR in gas; and
- liaise directly with Treasury to define and publish long- term budgets for taxes and levies impacting on consumers and industry.
In the words of our Prime Minister, this would be a “grown-up” rational approach to energy. His key message from now on should be that the pursuit of Net Zero is not incompatible with the urgent need to deliver to consumers and industry secure supplies of affordable energy.