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.
The inflated long-term targets set last week for nuclear and wind power generation will not ensure security and affordability. What they will do is fuel a rapidly rising spiral in energy charges and taxation for many years before any new power is delivered. As the founder and former chairman of the UK Gas Security Group, what I outline below is what I believe to be a more coherent and realistic strategy.
Well before the Russian invasion of Ukraine, the risks to energy security (supply and price) were rising as the UK and other Western countries turned away from coal and became more reliant on natural gas to support intermittent renewable energy. What sort of policies can the Government pursue to deal with this urgent problem?
1. Abolish Price Cap and Rebates
There is no sense in capping retail energy prices when you have no influence over the wholesale market.
Caps benefit larger, better resourced suppliers by making it quicker and easier for them to grow their market share. Better to let the market compete while tightening the financial tests that are applied to existing and potential suppliers. Ofgem’s failure to check on energy suppliers that have now gone bust has already cost consumers some £2bn.
The retail price rebate scheme is based on the false assumption that the future direction of wholesale prices can be expected to fall long enough to allow suppliers to recoup the loans through higher prices. Furthermore, price rebates are a “blunt” policy instrument benefiting all but in particular those who can afford to pay more.
Fuel poverty should be addressed through the existing benefits system and not via blanket rebates on Council Tax and energy prices.
2. Support New Investment in Gas Security of Supply.
Natural gas has a critical role to play in the energy mix up to and beyond 2050. Increasing on and off-shore gas production will reduce the threat of imported gas supply shortages. Moreover, the rationing of gas and electricity and more gas storage (now only 2% of annual demand) will reduce energy price volatility.
More domestic gas production will also be required. The decision to proceed with additional North Sea gas exploration and development should be welcomed but fracking also has a role to play in reducing the UK’s dependence on gas from the Norwegian and EU pipelines and global shipments of LNG.
More gas storage capacity could be built in the next 5-10 years by imposing an obligation on suppliers and shippers to keep a proportion of their annual gas demand in storage linked to a storage capacity auction. The amount auctioned should include an allowance for the possible growth in hydrogen production to fuel heat and transport.
National Grid does not have responsibility for the real-time balancing of the gas market (unlike its role as SO in the electricity market) and so, if shippers refuse to pay high prices, or cannot access LNG when required, and suppliers see a shortfall emerging, the effect is not only to raise prices but to trigger a gas supply emergency.
More could be done now to avoid blanket industrial rationing and increase short- term liquidity in the gas market through a system of Demand Side Reduction (DSR). An option to curtail incentive would encourage some industrial users to agree in advance to curtail demand in advance of any emergency.
3 Support New Investment in Gas Power Generation
In the next 20 years, with the demise of coal and the retirement of existing nuclear capacity, the UK will be short of both regular baseload and reliable flexible power generation to compensate for the planned expansion in intermittent renewable energy.
The answer is not another 40GW of intermittent wind power which would massively increase the system balancing costs: constraint payments and the need to finance back-up fossil fuel generation. Furthermore, there are growing concerns about the “whole life” costs of wind generation linked to reduce productivity of large wind farm clusters off-shore and the costs of repair and maintenance. The target for new off-shore wind capacity should be halved pending a more detailed analysis of a quantum jump in intermittent supply.
Nor is a massive expansion in large or small nuclear capacity the right way forward, despite the attraction of zero emissions. Large nuclear plant takes too long to build and adding decommissioning it is hugely expensive on a “whole life” basis. Taxpayer underpinning of capital costs, and/or penal price subsidies, are required to make large nuclear viable.
Small modular reactors are potentially cheaper to build but, planning concerns notwithstanding, the technology is unproven and there is no established manufacturing base capable of delivering the economies of scale needed to avoid capital cost and/or price subsidies.
To ensure the delivery of affordable cleaner energy in the next 10-20 years and possibly beyond we need new investment in natural gas. In the medium term, probably some 10GW of new baseload gas generation is required and this should be provided by unabated gas via a new capacity market auction and built in the next five years.
Carbon capture and storage (CCS) to remove the C02 is still an expensive prototype requiring more gas, raising electricity costs. So, initially, some new large- scale gas plant should be CCS compatible.
In addition, a separate auction should be run to procure smaller scale (eg 300MW units) flexible generation with unabated small-scale gas competing with batteries and Demand-Side Reduction (DSR) with strict bidding rules on network locality, reliability and costs with penalties for non-delivery.
4 Cost of Carbon and Competitiveness
It would help underpin both new gas and renewable generation if the Government sets a long term, gradually rising trajectory for the price of carbon up to and well beyond 2050.
But manufacturing in the UK should be protected by a carbon equalisation tax on countries with more lenient emissions regimes and manufacturers should be able to claim tax rebates or receive subsidies to help fund high energy efficiency processes.
5 No Deadlines on Sale of Gas Boilers
There are some 25 million domestic gas boilers in the UK which are reliable and cost-effective and run on an established network. Decarbonising domestic heating is essential to the 2050 Net Zero target. But, right now, the costs involved in switching to heat pumps or using “green” hydrogen are prohibitive, and user benefits doubtful.
6 Take the Politics out of Energy
Advocacy rather than rigorous analysis has so far dominated the Net Zero energy debate and the time has come to create an independent Strategic Energy Authority (SEA.) The proposed independent ISO for power and gas addresses only one part of the problem – the conflict of interest within National Grid.
An SEA would go further and set long term investment targets for generation transmission and distribution based on the need to balance emissions reduction against security and affordability. It would also create a consistent and cost-effective policy framework to ensure fair competition between different forms of energy supply. Moreover, it would oversee the system operation of the electricity and gas market and facilitate greater liquidity in the short term balancing market. Finally, it would be able to liaise directly with Treasury to define and publish long- term budgets for taxes and levies impacting on consumers and industry.
The Prime Minister asked for a “grown-up” approach to energy. These proposed policies would deliver it.