Keeping the lights on at a price

Ofgem warns of tightening electricity generating capacity and the UK government unveils a package of energy measures. But will they be enough and at what cost?

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Ofgem is concerned that margins “could tighten” in 2015 to 2016 to between around 2 and 5% depending on demand. This means that the probability of a supply disruption increases from 1 in 47 years now to around 1 in 12 years for 2015/16 or lower. In simple terms that’s pretty scary for keeping the lights on without big foreign imports over the interconnectors.

Perhaps significantly in the UK Government energy turf war it was the Chief Secretary to the Treasury Danny Alexander who announced a higher than expected £155 per megawatt hour “strike price” for offshore wind farms. The aim being to add “eight to 16 gigawatts” of offshore wind capacity. The price of onshore wind is now set at £100/MWh during 2014 and 2015 decreasing to £95/MWh in 2018 to 2019. Tidal and wave power has been set at £305/MWh from 2014 to 2019. The strike price for carbon capture and storage is expected at a later date.

They also announced an intention to consult in the summer on additional support for renewables projects located on Scottish islands (where these have clearly distinct characteristics to typical mainland projects). This is to allow a differential strike price to be set for these projects in the final Delivery Plan in December.

There was nothing in Alexander’s speech today on the much anticipated agreement on a new nuclear plant with EDF at Hinkley Point in Somerset. These negotiations have been described as “one-sided” by the shadow energy secretary Tom Greatrex. He said Labour supports new nuclear “but not at any price” and that Parliament should be able to scrutinise the deal with EDF Energy to ensure “a palatable headline price” was not agreed at the expense of other details. There is also a question mark over the loan guarantees being offered to nuclear. Surely this is a subsidy for nuclear that was supposed to be ruled out by the coalition agreement?

The big winner appears to be shale gas. The UK Government announced findings from the first independent study conducted by the British Geological Survey, of the potential volume of shale gas in the Bowland Basin and beyond, which covers 11 counties in the North of England. They have estimated that there is likely to be some 40 trillion cubic metres (1,300 trillion cubic feet) of shale gas in the ground in this area. That’s potentially a lot, but we still have no idea how much of that can be safely extracted.

None the less the Scotsman reports that an expert at Edinburgh university, Professor Jane Bower, believes that the English findings mean that similarly large reserves will be found in Scotland. She suggested Scotland should turn its attention to shale gas extraction instead of wind power, which is likely to see its costs “rapidly escalate year by year”.

Either way, the UK Government is introducing tax and planning incentives to encourage extraction in England. George Osborne said in the Spending Review that the government would “make the tax and planning changes which will put Britain at the forefront of 
exploiting shale gas”.

Others are much more sceptical believing that we may only be able to extract around 4% of reserves and even that will be at an uneconomic price. Damian Kahya analyses the evidence for Greenpeace and argues “using a geological survey to pre-announce a shale gas driven boom could risk putting politics before scientific or economic reality.”

To that you can add environmental concerns. Scientists at a US university analysed 141 drinking water samples from private water wells across the Pennsylvanian shale basin where extraction has been taking place and found that, on average, methane concentrations were six times higher and ethane concentrations were 23 times higher at homes within a kilometre of a shale gas well.

Busy day on the energy front, but it’s still not clear if the lights will stay on – and if they do it will be the consumer that pays the price.

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