The UK energy market is being rushed through an enforced update because it has been neglected for the last fifteen years or so. Today we are embroiled in that legacy.
When the Large Combustion Plant Directive was first proposed it made sense to phase out the large emissions emitting power stations and replace them with a greener and more efficient ones and that was the general view at the time so that the EU could comply with its environmental directives.
Now, ten years on as the stations are being phased out with 7.5 GW scheduled to go by 2015 but only 2.5 GW being replaced, we realise that we have not only a potential capacity shortfall but also a shortfall in the sustainable capacity coming from Renewables. The original question that this strategy provoked was “If new renewable capacity is not sufficient, will the Government of the day reprieve those stations under the LCPD or let the lights go out?”
We still do not have an answer but what we do know is that there were no plans to invest further in the actual plant designated for shut down under the LCPD and that it would be run down to the point beyond which it could go no further anyway. So, reprieve for much of it, without substantial investment is an unlikely option.
National Grid is naturally confident over supplies for the forthcoming winter. Demand for gas will be similar to last year and there is a range of different supply sources while for electricity with more planned scheduled for closure and not being replaced the situation will be tighter. Nevertheless, assuming we get through this winter, the next will be more demanding as closures take affect. We hear talk of large industrial customers cutting consumption in times of high demand but does this mean the return of interruptible gas contracts and the creation of such contracts for electricity?
Back in 2004 a statement from the Parliamentary Office of Science and Technology stated “The shift from domestic gas surplus to import dependency may leave the UK more vulnerable to supply interruptions and gas price fluctuations”. Yet, in spite of the warning, the UK has continued to deplete its supply of gas by exporting it through the Bacton Interconnector to the Continent. Now, nine years later, the UK can only supply around a quarter of its own gas needs while looking ahead to 2020, gas needed for generation will more than double to around 70% as it replaces coal and oil fired plant.
Concern over the cost of domestic energy is high on the agenda again following the latest round of price increases but this time politicians have attempted to gain from the situation. Ed Miliband for the Labour Party has promised to “freeze” prices for twenty months while David Cameron, Prime minister, in response, has expressed frustration at the impact of “green taxes” from domestic utility bills. Yet, with supplier profit margins running at 3 to 5%, consumers are quick to castigate them but when other organisations that thrive off public expenditure, like supermarkets and high street stores, make good profits they are applauded and customers switch to the best!
Senior Politicians don’t necessarily want to understand how the market operates but prefer to use the headline of the day for political advantage where they can. Their agendas may differ although in the background there is actually much cross party consensus on what needs to be done although environmental issues are often where the disagreement arises. We have a fluid wholesale market to which we add a range of pass through costs and taxes to reach a delivered price. The idea of fixing the delivered price while the components remain flexible simply doesn’t make sense.
