On a beautiful autumn morning in St. James’s, The alfaenergy Group, led by Chairman John Hall FEI, gathered at The Royal Society to host a look at the prospects and implications for commercial energy users affected by the latest developments in the UK and European energy markets.
As the invited guests gathered ahead of the scheduled start, the energy market activity was more charged than usual. The publication of the National Grid’s Winter Outlook for the coming 2014/15 winter had caused much media excitement around the power generation margin available to the UK grid for that period. Many of the speakers had spent the early morning dashing from one radio or television studio to another, debating the issues thrown up by the report.
With the day’s program nicely framed by events, the chairman called the conference to order, welcomed the audience, and briefly outlined the themes of the day before introducing the first speaker.
The views contained herein are an interpreted summary of the presentations submitted by the authors. They are not necessarily the views of alfaenergy Group.
Professor Charles Hendry FEI, MP.
Former Energy Minister and current Trade Envoy to the Caspian
“What to Expect in the UK Energy Market, within the EU, Accepting Climate Change Responsibilities”
Charles Hendry has in past years been at the very heart of UK energy policy, being both an energy minister and long-standing shadow energy spokesman. Unlike so many transient ministers, he has an active interest in the energy arena as chairman and advisor to energy related organizations. Against the backdrop of the morning’s news, Charles gave an interesting insight into the problems governments have faced in recent years.
- Current issues in system inevitable in terms of policy outcomes. EMR is a big step in the right, long term direction.
- In short term, politics at odds with longer term needs. Energy planning has been neglected.
- The trilemma of supply security, affordability, and sustainability are, in this transition, phase conflicting. Today, supply is the focus. Six months ago it was affordability and 6 years ago it was sustainability. Without security, the others cannot meaningfully exist.
- In a new world where Europe is driving towards the successful de-carbonisation of electricity, if not energy, global consumption and emissions still continue to rise. Despite the pain being felt in terms of pricing, the UK still lags on renewables within the EU.
- As the push for de-carbonisation has accelerated so has the need to redesign the whole energy landscape. Smart grids and technologies take generational planning and investment.
- Regulators have been fixed on price issues and not future need.
- Gas storage remains a key area for improvement in the UK at both large and micro scale. Under difficult conditions, the UK has recently come close to running out of gas several times in the last few years.
- Shale will prove much more difficult in the densely populated UK. Don’t expect the US experience.
- Politics still providing barriers to investment. Reckless promises do not aid the huge investment case.
Jeremy Nicholson
Director General, the Energy Intensive Users’ Group
“The Impact of Energy Costs on the Energy Intensive Sector and What is Needed from Government”
Jeremy provided a lucid overview of the problems faced by the UK’s energy intensive industries covering manufacturers in the ceramic, chemical, glass, paper, steel, and mineral sectors.
- Energy cost inequality remains the biggest problem faced by intensive users. The cost of energy in the UK is some of the most expensive in the industrialized world.
- Climate policy costs In the medium term, upside pressures will continue to build with the drive for high cost renewable generation capacity seeing CfD strike prices set much higher than originally expected.
- Carbon leakage Ultimately, the cost of climate policies within the UK and EU is not reducing global demand or carbon output, it is simply exporting it along with British and European businesses.
- The UK government is finally listening, but insulating energy Intensive users by way of subsidy doesn’t address the overarching issue of affordable security of supply.
John Kemp
Senior Market Analyst, Commodities and Energy at Thomson Reuters
“The Change in Global Commodity Markets since 2008 and Implications for Future Energy Costs”
John delivered a compelling presentation demonstrating that globally we will continue to consume(and find) ever greater amounts of fossil fuels. He opened his presentation with a quote from Martin Wolf. Under the premise that world energy is on an unsustainable course he noted that “putting carbon into the atmosphere is what we do” and we continue to do so at an ever increasing rate.
- The energy trilemma came into focus again: it must be affordable, secure, and sustainable. Not everyone will have the same focus or priorities.
- The variation in energy prices, particularly oil over history shows that forecasting long term prices, often triggered by unforeseeable events, has limited success.
- What is clear is that energy demand will continue to rise with over a billion people in the world having no access to electricity.
- Despite this demand growth, the world continues to discover more fossil fuels. Peak coal, oil and gas theories have proven to be unfounded. Technology driven advances means that not just post-shale but over the last 20 years oil reserves have grown significantly.
- Recoverable reserves of oil and gas sit either side of 200 years with 3,000 years for coal.
- In 2014, the US is expected to recover 9m/bpd, rivaling Saudi Arabia’s, which is near 10m/bpd.
- In real terms, energy affordability remains stable in both the US and UK.
- For the effective reduction in overall global emissions, more efficient ways of burning fossil fuels are essential.
- Fossil fuel usage and emissions growth remains certain, though, with China and the Middle East countries the fastest growing CO2 emitters.
Malcom Grimston
Honorary Senior Research Fellow, Imperial College, Imperial Centre for Energy Policy and Technology
“Achieving, in the Short Term, Adequate Long Term Sustainable Generation Capacity – the Sad Tale of a Failing Market”
Malcom delivered an engaging look at current energy policy, contextualizing how we got to where we are, the key drivers in getting there, and what it might have looked like if we had adopted a different model.
- Liberalisation is a product of the rejection of a centralized command model in electricity generation.
- Framed by memories of the power of the 1970’s and of the NUM.
- A fully diverse fuel mix with lots of capacity at the end of the 1990’s.
- Diversified generation assets meant unsustainably low prices in 2003. Generators went bust and companies stopped investing as the economic case disappeared.
- 2003 White Paper on energy saw no need to replace the nuclear fleet, blinkered by plentiful and cheap gas.
- By 2008, the government, now having witnessed a shift in gas generation economics, signaled that if the market wanted to pay and deliver it nuclear was now an option.
- De-carbonisation agenda from Europe and ageing generation plants meant that the market model was not grasping the big issues. The capital investment world looked very different after the banking crisis and collapse of 2008.
- Change in attitudes: Electricity is a commodity like no other. As generation capacity ages, opinions have polarised as to whether electricity is a public good or private enterprise.
- Government, like the free market, has grasped EMR very late in the day. The removal of market failures in the investment phase of plant building with state control, but private enterprise operation, we could perhaps have delivered low carbon affordable energy by now.
Dermot Nolan
Chief Executive Officer, OFGEM
“Objectives and Aspirations for Suppliers and Consumers”
Dermot used his presentation to outline the current focus of OFGEM. Key points for I&C buyers were:
- Current focus has been largely driven by domestic/micro business needs. The poor levels of tariff switching, legacy customer bases, vertical integration, and a lack of competition between participants being key drivers in the referral to the CMA.
- The referral to the Competitions and Markets Authority could have significant impact on commercial electricity users dependent on the outcomes. The report is not due until December 2015, although initial findings may be issued in the summer of 2015 (post-election). Separation of vertically integrated supply companies, should it be deemed necessary, or a return to pre 2000 style pool arrangements for the setting of energy prices, both under consideration in the referral, would have massive impact on all energy users in the UK.
- EMR is now complete, if not operational. Despite the politicization of energy in recent years, it is not expected that any new government in 2015 would seek major policy change.
- On the role of OFGEM in the I&C sector: The commercial user experience differs vastly than for the domestic user and levels of competition are far greater.
- On TPI’s: An estimated 66% of I&C energy contract holders are being advised by TPI’s. This market is not a current priority although it remains in the background for future consideration.
- In the longer term, a readjustment must take place. Ultimately policy and regulation should provide a stable environment promoting good practice and fair treatment.
James Summerbell
Head of Group Energy Buying, Tesco Stores Limited
“Buying Energy for a Diverse Multi-site Organization”
James presented an insightful overview of how he and his team help Tesco manage their large multi-site, multi-country energy spend. Having seen many diverse market conditions over the last 10 years, he has reached several conclusions:
- Have a strong governance and operating model with clear achievable objectives.
- Ensure the right people are in place and are given/providing clear and consistent messages.
- Process. Ensure the team standardises procedures as far as the markets allow. Regional power exchanges and single suppliers can really help here.
- Understand that buying in a commoditised market presents very different challenges to those presented elsewhere.
- Don’t pretend you know where the market is going in the long term.
- Get control of your data and in doing so don’t be afraid to outsource if and where necessary.
- Look at all the options, especially the new or fashionable ideas, but don’t assume that they are automatically the answer.
- Above all, manage expectations.
Damir Ahmovic
Chief Executive Officer, alfaenergy Group
“Renewable Energy as an Asset Class”
Damir discussed the concept of businesses looking at energy as an asset class not just a cost.
- Identify where your organization sits on its strategic objectives regarding energy. Energy as a cost and operational headache or, through embedded generation as an asset?
- The current regulatory framework sets out subsidies into generation over the short/medium term.
- Micro, or larger size asset investments don’t just offer a fix on costs and provision of supply security, but yields on investment that currently outperform most others by a multiple.
In closing the day, John Hall thanked the speakers and invited guests. The day had provided many talking points not only in the active Q&A sessions but also during the session breaks.
