Keeping the lights on: The UK's looming energy gap and the EU

The UK's energy regulator Ofgem's chief executive Alistair Buchanan made headlines this week by highlighting a looming UK energy generation crisis saying that it:

"will face a tougher challenge over the next few years because of the possibility of a prolonged lack of spare power station capacity."

Very true, but this should have come as no surprise to anyone - Ofgem was already highlighting a serious generation gap in its October 2012 assessment - as others have for many years. To cut a long story short policy decisions (and the lack of policy decisions) over decades mean that, in Ofgem's assessment, by 2016/17 the excess capacity of UK electricity generation over demand is predicted to fall to just 5%. And that is a mid-point estimate - so if demand is higher (a cold winter), there are delays in building new gas plants or a problem with existing plants, there will be even greater problems dealing with peak demand.

In the short term this problem is exacerbated by EU environmental laws that require the closure of large coal plants. This is in addition to the closure of nuclear plants which are coming to the end of their lives.

This is a looming problem for the UK and something politicians of all stripes should be aware of given the political resonance of higher fuel bills and the possibility of black outs. Other than building more coal or gas plants, immediate action could require the UK to seek to renegotiate its legally binding commitments with the EU, something that has been highlighted by the EU Fresh Start Group of MPs.

The UK's electricity generation at the moment:

DECC 2010

This is what Ofgem thinks could happen to this capacity

Ofgem highlights that on a midpoint prediction the UK will only have a 5% safety threshold

The big difference is the decommissioning of coal plants. And if Ofgem is gloomy, some analysts such as Credit Suisse have gone further by predicting that the UK could even end up 10% short.


Credit Suisse

So why is this all happening now? Well there are two parts to this.

Firstly we have the failure of domestic policy. Energy generation has become a political football with politicians from all parties promising to reduce CO2 (a vote winner) without committing to the policies and costs required (a vote loser). Creating new energy generation capacity requires a long lead time, something the current political culture is seemingly ill fitted to.

Secondly, we have the EU. The UK has signed itself up to some of the most ambitious/unrealistic (delete as appropriate) legally binding environmental legislation in the world. Specific to power generation are the following:

2009 Renewables Energy Directive

The renewable target requires the UK to shift from just 1.3% of total energy (i.e. not just electricity) from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state. The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. This is obviously a big ask and it is not clear where the energy will come from.

2001 Large Combustion Plant Directive (LPCD) and 2011 Industrial Emissions Directive

If you look at the graph above Ofgem puts a large proportion of the generation gap down to the decommissioning of coal fired power stations. This is important as coal (unlike wind) is a base load generator and can respond to peak demand. Unfortunately many of these coal plants are due to close.


Kingsnorth coal power station due to be closed by EU emissions legislation

This is due to the LPCD, which is designed to reduce the amount of sulphur dioxide, nitrogen oxides and dust emitted from large conventional power stations. Existing plants had the choice to either comply with the new targets by installing new technology to remove emissions or remain open for a limited period only. In the UK, 11GW of capacity opted out of the Directive and will consequently have to close in 2015 - and some will close sooner. In fact, Ofgem notes that, "power stations 'opted out' under the LCPD are using up their running hours faster than expected" and that "most LCPD opted out plant will come off the system well before the 2015 deadline."

In addition, the EU's Industrial Emissions Directive will place restrictions on the operation of some existing coal and older gas stations from after 2016/2017.So what can be done?

The problem needs a solution in two parts. Firstly the UK needs a huge amount of investment in new generation capacity of all flavours. For instance in 2011 the Government noted that:

“Around a quarter of existing power plants in the UK are due to close by 2020. Replacing this capacity will require up to £110 billion of investment in new generation and grid connections by 2020. Compared with the last decade, rates of capital expenditure on energy infrastructure will need to double." 

A second option to escape the short term generation crunch brought on by the EU's LCPD could be to seek to negotiate for a UK opt-out or extension from the Directive. This could for instance come in the form of a limited exemption for a number of hours at times of peak demand. The problem with this is the Directive is legally binding and so would require other EU states to agree.

 
Will the Coalition attempt to re-negotiate a partial exemption? Well it is clear that a large number of Conservative MPs are becoming wary of how higher fuel bills and possible blackouts could reflect on them in the next election. The EU Fresh Start group of MPs has for instance called for the renewables and LCPD to be reviewed. This is what their manifesto says:

"The UK should renegotiate, or, if unsuccessful, suspend its obligations under the 2009 Renewables Directive, and not sign up to further commitments with respect to renewable energy targets. Our own roadmap (which would replace it) should maximise the cost efficacy of the reduction measures taken."

"We should review the timescale of the Large Combustion Plant and Industrial Emissions Directives with particular reference to the requirement to close down our large coal burning stations. To the extent we believe that premature closure is causing an unacceptable impact on fuel poverty or energy network resilience, we should extend their lives. We should make it clear to our EU partners that the large scale construction of unabated coal stations while we switch ours off is not a fair or an acceptable position."

Will this happen? Well David Cameron's commitment to re-negotiation is only for the post 2015 Parliament which might be too late. So could there be a case for early action? Yes, but immediate action seems unlikely, at least for as long as the lights are still on. Both the Conservatives and Liberal Democrats have reiterated their support for legally binding renewables targets and if Labour were to return to Government they were the party that originally put them in place!

So, expect to hear more about the looming energy crunch and expect the political temperature to increase.