Select Committee on Trade and Industry Second Report


II ENERGY SUPPLY IN THE UK

The current position

8. At present the UK enjoys a high level of diversity and security of supply. Electricity generating capacity currently exceeds demand by more than 30%.[2] The combination of the legacy of generating plant from the nationalised era and more recent market forces have produced a mix of fuels in electricity generation, with significant contributions from gas, coal and nuclear power. In recent years, successive Governments have not attempted to prescribe a particular mix of fuels. The principal exceptions to this policy have been the specific measures taken to promote the growth of the renewable energy sector in order to meet environmental objectives. UK-generated nuclear energy has provided as much as 25% of the UK's current electricity needs.[3] Electricity is also imported from France via the Interconnector. There has been a significant shift in the balance between gas and coal over the period 1996-2001. The abundance of gas supplies from the North Sea combined with low gas prices on international markets has encouraged the use of gas both to replace coal-fired electricity generation and to cover the loss of nuclear plant through decommissioning. As a result, the use of gas has more than doubled over the past ten years.[4]

9. Electricity prices are also low, as a result of the introduction of competitive markets and through the increased use of lower-priced gas from the UK Continental Shelf (UKCS). Environmental objectives have been met, partly as a result of the decline in traditional, energy-intensive industry and partly as a result of the increased use of gas. Unfortunately, there is no guarantee that low energy prices and environmental benefits will continue. UK gas supplies are finite, though the large reserves now estimated to be available are almost twice those estimated in 1973 in spite of the production of gas in the meantime.[5] Alternative supplies are available,[6] but they may prove more difficult politically and possibly more expensive to source. Recent rises in gas prices have been accompanied by increased use of coal for electricity generation. Coal use was 11.4% higher in the second quarter of 2001 than in the same period in 2000.[7]

10. Future demand and the resultant fuel mix will depend not only on the availability of fuel sources but also on the extent to which technological advances will improve energy efficiency in both the domestic and industrial markets. The Green Paper on Security of Supply in the European Union produced last year by the European Commission correctly highlights the importance of demand management and the contribution that improvements in energy efficiency could make in reducing demand.

11. We are at a loss to find any statistical basis for the PIU's assumed growth in energy demand of 2% per annum,[8] given that the rate of growth has been 0.5% for the past 20 years.[9] There are considerable uncertainties attached to any predictions of future demand. Factors contributing to uncertainty include the decoupling of demand for electricity from economic growth, changes in types of demand (such as the loss of energy-intensive industries, but growth in demand for transport), the increase in the uptake of information technology both in the business and domestic sectors, even changing trends in consumers' use of domestic appliances. Changes in patterns of use will also affect energy supplies: for example, in the UK traditionally energy demand exhibited winter peaks. However, we have been advised that in the commercial and financial areas of many UK cities, because of the increased usage of air conditioning in offices and IT installations, the peak demand now occurs in summer.

Energy sources, in descending order of significance for electricity generation

Gas

12. Gas holds a key position as an energy source, both because it is a significant primary fuel (for heating and cooking) and because of its importance for electricity generation. More recently, gas prices have risen to the extent that some generating companies have considered moth-balling gas-fired plant and at least one coal-fired power station has been brought back into service. Despite this, gas is an increasingly important fuel for the electricity generating sector, and some commentators predict that gas could form the energy source for 70% or more of the UK's electricity generation needs by 2020, not only because it has been cheap and easy to obtain, but also because it is not clear that alternative fuels will be available. Nuclear energy production is predicted to decline over the next 15 to 20 years unless circumstances, including Government policy towards that energy source, change; and the significant contribution to energy needs from coal-fired electricity generation will become increasingly difficult to reconcile with the Government's environmental targets.

13. The DTI expects demand for gas, both for electricity generation and for direct use, to rise gradually, from about 90 Mtoe (million tonnes of oil equivalent) in 1999 to more than 120 Mtoe by 2020[10] although demand will depend on changes in the cost of alternatives on international markets. On this basis, annual UK demand is predicted to exceed production capacity on the UKCS by 2005, with imports concentrated in the winter months. The DTI projections are of UK gas import dependency rising to more than 63 Mtoe (or 58% of demand) by 2010, and to 110 Mtoe (90%) by 2020.[11] Projections of UKCS oil and gas reserves have varied over time and the degree to which they are assessed as recoverable seems to have fluctuated with the price of oil and developments in recovery techniques. Although analyses provided by other witnesses differ in some respects from those of the DTI, there is widespread agreement that the UK will become a net importer by about 2010.

14. The primary sources of UK gas imports are expected to be Norway,[12] the Netherlands, Russia, Libya and the Middle East, all of which have substantial proven reserves. The use of many of these sources will require considerable investment to develop and/or maintain transmission infrastructure. Liquid Natural Gas (LNG) offers the UK the potential for diversity of supplies and LNG storage could increase reliability of gas supply for the winter peak demands. It can be shipped in from as far afield as Australia, Qatar, Malaysia and Indonesia, but supplies to the UK would most likely be sourced from North Africa and the Caribbean. If LNG is adopted as an option, increased investment would be necessary to build upon the limited LNG import and storage capabilities currently available in this country.

Coal

15. Indigenous coal production in the UK was 32 million tonnes (Mt) in 2000, (compared to 85 Mt in 1990, when coal was the dominant energy source for electricity generation). A further 14 Mt was imported. DTI projections indicate that demand for coal is likely to be between 26 and 43 Mt by 2010, depending on future trends in world energy prices, while domestic production is expected to fall to 23Mt or lower in that time.[13] It is therefore probable that the UK will become increasingly dependent on imports. Although the UK has substantial reserves of coal, it is thought unlikely that they can be exploited to the full unless there is a significant increase in world prices. The future for deep mining operations looks particularly bleak, and the industry predicts that further development will come from open-cast mining.

16. Coal has a number of advantages for electricity production. The raw material is in plentiful supply and is obtainable from a number of stable and friendly countries. It can be (and is) stockpiled at power stations and, in generating terms, it is a fairly flexible fuel, providing base load but also some capability of being turned up and down to meet peaks in demand.

17. However, coal presents in stark form the conflict between the need to preserve diversity and security of supply and the Government's environmental targets for the reduction in emissions of greenhouse and other gases. It is clear that the use of clean coal technology (CCT) in coal-fired electricity generation will be essential if this conflict is to be resolved and the maintenance of coal as a significant contributor to the energy mix is to be ensured. The coal industry is convinced that the adoption of such technology cannot be undertaken without Government support for a commercial-scale clean coal demonstration plant which would build upon the research undertaken elsewhere, notably in the USA and the Netherlands, and adapt it for the needs of the UK industry. The Government is currently reviewing the case for such support.

18. The coal industry has also suggested the introduction of a Clean Coal Obligation, to operate on a similar basis to the Renewables Obligation, which would require electricity suppliers to purchase electricity generated from clean coal sources. This would encourage the building of commercial CCT plant as it would provide a degree of certainty about the medium- and long-term demand for electricity supplies from coal-fuelled plant.

Nuclear power

19. Nuclear power is a proven technology which continuously generates electricity on a large scale with zero greenhouse gas emissions. The supply of uranium required for nuclear generation is reasonably plentiful and secure.[14] Nuclear power stations in the UK were designed for base-load operation[15] and, as a consequence, lack the flexibility of output that the UK's new electricity trading arrangements are designed to encourage. Alternative reactor types, as adopted in countries such as France, are more flexible and can respond, to a limited extent, to fluctuations in demand. British Energy has experience of operating the other types of reactors in countries such as Canada. We note that the nuclear sector has made a significant contribution both to the UK's security and diversity of supply and to the Government's own climate change targets, although the issue of waste management has yet to be resolved in the UK.

20. Since 1995, the Government's position on nuclear energy has been that the building of new nuclear power stations should be a commercial decision. Market conditions and other considerations, such as the potential environmental impact and public acceptability of nuclear power generation, have deterred companies from investing in new plant for more than 10 years, and much existing nuclear plant has reached, or is approaching, the end of its useful life. Current events have, also, increased concern over the vulnerability of nuclear installations to terrorist attack. In the absence of new capacity, nuclear power's share of electricity generating capacity is likely to decline from the current level of about 21% to possibly less than 17-18% by 2010 and to 7-8% by 2020. The resultant generation shortfall will be met either by a return to carbon-based fuel sources (gas and coal), with a resulting negative impact on environmental targets, or by renewables.

Renewable power

21. The Royal Commission on Environmental Pollution advised that the use of renewable energy resources would play a key role in reducing the production of greenhouse gases and that increased use of renewable energy should be a non-negotiable element of future energy policy.[16] In fact, successive Governments have supported the development of renewable energy technology for more than 25 years. Although renewable sources and waste incineration currently contribute only 2.8% of the country's electricity requirements,[17] the present Government is committed to a target of 10% of UK electricity supplies from renewable sources, excluding non-biodegradable waste, by 2010, "provided the costs to consumers are acceptable".[18]

22. Unlike other forms of generation discussed so far, most renewable power plants are small-scale. The creation of a large number of small-scale plants, possibly replacing fewer, bigger power stations, will have repercussions for the electricity transmission and distribution networks. The issues raised by such a development are dealt with in Section III of this Report.

23. A critical feature of most renewables is that they are energy sources and not fuels. The difference lies in availability. Fuels are always available for use when required, albeit at a price determined by the market. Energy sources are usually intermittent, but are free.

24. The Government's Renewables Obligation, which will have effect during the period 2002-2027, will require electricity supply companies to purchase a proportion of their electricity from renewable energy sources. It is inevitable that the Obligation will result in upward pressure on energy prices. Some suppliers are already offering domestic consumers the opportunity to help pay for the Obligation through acceptance of a 'green tariff' for their electricity supply. The Government estimates that the Obligation will create a market worth £750 million for the renewables sector by 2010, assuming that its 10% target is reached. The Government has also claimed that it will spend £260 million over the next three years on the development of renewable energy technology,[19] although £50 million of this expenditure will come from the National Lottery New Opportunities Fund to support the development of energy crops/biomass power generation (at least £33 million), offshore wind power development (£10 million) and small scale biomass heating (£3 million). The Government itself will contribute £39 million for offshore wind power projects, £29 million for support of energy crops through the England Rural Development Programme, £10 million for photo-voltaic roofs and £55 million from its research and development budget for a range of renewable technologies and resources. Another £100 million will be allocated in the light of the PIU's recommendations.[20] The Government expects these measures, together with the Climate Change Levy on fossil fuels and legislation to protect the viability of projects started under the previous Non Fossil Fuel Obligations, to create a market worth £1 billion by 2010.


2   Memorandum from Ofgem. Back

3   Memorandum from the British Nuclear Industry Forum. In recent years, the trend in this percentage has been downwards: 26.6% in the first half of 1999; 22.4% in the same half of 2000; 21.2% in the same half of 2001: all figures taken from the DTI's publication Energy Trends, passimBack

4   DTI initial submission to the PIU Energy Policy Review. This can be found at www.cabinet-office.gov.uk/innovation/2001/energy/submissions/EPQw.pdf. Back

5   Reserves now are estimated to be 2096 Bcm; in 1973 they were estimated at 1115 Bcm. In the meantime 1604 Bcm of gas has been extracted from the fields. See the DTI's Development of UK Oil and Gas Resources (commonly known as the Brown Book) for 2001. Back

6   In the medium term, from Norway; and from Russia and elsewhere in the longer term. Back

7   DTI Energy Statistics, 27 September 2001. Back

8   In Table 2 of the Annex to the Project Scoping Note, dated June 2001 (the projections are taken from Energy Paper 68, based on the average of the central low and high scenarios). See www.cabinet-office.gov.uk/innovation/2001/energy/scopeannex.pdf. Back

9   See note by Professor Odell annexed to this Report, p.72, paragraphs 5 and 6. The Minister also said that the DTI did not expect there to be large-scale growth in demand over the next 10 to 15 years (Q 271). Back

10   DTI's initial submission to the PIU, Table 1.1. Back

11   Ibid., p. 11. Back

12   From whom, of course, the UK has imported gas in the past: Qq 206 (UKOOA), 659 (Lattice/Transco) and UKOOA's Memorandum Back

13   Ibid., p. 34. Back

14   Memorandum from the British Nuclear Industry Forum. Back

15   See glossary, annexed at p. 67 below. Back

16   Energy - The Changing Climate, Royal Commission on Environmental Pollution, Cm 4749 (June 2000). Back

17   Memorandum from Ofgem. Back

18   Memorandum from the DTI, paragraph.2.21. Our italics. Back

19   Ibid., paragraph 3.5. Back

20   See the PIU's report, Renewable Energy in the UK-Building for the Future of the Environment, at www.cabinet-office.gov.uk/innovation/2001/energy/Renewener.shtml. The PIU recommends the following allocation: £25 million for offshore wind power; £15.5 million to help farmers and foresters establish energy crops; £10 million for innovative photovoltaic systems; a further £10 million for technologies (such as PV and biomass heat) "that can be utilised directly in homes, communities and businesses"; £5 million for demonstration and testing of wave and tidal technologies; £18 million for development and demonstration of advanced energy crop technologies; £10 million for fundamental research on new renewable technologies; £4 million for advanced metering and control technologies; and £2.5 million for "information and support for land use planning purposes". Back


 
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