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News Extra: UK Government outlines energy security plans

26 July 2013

In a speech at Columbia University’s Centre on Global Energy Policy in early June, Minister of State for Energy Michael Fallon gave an overview of the UK’s energy situation and the main planks of the Government’s energy security policy.

A major background element in UK energy policy is the commitment to reducing greenhouse gas (GHG) emissions by 80% by 2050. Government measures such as electricity market reform are designed with this in mind, but reducing energy demand and promoting low carbon energy sources will be the main drivers towards achieving the GHG reduction target.

Even with these efforts, UK oil and gas import dependency is set to rise due to declining North Sea oil and gas reserves, Fallon said.

The UK became a net importer of oil in 2005. In 2011 imports reached 25%, in 2012 32%, and by 2020 the figure is expected to be 40%. This is against a predicted small decrease in UK oil demand to 2030, but the country is likely to import more oil in 2050 than now. 

For gas, the UK became a net importer in 2004; in 2012, import dependency stood at 49%; and by 2020 it is likely to rise to 53%. While the longer-term picture for gas is harder to predict, it will remain an important element of the country’s energy mix for decades to come, Fallon said. UK unconventional gas production is in its early stages, so its impact on import dependency is not yet clear, he adds.

Regardless of the precise level of imports, wholesale oil and gas prices in the UK will very largely be set by international markets. This in turn can have a significant impact on economic growth and bills.

The Government says £110bn investment is needed in the electricity sector alone by 2020, both to replace outdated infrastructure and to diversify towards lower carbon sources.

The Energy Minister outlined five policy responses to the key risks to the UK’s energy imports and investment needs.

The first is to promote low carbon technologies and energy efficiency to restrain rising oil and gas demand.

Based on its New Policies Scenario the International Energy Agency (IEA) estimates a 35% increase in energy demand from 2010 to 2035. Low carbon energy sources will not expand sufficiently swiftly to displace fossil fuel growth, and oil demand is predicted to be 14% higher in 2035 and gas demand 50% higher. This has serious consequences for both energy security and climate change.

Restraining global energy demand will not only mitigate climate change, it will reduce the extent of price rises, just as domestic energy and transport policies can reduce our exposure to them. In both cases this would reduce risks to economic growth, and protect domestic and business users from increasing energy bills.

The second is to encourage investment in oil and gas production. Fallon considered this to be consistent with the UK’s climate change goals: even under the IEA’s 450 Scenario, the world will be consuming 79 million barrels of oil a day in 2035, compared to 87 million barrels a day in 2011.

Over the same time, production from existing sources of conventional crude oil will have declined from around 65 million barrels a day to 26 million barrels a day, so new sources of oil will be needed to make up the difference. Global gas demand actually rises by 2035, even under the IEA’s 450 scenario.

In addition, further work is required on safe and sustainable exploitation of unconventional gas (and oil) to maximise global production. Unconventional is expected to account for almost 50% of the increase in global gas production between 2011 and 2035, with the US experience a pointer towards the future in this area.

The third is to ensure reliable energy supplies, in particular encouraging greater liberalisation of energy markets and strengthened trading links and infrastructure. There has been progress on new supply routes, for example on the Southern Corridor, and better functioning of EU gas markets. Nevertheless, Fallon thinks we are a long way from a fully liberalised global energy market, especially for gas, and events in North Africa and Iran should are a reminder that, even in the largely globalised oil market, secure supplies are far from guaranteed.

The fourth is the need to work to enhance energy price stability. Last year witnessed considerable energy price volatility, with oil prices fluctuating between US$89 and $127 and gas prices between 51 and 99 pence per therm. The UK’s Office for Budget Responsibility suggests that for an annual 10% increase in oil prices, GDP might reduce by around 0.1% in the first year of the oil price shock.

The fifth is the need to secure sufficient international inward investment in the UK’s energy infrastructure. The prime challenge is to ensure that UK energy policy delivers sufficiently attractive terms for investors whilst remaining affordable for consumers. This is made more difficult by the global economic climate and strong competition for financial resources, Fallon said.

Reforms to the electricity market are designed to provide investors with greater revenue visibility combined with greater certainty on the returns that they can expect. The Government is also exploring ways to incentivise shale gas exploitation in the UK by reforming the tax regime, he concluded.

As a reflection of medium to long term Government policy, Fallon’s speech gave a good overview of where the UK is now, and where it might want to be in future. But he failed to give much detail on how the Government would meet the significant shortfall in energy the country is facing over the next three to four years.

Alistair Buchanan, the chief executive of UK energy regulator Ofgem, has warned the country is "near crisis" because the closure of old nuclear, oil and coal-fired plants has reduced electricity supply substantially at a time when little new capacity is coming online.
Buchanan pointed out that the UK will not have any new nuclear capacity on line until at least 2020, clean coal was not on the near horizon and carbon capture and storage facilities have yet to be developed. "This means we are going to have to rely on gas," he said. "Gas currently supplies 30% of our power stations; it will be supplying 60%."

In the short term, therefore, UK energy security will depend to a great extent on whether the country can maintain access to large amounts of gas from reliable sources, and the price structure is such that it makes economic sense for utilities to buy and burn it.

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