February 19, 2013 8:45 pm

UK energy policy – great gas

There are two risks that hover over energy policy. One is that electricity gets so expensive that consumers cannot afford it. The other is that the lights go out. These risks have to be managed. The important thing is to avoid a supply crunch in the gap between shutting down more-polluting generating capacity and building new capacity. This is the trap the UK could fall into, as the electricity and gas market regulator Ofgem warned on Tuesday. There are lessons here for governments, consumers and investors.

The UK’s immediate problem is that 10 per cent of its generation capacity is due to be mothballed in the next few weeks to meet Europe-wide pollution reduction targets. On Ofgem calculations, this means that the UK’s spare generation capacity as a proportion of the total will fall from 14 per cent now to 5 per cent in three years. Essentially, high-polluting fuels like oil and coal are being replaced by gas, which is becoming more expensive.

Fuel for thought

Cue a soaring import bill for gas – the UK’s own supplies in the North Sea are declining. Cue also higher consumer bills, short-term and long. But that must not be allowed to distort sensible policy making. UK energy prices are among the lowest in Europe, because of a liberalised market and because infrastructure investment has been frozen for 20 years. The UK needs £110bn of new generation capacity. Higher bills would help enable that investment.

It is a myth that private investors do not want to invest in energy projects. Shareholders in Drax, the independent producer converting three of its six coal-fired generators in Yorkshire to biomass in a £700m investment, have enjoyed twice the total return of FTSE All-Share index in the past three years. There is no reason why private capital will not be available to fund new gas-fired stations in the short and medium term if the returns are seen to be there. With new nuclear power at least a decade away, UK shale gas delivery uncertain, and wind energy more expensive than expected, conventional energy remains an attractive investment.

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