We are six years away from an energy crisis

The Times
April 16, 2009
Protesters may object to new power stations, but we need vast investment right now to prevent a precarious, volatile future
Dieter Helm

The good news for Britain's energy supply is that the sheer scale of the recession has cut our electricity demand and carbon emissions. An impending energy security crunch has been postponed.
The bad news is that the recession will almost certainly delay investment in Britain's energy infrastructure and encourage complacency.
Energy security is no longer something that we can take for granted. This week more than 100 people were arrested in Nottingham over a suspected plan to disrupt a nearby power station. Will there will be more disruptions at other coal-fired power stations or against new nuclear developments now that we know more about where they will be sited?
Russia's interruptions of its gas supplies to Europe for three weeks in January was another warning, as well as performance failures at our existing nuclear power stations. These may be isolated instances, but our vulnerability to such events indicates that all may not be entirely well with our energy systems.

For the past two decades we have had ample reserves to absorb the shocks: now the margins are beginning to wear thin. Many of the existing power stations were built in the 1970s or earlier. All the coal-fired stations are more than 30 years old, as are most of the nuclear ones. They are all coming to the end of their lives and their reliability is inevitably beginning to suffer. Although significant numbers of gas power stations have been added, North Sea gas and oil supplies have been depleted at breakneck speed. After decades as an energy exporter, Britain now relies increasingly on imports of gas and coal.
Fast-forward to 2015 and the energy position could be precarious. By then the remaining coal power stations will be facing closure because of the pollution control requirements of the EU directive on large combustion plants. By then all except one of the existing nuclear stations will also be closed or facing closure. Having to replace so much coal and nuclear capacity in such a short period is unprecedented - except perhaps in wartime.
And at the same time because of the EU Renewables Directive the Government has committed itself to a crash programme to increase wind's share of electricity generation from the current 5 per cent to perhaps 35 per cent by 2020. But not only will wind power do little to combat global climate change (the big issue is the projected increases in coal burn in China, India and developing countries), it is also expensive and may even reduce the security of supply. It is uncertain too. Few think that wind supply on this scale will be achieved - though, unsurprisingly, few politicians will admit this in public.
The security problem arises because wind is intermittent. When it does not blow, back-up capacity is needed; and when it does blow, it reduces the profitability of power stations whose alternative energy supplies it displaces.
If current capacity were around 70GWs, by 2020 even if demand stayed the same we might need as much as 90-100GWs of capacity to meet peak demand. So not only do we need to replace at least 30GWs of existing power stations, but we also need to add another big tranche of capacity to support the vagaries of wind power. Wind power is largely additional to the existing system: it does not replace the capacity that is being closed.
The economic effects on non-wind energy investment are more subtle but no less serious. The economics of nuclear power stations dictate that they need to run all the time. Turning them on and off is expensive - it's not like turning a car engine on and off. So once the wind turbines are built, if the wind blows and they displace everything else, they could possibly ration nuclear off the system. Wind and nuclear are not easy bedfellows - as potential investors in nuclear power will be keenly aware.
What will fill the gap and at the same time back up the intermittent wind? The answer appears to be gas, gas and more gas. We will be lucky if even a single new nuclear station comes on stream by 2020. The carbon emissions from new coal stations will need to be sequestrated underground, and that technology is not likely to be commercially available until well after 2020. So before 2020 it would have to be “unabated” coal - which sits uncomfortably with the climate change objectives.
The chances of enough gas stations being built on time are not looking good, so the gas will have to be imported, and at a time when across Europe everyone is dashing for gas too. The Russians are not increasing investment in new gas resources and doubts remain about their ability to meet Europe's demand. Liquefied natural gas will be used to plug this gap, but the sources of supply are quite limited and again lots of other countries (especially the US and Japan) will want it too.
The scale of the investment required to plug the energy gap while pursuing renewables is enormous. The cost of building not only power stations, but also new transmission networks and gas storage facilities, fitting smart meters, developing an offshore wind industry and implementing energy efficiency measures will run to tens of billions, possibly more than £100billion in the next decade. Though the recession has brought a breathing space on the demand side of the equation, it has markedly worsened investment on the supply side. The credit crisis has made it harder and more expensive to finance investment; just when the investment is needed, finance has dried up.
Time is now very short in energy terms. Investment does not fit into neat electoral cycles. With about five years to go if the economy recovers, there are still things that can be done. Our energy policy was designed for the years of energy surpluses and North Sea gas. It is still focused on keeping costs down and sweating assets. What is needed is a radical rethink, with investment the priority. It will take a national effort to prevent a serious crisis in the middle of the next decade.
Without such a redesign, if there is a rapid economic recovery, things could get nasty quite quickly. As energy systems operate closer to the margin, small shocks have large consequences. Today a few demonstrators cannot make any serious impact, and even a prolonged interruption in Russian gas supply can be withstood. But as margins tighten, prices respond disproportionately. Britain has probably already committed itself to higher and more volatile prices.
This matters not only for customers - though they are likely to be paying a lot more. The rest of the economy depends on energy supply. Have a bit too much and we pay a small premium. Have too little and we pay a lot. These costs are the real burden on the economy and they are felt long before any physical interruption in supply. We should worry less about the lights going out and more about the costs to the economy of running our energy system on the edge.
Unless reform is quick, the best hope for Britain's energy supply from a security perspective is that the economy does not recover quickly - a long hard Japanese-style recession would keep demand (and carbon emissions) low. But that's hardly a sound energy policy.
Dieter Helm is Professor of Energy Policy at the University of Oxford and a Fellow of New College.