It is hard to see a future, at least in the medium-term, where the UK does not need a secure supply of gas. As we move away from coal-fired power generation, gas has a vital role to play, in delivering energy security in a way that also helps reduce our carbon emissions.
Even as we make progress on our decarbonisation targets – making faster progress than many had thought possible on both energy efficiency and renewable energy development – there will still be a need for gas in the generation mix.
However, this brings two particular challenges. The tools to deliver new gas plant – in particular the Capacity Mechanism – have not done so. Although much new gas plant has been consented, the economic case for building it has been absent.
And if we are to see more gas being used in the mix, then we also need to recognise that this is likely mostly to be imported. Whilst we may yet be able to stretch out the decline of UK production in the North Sea, it is in decline nevertheless. Shale may have a role to play, but that is as yet uncertain, and it will at best take a while to happen. Even then, we have to accept that domestically-produced gas, with its enhanced security benefits, will still come at a price for consumers, as it is likely to be more expensive than many sources of imported gas. That does not mean we should not do it, but there needs to be an honest debate with consumers about the costs of domestic shale gas supplies.
To deliver the new gas generation capacity, we need to look again at how the Capacity Mechanism is working. It was never intended to be used for nuclear capacity or for easily-set up diesel generation units, but they have done well at the auctions because they can bid low. If we are to see the capacity mechanism support new gas, then the scheme needs to be re-worked so that becomes a clearer goal. It will always be challenging to make an economic case for a new CCGT if it will only be used part-time when renewables are not producing.
The imports issue is, if anything, a more immediate challenge. Our import network has mostly worked well over the past decade, but there have been too many occasions when it has been too close for comfort. Invariably, this has been because of factors outside our control. An unexpected reduction in our storage capacity (as again this year); a dispute elsewhere in Europe over gas supplies, so gas has come into the UK via one interconnector and straight out via another because the European price is higher than in the UK; a very cold winter going on longer than anticipated. Just a couple of years ago we were within hours of exhausting our gas storage supplies.
The solution, I think, lies in more import routes and more storage. We have been well served by our LNG import capabilities, but an LNG facility is no guarantee of itself that gas will come into it. In a world where there is high demand for gas, the gas being transported by LNG tankers will go where the price is highest. One shipment of gas to the UK from America does not make us the preferred destination, when it can just as readily go to Africa or Asia.
I remain persuaded that part of the solution is some form of obligation to develop more gas storage in the UK. Gas storage will take up to five years to build, so if we want it for the 2020s we need to start building now. France has over 100 days of gas storage, Germany around 120 – and the UK less than 20. In the days when we could get extra volumes out of the North Sea when we needed it, that was not an issue, but when we depend on imported gas for our security, it becomes a different matter. Add to this the challenges our own interconnectors face as their ownership changes in the coming years, and we need action now to deliver the future security we need. It is already overdue.
The Rt Hon Professor Charles Hendry was appointed Minister of State for the Department of Energy and Climate Change in 2010, serving until 2012. He is currently leading an independent review into the feasibility and practicality of tidal lagoon energy in the UK.
Charles is President of the British Institute of Energy Economics and an alumnus and Honorary Professor at the University of Edinburgh.