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Failed energy strategy
Image: Tom Blackwell

UK energy strategy on the edge

Yesterday the UK government were at pains to point out just how important the digital economy is.  According to Gordon Corera at the BBC:

“The UK is one of the most digitally dependent economies, with the digital sector estimated to be worth over £118bn per year – which means the country has much to lose.”

All the more important then, that in addition to spending £1.9bn on a shiny new cyber-security centre, the government takes a long hard look at its strategy for keeping the lights on beyond 2020.  Because an awful lot of that £118bn digital income is going to vaporise if digital businesses no longer have access to a 24/7 electricity supply.

Insofar as the UK government has an energy strategy – and “leaving it to the free market” doesn’t really qualify – it is to generate the bulk of the UK’s electricity from gas.  Coal is to be phased out by 2025.  The remaining supply is to come primarily from nuclear and renewables (primarily offshore wind).  Unfortunately, there are gaping holes in every element of this plan.

First, North Sea gas production has fallen by two thirds since peak production at the turn of the century.  For the time being, the UK is able to import a large proportion of its gas from its less populated North Sea partner, Norway.  But as supply continues to fall and global demand for gas increases, the UK will also have to rely on supplies from Qatar, Russia and Libya.  Although the UK government believes (in the same way a toddler believes in the tooth fairy) that much of its future gas supply will come from UK and US hydraulically fractured gas, any serious examination of the economically recoverable reserves shows that this will simply not produce gas in the quantities required.  The danger is that the UK is investing precious capital reserves in a fleet of new gas power stations that may be idle for lack of affordable gas early in the 2020s.

Second, the decision to phase out coal by 2025 almost backfired as the owners of UK coal power stations realised that there was no point paying to maintain plant that was going to be obsolete within a decade.  Several large coal power stations have already closed.  Others only continue to operate on a stand-by basis because the UK government is paying them to be available in the event of demand outstripping supply.

Third, renewables account for around a fifth of UK electricity generation, and as the price of wind and solar continues to fall we can expect more capacity to be installed.  The key problem with renewables, however, is that they offer a very low energy return on investment – it takes a huge outlay of capital, labour and resources to produce a relatively small amount of power.  For example, the £2bn, 32 square mile Gwynt-Y-Mor offshore windfarm produces 574MW of electricity – about a third of the output of the – now largely mothballed – Aberthaw coal power station.  Similarly, the proposed £1.3bn Swansea Bay tidal lagoon – if the government ever gets out of the way and allows it to be built – will generate just 300MW; i.e. a fifth of an Aberthaw.  The point is that large scale renewable projects will require far more capital than is currently available if they are to take up the slack left by the closure of the UK’s coal power stations.

Fourth, on paper, nuclear power is extremely attractive, so the UK government has committed to a large expansion of new stations.  The advantage of nuclear is that unlike renewables which have to be deployed across huge areas in order to concentrate the energy in sunlight, wind and tide, a single 3.2GW nuclear power station can be contained inside a 1 square mile site.  Moreover, anticipating public opposition, the UK government’s intention is to build its new nuclear plants on existing sites like Wylfa in North Wales and Hinkley Point in Somerset.

The key problem with nuclear, however, is the same as that for renewables – At £18bn a time, nobody has the cash to pay for it up front.  The pseudo-solution to this problem has been for government to load the build cost onto future bill payers.  In effect, guaranteeing a minimum price for future electricity generated by the new power stations.  However, there are two serious flaws with this plan.  The first, and now glaringly obvious, problem is that the corporations with the necessary expertise to build the UK’s new nuclear plants are more or less insolvent.  This feeds into the second problem – confidence.  Concern over the ability of companies like Toshiba, Hitachi and EDF to bear the cost of major projects at a time when they are struggling to avoid bankruptcy has a knock-on effect on investor confidence.  Why would anyone in their right mind invest their savings in a company that might already be bankrupt today, solely on the promise of some kind of return on investment in the 2020s?  Indeed, why would anyone trust that in the 2020s UK energy users will be able to afford electricity prices more than double those that many are struggling to pay today?

Even the relatively conservative and market friendly Financial Times understands the predicament that we find ourselves in:

“The UK is in theory an attractive market, since few developed countries are expanding nuclear generation, and approval from the UK regulator serves as a badge of quality. Nonetheless, ministers need to recognise the reality: without government support, private capital markets will not finance projects with enormous upfront capital costs, huge construction risks and very long-term pay-offs…

“If the government now believes it can meet the UK’s future energy needs by other means, it should explain how it plans to do so. If it is still relying on nuclear expansion to plug the gaps in supply that will open up, it will need to be open to funding it directly.”

There will no doubt be those on the green left who will welcome the collapse of an energy strategy based largely around fracking and nuclear.  From an environmental standpoint it is a superficially attractive prospect.  But in reality it is catastrophic for all concerned precisely because the same capital formation problems afflict the renewable energy industry.  If we are not going to be generating the electricity we need to power a digital economy using gas and nuclear, we most certainly are not going to be doing it with wind, solar and tide.  Not because this is not theoretically or even technically possible, but because nobody thought to set aside the investment capital in anything like the necessary amounts.

The stark truth is that when the new nuclear plants fail to materials, and the gas power stations stand idle once we discover that fracking is little more than a Ponzi scheme, we are not going to have a digital economy at all.  Indeed, when the lights go out, we will be lucky to salvage anything of our current way of life.  That will, indeed, be good for the environment.  Whether it is going to be good for us is a different matter.

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