UK Energy crunch approaching
by TECHSTAR on JUNE 24, 2012 - 0 Comments in ENERGY

The British Government is in the pockets of the big energy companies. The UK still has a mountain to climb in terms of funding if it is to secure energy supplies through the end of the decade, according to the head of energy at one of the country’s big accountancy firms.

Three-and-a-half years have passed since British energy regulator Ofgem estimated that £200bn (€248bn) would need to be pumped into the energy sector though 2020 in order to secure supplies and meet carbon targets.

But KPMG’s Andy Cox says: “When you stand back and look, I’m not sure the position has really moved. We are just getting closer to the crunch point.”

Some of Europe’s largest utilities are set to begin developing huge offshore wind farms in UK waters under round three of the Crown Estate’s development programme. A maximum of 32GW of generation capacity could be built across nine development zones.

The daunting scale of the third round of projects will require utilities holding development licenses to secure financial partners, Cox said – something that, with electricity market reform in its nascent stages, is taking time. “If you talk to the utilities involved, they are all trying hard to find the right structure,” he said.

Reform

However, Cox added that, in the next 12–18 months, the funding structures made possible by the evolution of electricity market reform could speed up investment:

“Once a structure that can be replicated – and that works for everyone – is designed, I’d like to feel that the money will start to flow into those projects,” he said. “But we haven’t quite reached that point yet,” he added.

In total, 19GW of power generation capacity is set to be removed from the UK system by 2020. By comparison, in the past decade just 6GW has come off the grid.

Much of this capacity gap will be filled by wind power, while the Department of Energy and Climate Change (DECC) is hoping to attract investment in new gas-fired power plants in the medium-term to offset the intermittency of wind.

But this has in itself led to investment-related concerns, with profit margins for gas-fired power generation, or spark spreads, at historic lows. Even DECC recognised that an increase in spark spreads may not be seen until later in the decade.

Energy secretary Ed Davey spoke of the encroaching need for new capacity last week at a wind power conference in London.

“Over the coming years, electricity demand will soar as we electrify heating, transport, and industry,” Davey said. “We could need twice the capacity we have now, and it must be low carbon.”

Some trading sources believe the potential loss of supply has not been sufficiently priced into the UK power forward curve. “In 2015–16, things could be quite tight,” Cox said. “Having the right mechanisms in place to attract the right technologies to be developed to fill the gaps is going to be important.”

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