UK's dependence on gas to rise significantly by 2025 if Energy Bill is not fully implemented, says report

London, 22nd January 2008: The UK is in its strongest position in a decade to significantly change the generation fuel mix landscape, according to a new report by Ernst & Young, but the government will have to continue to work hard to ensure that the Energy Bill is fully implemented if it wants to avoid dependence on gas.

The report – Getting the balance right: the UK's evolving generation mix – which looks at the UK’s evolving future generation mix to 2025, says that inaction and investment by default solely in CCGTs (combined cycle gas turbines) could see the UK’s dependence on gas increase by as much as 30% to 2025. This would lead to gas contributing up to 65% to the UK’s generation fuel mix by 2025, with serious implications for security of supply in a period when indigenous gas reserves are being rapidly exhausted.

Less than 100% commitment and effectiveness increases vulnerability of UK’s position
Failure to stimulate the building of new nuclear capacity, according to the report, would effectively commit the UK to a ‘no nuclear’ future by 2025.

Jon Hughes, head of utilities at Ernst & Young, comments, “The Energy Bill takes action and sets out a positive course for changing the decision-making status quo so as to influence the shape of the future generation mix. Successfully implemented it will lead to a more balanced generation fleet and an improvement in financial sustainability across the whole industry. Anything less than 100% commitment to achieving this will put the UK in a more vulnerable position, materially increasing its dependence on gas imports.”

2020 renewables targets challenging to achieve
The report goes on to say that nuclear and clean coal must play a pivotal role in reducing the UK’s reliance on imported gas and in managing emissions, but this must be in tandem with the vital ongoing expansion of the renewable energy sector.

Tony Ward, utilities director at Ernst & Young says, “Given the right encouragement, we can see at least 21GW of wind capacity contributing to the energy mix by 2020. However, the sheer scale of infrastructure investment required to significantly increase its contribution to the generation mix beyond this level will be very challenging. Moreover wind is still an intermittent power source which requires back up power – and this intermittency could put significant strain on the UK power grid.”

The economics of nuclear and clean coal - £17bn of additional investment
If nuclear, clean coal and renewables are the solutions to the UK’s energy gap beyond 2012, created by the retirement of ageing coal and nuclear plants and steadily increasing peak demand, industry will be required to invest up to £45bn by 2025 into a new build programme. This is some £17bn more than an alternative mix which sees the unrestricted expansion of gas-fired capacity.

Ward says that while this represents a major capital investment programme, the scale of finance required can be successfully met by the industry.

Nuclear and clean coal can contribute to reduction in UK emissions
The scale of the reduction of emissions intensity is influenced by which generation technologies are used. Successful investment in new nuclear and cleaner coal, according to Ernst & Young’s calculations, would lead to the lowest average annual emissions in the period out to 2025 – an average of 191 mtCO2. Although this is only 1% lower than a programme of CCGT only investment, the UK would be set on a path of continuing lower emissions post-2025.

Ward comments, “This is a reflection of the scale of the environmental challenge that is facing the UK generation sector – even major incremental investments in non-CCGT lower carbon technologies have only a relatively limited impact on the level of emissions in the period to 2025. This is due to the continued and unavoidable embedding of fossil fuels in the generation fleet.”

UK could end up with costly, less diverse fuel mix
Failure to fully implement the measures from the Energy Bill, or provide sufficient regulatory and planning clarity around the scale and timing of the programmes, would put the UK in an awkward position. “The UK could be left with a costly, less diverse fuel mix that fails to enhance security of supply significantly and contributes towards emissions staying stubbornly high,” according to Ward.

He concludes, “If the Energy Bill is the success we hope it will be and can be, government will see the benefits of greater fuel security and diversity, alongside an improved, albeit not ideal, emissions backdrop. Corporate utilities and power generators can expect to see better returns over the medium term, as well as improved risk management and arbitrage opportunities – through broader diversity of fuel choices and ongoing interaction with emerging markets for carbon trading. Consumers will benefit from the lower volatility in the wholesale power market – due to the reduction of gas in the mix – which will feed through to electricity prices.”