Daniel Byles MP: Britain must find £200 billion to keep the lights on
It's Monday morning, and alarms are going off in Acacia Avenue, Somewhereville. Residents are waking up and switching on lights, kettles and toasters. As the demand for electricity starts to spike, unseen by residents the smart grid (which regulates demand and supply) increases the availability of power for the homes in Acacia Avenue. In layman's terms, power 'flows' into Acacia Avenue from the grid.
By mid morning, residents have finished their breakfasts and left for work. The kettles and toasters are now cold, and the lights off. Meanwhile, the sun has come out and is shining on the solar panels that adorn every roof. As each house flips from being a net consumer of power to a net generator, the 'flow' reverses and Acacia Avenue starts to feed power into the grid instead of consuming it.
The previous evening, Mr Average at number seven had filled his washing machine with laundry and turned it on. He has a new 'smart' washing machine which allowed him to programme when he wants it finished by, and he selected 6pm Monday evening. This isn't a timer. It is smarter than that. His washing machine doesn't decide when to switch itself on, nor does any computer inside his house. The grid itself makes that decision, and in this case it decides at 11.34am that demand is low across the grid and it is a good time for Mr Average's laundry to be done.
Evening comes, the solar panels go dark, and residents return home. Traditionally this would lead to a spike in demand as meals are cooked and TVs switched on, before demand fell off rapidly as people switched off electrical equipment and went to bed. In this brave new world, however, night time is no longer a period of low demand. As every resident returns home, they plug in their electric cars. Each of them sets their smart recharging units for what time they want their cars ready in the morning. As people go to bed, the smart grid now has the task of balancing a high and steady night time demand across the nation as millions of electric cars need to be charged by morning.
That's the picture on Acacia Avenue. On a national scale, the smart grid must manage an increasingly complex mix of power generation as it balances the system from one minute to the next. The system contains a sizeable slice of decentralised generation in the form of domestic solar panels and micro generation schemes. However, the bulk of the UK's power generation continues to come from large scale sites. The new generation of nuclear power stations provide a base load of around 20GW and a large but fluctuating amount of power feeds into the grid at a very low marginal cost from the UK's huge arrays of offshore wind farms. The intermittent nature of the wind power is balanced by a generation of new gas fired power stations operating as 'peaking plant'. Able to scale power generation up and down relatively quickly, they are ideal for smoothing out the uncertain wind power and ensuring a steady supply is available regardless of weather conditions. Powered primarily from UK and Polish shale gas, the carbon emissions from these plants are captured by
British designed 'Carbon Capture & Storage' technology (known as CCS) and pumped in the form of CO2 into some of the long empty North Sea gas fields where it is sequestered underground safely away from the atmosphere. At times when the wind is blowing steadily across the entire British Isles, the gas plants sit idle and the excess power from British wind farms flows across the North Sea to Norway where it is used for hydroelectric storage - pumping water up to high altitude reservoirs to provide a store of potential energy for the next surge in demand. If these are already full, excess British wind power is fed into the European super grid and sold at the market spot price.
That is DECC's vision of a future UK in a low carbon world. The question is, do we have the right energy policies to even keep the lights on, let alone get us to this utopian vision? Perhaps, but there are one or two sizeable hurdles in the way.
The UK has a looming energy gap. Despite a huge effort to improve energy efficiency, demand for electricity is expected to double by 2050 as we see continued electrification of trains, cars and heating. In the short to medium term, our generating capacity is being slashed. As a result of the European Large Combustion Plant Directive, and an ageing fleet of nuclear reactors, a quarter of the UK's generating capacity will be shut down in the next ten years. By 2023 all bar one of our existing nuclear power stations (which currently generate 18% of our electricity) will have been shut down. It is estimated we will require at least 20-30GW of new generating capacity by 2020.
There are also serious questions about the commercial viability of large scale carbon capture and storage (CCS), on which so many DECC projections rely. Despite a billion pounds of taxpayers money being available the only UK trial scheme collapsed last year. Energy market experts within the financial sector tell me they are not recommending clients invest in CCS projects due to real uncertainty over whether the technology will ever be viable.
In addition to this, the national grid needs to be almost completely rebuilt. The current grid was designed to distribute power from a small number of large power stations close to population centres. As we move towards greater decentralisation and more is power produced in remote locations such as the highlands and offshore, the grid is increasingly in the wrong place. It is also old and crumbling, and it is a 'dumb grid' not capable of facilitating the subtle and intelligent approach to balancing the system that we will need in the future.
As a result of these factors, Ofgem has estimated that the UK requires some £200 billion of investment over the next 10 - 15 years in energy infrastructure alone. Other studies put the figure higher. This is a colossal sum of money, and it needs to be attracted urgently from the private sector. The clock is ticking. The problem is, we aren't alone with this problem. The required investment in energy infrastructure across the EU has been estimated at some €1 trillion, and when you factor in projected growth in the BRIC countries of Brazil, Russia, India and China we will be competing hard in the coming years for investment capital, construction capacity and expertise.
Even if the UK were the most stable and attractive investment destination in the world we would face a huge challenge raising the capital required. European utility companies have been severely de-rated in recent years relative to the market and will struggle to raise anywhere near the finance required. There are serious concerns whether the capacity to physically do the work required exists within the industry and the supply chain. With the UK market so highly regulated and the current Big Six energy companies demonised whenever they make a profit, the relative attractions of investing in China and elsewhere will be hard to overcome. E.On have already begun selling UK assets in order to invest in growth regions in Asia and Latin America.
The government is well aware of this. Energy Minister Charles Hendry has stated regularly in public that we need to make the UK the most attractive destination for infrastructure investment in the world. Charles is widely regarded in the energy industry as having a very good understanding of the challenge the UK faces. The trouble is, has anyone told the Treasury?
Investor confidence takes years to build up, and moments to destroy. The levels of investment we require demand a stable and consistent investment and operating environment to ensure that confidence is there. But in recent decisions the Treasury has imposed an unexpected tax on North Sea oil and gas; has chosen to designate the levy-funded solar feed in tariff as public spending and cap it, causing DECC to unexpectedly reduce the tariff months before a review was scheduled; and has halted the £1 billion trial CCS programme at Longannet in Scotland. Already financial institutions such as Citigroup are expressing serious doubts about investor confidence for large scale energy infrastructure projects in the UK.
There is so much more to say on the challenges facing UK energy policy. Controversy still rages over our future reliance on offshore wind, with Ruth Lea's thought provoking article on ConHome last week challenging the current approach. Energy policy must balance security, affordability, and emissions reductions; and there are strong arguments that UK policy currently leans too much towards reducing emissions at the expense of security and affordability. There are many who question whether DECC has the organisational capacity and the expertise to preside over the pace and scale of change - new nuclear, rapidly growing offshore wind farms, Electricity Market Reform, the need for greater gas storage, a national roll out of smart meters, developing the smart grid, the European Supergrid, the Green Deal, the Green Investment Bank, the Retail Market Review, and rising consumer bills. This is a huge policy area with a lot of plates currently spinning.
But ultimately, it is the responsibility of DECC to keep the lights on and the power flowing. The minimum cost of that is £200 billion over a very short period of time, and the growing doubts over whether we will attract anywhere near that level of investment should worry us all. On more than one occasion during our inquiries, a fellow member of the Energy & Climate Change Select Committee has leaned over and whispered in my ear; "time to invest in woolly hats and candles?" I like to think it is a joke. At times I'm not so sure.