The Energy Review

12.07.06 Share

 

Yesterday Trade and Industry Secretary Alistair Darling published the United Kingdom (UK) Energy Review Report 2006; following the UK Energy Review which was initiated in November 2005 at the direction of the Prime Minister.

The report identifies two key objectives for energy policy:

  • reducing climate change (viewed in the context of the UK's commitment to reduce emissions by 60 per cent by 2050); and
  • the need to ensure security of energy supply. According to the report, the way to achieve this is to build new nuclear generation plants, to continue the growth of renewable generation, to increase the number of microgeneration projects and to drive energy efficiency measures.

Fossil fuels

Dwindling stocks (particularly North Sea oil and gas), along with political instability in the main oil and gas supplying regions are points which count against oil and gas from a security of supply perspective.

Without action it is anticipated that the UK's reliance upon gas-fired generation will increase from its current levels of 38 per cent to 55 per cent by 2020. By that point approximately 90 per cent of gas would be imported as North Sea stocks are depleted. The mains sources for that imported gas would be Russia and the Middle East. While recent discussions between the EU and Russia regarding gas supplies may have assuaged some fears regarding security of supply from Russia, the recent pipeline closure in the Ukraine highlights the danger of relying too heavily on that source.

The report indicates that fossil fuels should continue to take a place in a diverse energy mix. It is anticipated that the carbon impact of fossil-fuel derived power can be reduced by a variety of means, including by carbon capture and storage, which can reduce the carbon output from coalfired generation by as much as 80-90 per cent.

Nuclear

Nuclear generation currently provides around 20 per cent of UK electricity generation, but this is set to fall to six per cent by 2023 as current generation nuclear plants are decommissioned. The report states that new nuclear power generation plants could be commissioned to maintain the current levels of generation from nuclear sources.

The report highlights two advantages of nuclear in particular. The first is that it meets climate change goals because it does not produce greenhouse gas emissions. Secondly, it reduces the extent to which the UK will be dependent upon potentially unstable fuel supplies, and thus contributes to a secure energy supply.

While the Government does not commit itself to a precise number of new nuclear power stations, commentators expect that around six new stations will be required to maintain 20 per cent of generation from nuclear sources.

The report does stipulate that nuclear plants will need to be financed and operated by the private sector without subsidy.

This includes bearing a share of decommissioning the plant. However the Government has carried out studies to demonstrate that the development of nuclear without subsidy would be economic.

Renewables and emissions trading

The report also envisages a significant growth in the renewables sector. Renewable generation currently provides around four per cent of the UK's electricity, but the Government wants that to rise to 20 per cent by 2020. This will be achieved through a variety of means, including wind, tidal and solar generation. In addition, the report discusses ways to encourage the development of new renewables technologies such as wave and tidal power.

In order to drive growth in the renewables sector it is proposed that the Renewables Obligation (RO) should be increased from 15 per cent to 20 per cent. The new RO may be banded to encourage the development of these new renewable power technologies.

It also proposes that methods of extending the European Union (EU) Emissions Trading Scheme (ETS) to cover a further 5000 significant energy users be investigated.

In addition the Government will be lobbying at EU level for EU ETS to be extended to cover new categories of business including transportation and aviation. At the same time it will be looking to encourage the growth of alternative carbon-neutral fuel technologies for these industries, such as biofuels.

Micro-generation and distributed generation

Distributed generation and micro-generation projects will also receive a boost, with the government keen to encourage small generation projects. These will range from more traditional combined heat and power projects to incentives for domestic micro wind and solar generation.

Energy efficiency

The report also discusses the need for greater efforts to be made to ensure that energy is used efficiently. It highlights the potential for savings to be made in a number of areas, from increased domestic insulation to more efficient domestic appliances. According to Alistair Darling's statement to the House of Commons introducing the report, seven per cent of domestic energy usage is attributable to appliances in 'standby' mode.

Incentives are to be provided for energy suppliers to encourage energy efficiency by customers (by selling more insulation or energy saving products for example). Alistair Darling contrasted this to the current situation where energy suppliers' only motivation is to sell more energy.

Planning regime changes

In order to assist in the implementation of energy policy, the report recommends certain amendments to the planning regime to make it easier for generation projects to be given the go ahead. While the Government has stressed the benefits this scheme will have for all power projects including renewable generation, commentators have indicated that this scheme is likely to be intended to facilitate nuclear power projects which might otherwise struggle to get planning permission.

Thoughts

The report might be welcomed by some, but others have raised a number of issues. In particular there is likely to be a finite quantity of investment capital available for new projects in the generation sector. To date, energy policy has been directed towards channelling that investment into renewables projects through the introduction of mechanisms such as carbon credits and the renewables obligation scheme. The announcement that nuclear is "back on the agenda with a vengeance" may well change that market, and some of the money that might otherwise have been available for renewables projects may now be diverted to nuclear projects.

The full report on the Department of Trade and industry.

Key Contact

Derek Goodban, partner, +44 (0)121 685 2710, derek_goodban@wragge.com

This alert may contain information of general interest about current legal issues, but does not give legal advice.

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