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Davey joins the table in the Coalition's gamble with UK energy policy

    Writing in the early May edition of Liberal Democrat News the new Lib Dem Energy Secretary, Ed Davey, declared, “I was astonished to learn that we still get around a third of our electricity from coal and those power stations are coming to the end of their life, as are many gas plants and older nuclear plants.”  What Mr Davey is here rightly acknowledging is that for a over twenty years Britain has enjoyed a diversified electricity generating grid with no overdependence on any one fuel.  This is about to change irrespective of the ambitions set out in Tuesday’s Draft Energy Bill.

    In fact this winter the UK regularly sourced 50% of its electricity from coal plants, a third of which the UK must close by 2015 to meet EU rules.  The gas plants are not nearly as old as Mr Davey thinks and will increasingly shoulder electricity demand as more are built and the price of electricity becomes closely linked with the price of gas.  So what of this week’s Draft Energy Bill and the likelihood of new nuclear plants being built by 2020 and a future balanced electricity generating grid?

    Ed Davey had a letter published in the Daily Telegraph yesterday in which he rightly claimed that more dependence on imports of gas from the Middle East will leave Britain exposed to further price shocks from the rising price of wholesale gas, but his rhetoric is not matched by the actions of his own department.

    As a result of the new delays facing the construction of new nuclear plants the construction of many more gas fired power stations is to continue apace which will exacerbate this very overdependence on imports which the Energy Secretary seeks to avoid.   Add to this that Mr Davey is set to announce a ‘Gas Generation Strategy’ in the autumn which will start a new ‘dash for gas’ which could see over 70 per cent of UK electricity generated from gas by 2020 and rising;  80 per cent of this gas is likely to be imported.

    By providing life extensions to Britain’s rapidly ageing nuclear reactors Mr Davey, contradicting his point in Liberal Democrat News, risks further delaying new nuclear build further and creating a situation where new gas plants fill the gap. 

    An option still open to the Energy Secretary is to ignore the EU directive which is forcing the UK to close a third of its coal and all of its oil electricity generating capacity and instead place it in a ‘strategic reserve’ thereby maintaining some electricity supply diversity until new nuclear and carbon capture plants are ready in the early 2020s.

    In The Atomic Clock, published in January by the CPS no pleasure is taken from two predictions which have since come true.  The first, that E.ON and RWE which made up the Horizon nuclear consortium would leave the field in seeking to build new reactors and that EDF would seek lifetime extensions to its ageing British nuclear plants. 

    Ironically, the Coalition’s imposition of a carbon price floor from April 2013 undoubtedly helped persuade the Germans (E.ON and RWE) to leave the nuclear race (due to their high exposure to UK coal, gas and oil plant) and also prompted EDF to request reactor life extensions as their existing zero carbon nuclear plants will not face any future carbon price floor penalty.  The carbon price floor will nearly double between 2013 and 2020, rising from £16t/CO2 next year to £30t/CO2 in 2020.  Resulting higher electricity costs will be passed onto consumers and energy intensive industry by the generators.

    Electricity Market Reform perhaps needs a new title; it is not about reforming a market but about replacing the very nature of a market’s function with that of Government control and central planning where prices are fixed so that investment risk is slashed, but it remains unclear how Contracts for Difference, that are intended to guarantee return on investments, would work. Is the Government the counterparty in the CfD arrangement or not?  Investors need to know.

    A Government which decides to impose high carbon taxes just as it proposes more carbon intensive plant in the shape of new unabated gas plants should prepare and expect those of us who follow these issues to react with both bemusement and deep concern.  The deepest of these concerns is that Electricity Market Reform will lead to higher bills, overt foreign energy dependence and no new nuclear plants online before 2020.  Watch this space.

    Tony Lodge is a Research Fellow at the Centre for Policy Studies and author of The Atomic Clock - How the Coalition is gambling with Britain’s energy policy published in January by the CPS

    Tony Lodge is a political and energy analyst. He is a former Editor of the European Journal and a former Chief of Staff to the Shadow Attorney General and Shadow Secretary of State for Constitutional Affairs. He has written regularly in the national and international media and appeared on national TV and radio covering energy policy issues.

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