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Utility Week 28th November 2014

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18 | 28Th NovEmbEr - 4Th DEcEmbEr 2014 | UTILITY WEEK Policy & Regulation Market view A s winter begins to take hold, the UK government faces the prospect of energy shortages and blackouts against a background of geopolitical instabil- ity. This is not the Winter of Discontent, but the winter of 2014/15 – and its consequences – could be as severe. As consumer and retail demand for gas and electricity increases due to cold weather and shorter daylight hours, the UK's abil- ity to meet that demand is threatened by disruption to supplies of natural gas and restrictions in capacity to generate electricity (which, in part, is a consequence of the disruption of gas supplies). Declining North Sea resources and ageing infrastructure threaten the UK's supplies of gas. In the past two years, scheduled and unscheduled closures of North Sea pipelines and the interconnector pipeline with con- tinental Europe caused stocks of gas to run very low; it was reported in May 2013 that the UK's supplies were within six hours of run- ning out in the previous March. This winter, domestic supply problems might be exacerbated by interruptions to European supplies should Russia cut off sup- plies in response to EU sanctions imposed over its alleged involvement in Ukraine. Furthermore, instability in the Middle East and North Africa could have severe ramifications. While exports of US shale gas in the form of liquefied natural gas (LNG) offer an alternative source of supplies, the UK faces competition for LNG supplies from other EU countries and from China and Japan. Supply problems threaten electricity gen- eration, in themselves and via the impact of shortages on the retail price of gas. Electricity generation capacity is also reduced by the EU's desire to cut carbon emissions. Com- pliance with EU climate change directives has led to the shutdown of "dirty" coal- and gas-fired power stations before new nuclear generation facilities are in operation. Renew- able electricity generation is unreliable, particularly in winter months, and does not offer sufficient capacity to replace the lost conventional generation capacity. Obtaining supplies from Europe might be problematic as the EU faces potentially worse capacity problems for the same reasons. All these factors mean the UK's maximum electricity generation capacity is danger- ously close to maximum consumer demand. The situation has also worsened recently because the nuclear reactors at Heysham 1 and Hartlepool will be shut down until 2015 aer cracks were discovered in a boiler, and when restarted they will not be at full capacity. In addition, the Didcot B combined-cycle gas turbine (CCGT) power station remains shut down indefinitely following a severe fire in October 2014. The UK government has policies to deal with the capacity problem. In the long term, it is subsidising the construction of new nuclear power stations and renewable energy programmes. In the short term, under the capacity market scheme, it contracts with owners of gas- and coal-fired power sta- tions to pay a guaranteed price in return for guaranteed generation capacity. The problem with this, though, is that the long-term solutions do not solve the imme- diate problem, and the short-term solution has its own problems. In July 2014, the EU confirmed that the capacity market scheme complies with EU state aid rules, but will it face civil challenges by those who lost out in the auction, under other EU-derived competition legislation on the grounds that it distorts competition? And how does the concept of the UK government fund- ing high-carbon-producing coal-fired power stations square with EU carbon reduc- tion legislation? Most importantly, will the capacity market actually deliver guaranteed generation capacity? The year 2015 will see a general election and membership of the EU is likely to fea- ture heavily in the build-up. If Eurosceptic parties can show a link between EU climate change and/or competition legislation and/ or EU foreign policy on one hand, and win- ter blackouts in the UK on the other, the UK government might face a political problem. The situation is far more complex than that, but in a world of soundbites and spin, securing the UK's energy production capa- city takes on added significance. Richard Power, head of energy disputes, Berwin Leighton Paisner LLP Cold snap Richard Power appraises the UK's security of energy supply and the ability of the capacity market's guaranteed generation to patch up any problems that might arise. Could gas get us off the hook? The obvious alternative short-term solution to the UK's security of energy supply issues is to create a strategic reserve of gas and reverse the closure of gas-fired power stations. Embracing gas as a "cleaner" carbon-producing fuel could provide a buffer period before the development of more efficient and reliable renewables and the new generation of nuclear power stations coming online. But is this realistic? Creation of a strategic reserve would require significant expenditure on storage facilities and stocks of gas, which in a time of austerity would be difficult to justify. Perhaps more significantly, it would require a volte-face by the government, going against EU climate change policy, domestic legislation and the environmental movement. Politically that would be unappealing, and in any event, it might well be too late to achieve this anyway. Another solution would be to take the view that the EU's contribution to cutting global carbon emissions is so minuscule compared with emissions from the US, China and other developing nations that it is an inefficient, futile gesture, the main effect of which is the distortion of the European energy market. Security of the UK's energy supply can be achieved by repudiating EU and domestic car- bon agreements and laws on carbon emissions; keeping open and building new coal-fired power stations; and importing coal from the US, which is easily transportable and cheap due to domestic competition from shale gas. That, however, could be political suicide.

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