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Bills face a power surge

Douglas Fraser | 19:49 UK time, Friday, 18 September 2009

The big six energy utilities, including Scottish Power and Scottish and Southern, are today brazenly facing down criticism that they seem to be failing to pass on lower energy prices to their customers.

There's no anti-competitive collusion, concludes the regulator, so customers are left to pressurise the companies as they choose.

The main explanation is that the forward prices of gas, to which they have committed, are higher than the wholesale market if they buy now.

But that's merely a row about the short term. And the price of raw materials for gas and electricity only account for between 50% and 60% of bills.

What about the medium-to-long-term?

It doesn't look good.

The message I'm getting from the utilities is that several different factors are driving costs up relentlessly, and it's not just about their need to turn a profit.

The source of gas, of course, is becoming less secure, and its price more volatile.

It's not even following the price of oil these days, as it's previously done.

Oil has bounced up again from its lows in winter, and gas has plummeted in price since its peak last year.

It's been helped down by a highly carbon-intensive process of extracting gas from Texas shale, which has been sharply increased in recent years for the US market.

Britain now needs to import gas. It's at the end of the big pipelines from Russia, and, eventually, from Libya.

The insecurity is eased by the recent start of liquefied natural gas being shipped into Wales, but that doesn't stop a vulnerability to spikes in global prices.

A key factor is the need to replace generation capacity, and to make it greener.

Wind power is much more expensive than conventional big power stations, but it's essential to meet climate change targets.

Other renewable technologies haven't even been proven commercially yet, and once they are, they don't look like they're going to be cheap either.

Even without the need to boost renewables, old power stations need replaced.

Old nuclear will cost vast amounts to de-commission.

New coal is supposed to come with carbon capture technology - clever stuff, though unproven technology, a long time from becoming fully commercial, and it's reckoned to be one of the most expensive ways to save the planet.

Distribution costs are another significant pressure, already accounting for about 15% of the bill.

Energy reaches us via a national grid which is creaking, partly through age and partly through changing patterns of demand.

It was built as a solid piece of fine British engineering. But that was decades ago. Many billions of pounds are needed to replace kit.

And it was built to link big power stations with population centres. That pattern is changing.

Power sources are moving to more remote areas, where renewables can be generated most efficiently.

So new power lines, carrying more capacity, are needed.

The most recent costing for a British upgrade was heading towards 拢6bn, and all of that can be expected to land up on your power bills.

There's also a need to build an international grid, across the North Sea and the English Channel, as the ability to trade power will be important to keeping supply constant.

That will cost lots more. One energy expert told me this week the cost of of re-wiring the European Union over the next two decades is reckoned to start around 600 billion euros, and that could easily hit a trillion.

If we're smart, we'll also need power lines that allow homes and businesses to feed back their surplus micro-generated power. More cost.

Talking of smart, we're all due to get meters that inform us how much energy we're using, so we can monitor our use and cut down on unnecessary waste.

Between electricity and gas, up to 44 million smart meters should be distributed to 26 million homes in the next decade. The cost of that will be piled onto bills.

The list of upward pressures goes on. As prices go up, so does fuel poverty, and there's additional political pressure to combat that.

One solution is use social tariffs. But with government finances getting very tight, is that money going to come from the taxpayer? More likely it will come from levies and pressure on the utilities, which are also being expected to fund energy conservation measures, such as insulation or advice services.

Any way you plug in the figures, the power surge on your bill can be expected to keep going.

Comments

  • Comment number 1.

    Hello Douglas,
    I made a suggestion on the No 10 web site which disappeared without trace: when all the North Sea gas and oil has run out, refit the gas rigs with solar panels to generate electricity, then use that to electrolize all that salty sea water (nice and conductive is sea water). collect the hydrogen and pipe it through the existing pipe network. The oxygen can be liberarted to the atmosphere.
    OK, so perhaps gas rigs in the North Sea do not get enough sunlight for your typical PV panels to be efficient. Well then, use big sunlight collectors to heat water, to raise steam to drive turbines to generate electricty. You could also strap some wave powered generators underneath the gas rigs to help. ...and go the whole hog with some wind turbines.
    The advantage of shipping the gas would be that it is less peaky than instantaneous electricity and gas storage technology is mature (pass me my old hat) whereas we're still doing battles with batteries. Oh, and of course, that hydrogen could also be shipped to "gas stations" to fuel the next generation of fuel-cell equipped motor vehicles...
    Best Regards
    John Rendall

  • Comment number 2.

    Hi Douglas,

    Excellent summary of the energy issues facing us in the coming decades - you've got a good grasp of the decisions facing the country. The price of oil and gas has effects throughout the economy, and there is a real need to create energy security in this country. I would agree that the new wave and tide energy devices have a long way to go, but at least Scotland is leading with this technology. Wind and conventional hydro are going to be the principal renewable energy sources in the coming decades, and from the experience of the projects being established in Orkney and Shetland, local and community ownership of the machines is the way forward.

    Kind regards,
    Richard Gauld

  • Comment number 3.

    Douglas:
    Some key inaccuracies, based on your prime assumption that gas supplies are insecure. They stem from your (or your utility message givers) misunderstanding about "

    "It's been helped down by a highly carbon-intensive process of extracting gas from Texas shale, which has been sharply increased in recent years for the US market."

    I think you confuse the highly carbon-intensive process" with OIL sands (which are in Alberta by the way). Shale Gas, as any Google search will tell you, has revolutionised US natural gas production. The question is, if the technology can be transferred worldwide. And let's knock the environment question on the head first:

    This week in Washington, the foremost and oldest US environment charity the Sierra Club, joined with the gas industry to lobby the US government to use the glut of US gas in more coal fired generators, something which is already starting in the US. That's right : replacing coal with gas is cheaper. The Sierra Club, and US Greenpeace, want to replace coal with gas because it only uses half the carbon to generate the same amount of electricity.

    Back to Shale: Shale production started in Texas, but has now spread throughout North America. It's big in parts of the US Northeast, where it has an added advantage of being close to major markets. It has also been discovered in Quebec and Nova Scotia. But the big news in Canada is a huge discovery in British Columbia (the greenest politically province in Canada. The gas from there is to exported via the Kitimat LNG plant, which was built to import gas. The customers lined up include South Korea and Gas Natural of Spain, the largest European LNG importer.

    The big question is: If shale gas is so easily found in North America, can it not also be found elsewhere, as shale is the most common form of sedimentary rock, which in turn is the most common type of rock on earth?

    Google the name of Dr Stephen Holditch, head of Petroeum Geology at Texas A+M University. You will find links to an address he made at the Groningen Gas Conference in June 2009, where he said that shale gas would increase gas reserves NINE times!

    At that conference., he also discussed specifically if the Southern Permian Basin, which runs from Eastern England, under the Southern North Sea (source of most UK gas production) across Europe as far as Poland would have nine times more reserves than previously thought. In anonymous voting, 56% of the audience of gas professionals agreed.

    In the UK, shale play have been identified onshore in Cheshire, Surrey, Kent and Hampshire. Conoco Philips recently announced a big shale play in Poland. Shale prospectors are also active in Eastern France and even Switzerland. Austria and Hungary are also considered hopeful. Dr Holditch said he believed that there was over 500 trillion cubic feet of gas in Western Europe alone, and over 10,000 TCF worldwide. How big a number is that? Huge. The UK uses about 2TCF per year!

    The monster in the planetary room is China, where gas reserves of over 2500 TCF are considered possible. Imagine the impact of China using shale gas. That alone knocks the idea of the UK having to compete on world LNG markets on the head.

    The Oxford Energy Institute for Energy Studies has a study called "Can Shale Gas be a Game-Changer for European Gas Markets?". The answer is probably yes.

    Utilities, and commercial energy consultants, and most especially switching sites, want us all to think that gas, which is the prime price driver for UK electricity, is in a finite supply. As recently as last year it was considered so. Shale gas will change everything everyone thinks they know about energy use, energy prices and the impact of energy on the world environment and economy.

    I don't know if I'm allowed to post web links, If I am let me know, I have quite a few. Or Google them yourself everybody: Shale Gas, Stephen Holditch, Potential Gas Committee, Groningen Gas Conference etc etc.

    Kind Regards

    Nick Grealy




  • Comment number 4.

    Meantime while we're waiting for all this pie in the sky technology to appear magically on the horizon, let's have a little bit of action from the government. How about a cut in tax on fuels, or dare I suggest, fix gas and electricity prices; whether the power companies like it or not it should be done and could be done,there would be squeals of outrage, but they would soon find ways of maintaining their obscene profits by reducing costs. Fixing prices doesn't kill business, they make it more efficient and everything associated falls into line very quickly or goes bust.Fixed prices worked well in the 40's and 50's and would work just as well now, though a lot of company shareholders would be unhappy.

  • Comment number 5.

    This summer, the Scottish government published its final report into .

    Despite strong submissions from Scottish industry and the trade unions in support of nuclear power, the policy of the Scottish government was restated:
    鈥淲hile nuclear energy will continue to play a part meeting service demand for electricity for the lifetime of the current nuclear power stations, the Scottish Government is also very clear that Scotland neither needs nor wants new nuclear power generating capability in Scotland, and no replacement nuclear power capability will be developed in Scotland.鈥

    The report says the government takes this view because it questions the reliability of uranium imports, the net CO2 savings that can be made if calculated on a full life-cycle basis, the moves towards deep storage of waste and the costs of decommissioning.

    The results of the government's current inquiry into the future of the financial sector is keenly awaited. The damaged reputation of Scotland for economics certainly needs improving.

  • Comment number 6.

    Shale gas can also be used as a bridge fuel to renewables. For example, if wind is backed up with gas generation, the result isn't as carbon free as nuclear, but it would be far less expensive.
    The idea that renewables are unreliable or expensive or will never happen is another old idea that needs to be revisited.
    For example, Ireland has a target to generate 40% of electricity from renewables by 2020. In August 2009 there was a day when 39% was reached, and more could have been generated but there was no way to export the surplus to the rest of the British Isles.
    Another point to consider is how energy demand is falling in the developed world, and the rate of growth is slowing elsewhere. For example, January 09 was 20% above average coldness, and 40% up year on year. But how to explain domestic use falling by 3%?
    Basically it's an aggregation of lots of little things. For example, 40% of gas demand comes from domestic central heating. 5% of boilers get replaced each year, and they are anywhere from 20 to 60% more efficient than the those they replace. In one year, it's a minimal impact. After five, it starts to show up and won't be reversed. 5% of people hate CFL lights, and 95% have a life. But with 20% or so of electricity demand from lighting, reducing the kWhs to 13watts instead of 60 adds up to a whole bunch multiplied by 250 million or so light bulbs. By the way, LED lights will provide as good or better light temperature than incandescents at the same cost, but at 3 watts instead of 60. This is happening now. The worlds two leading light bulb companies, GE and Philips have abandoned incandescent lighting independently of government regulations.
    Every refrigerator sold today is at least 20% more efficient than the one it replaces is another example of the impact of many small things.

    So with electricity demand down, and gas supply way up, the way for prices should be down, not up.

  • Comment number 7.

    If we stop fiddling around with carbon capture and sequestration and start to seriously invest in the use of algae reactors to consume the CO2 and produce oil which can then be "refined" into a range of liquid fuels. Interestingly this reduces the final amount of CO2 released by 50%.

    Burn coal (or gas) and solve the forthcoming liquid fuel supply issue!

  • Comment number 8.

    That 拢600 Billion cost to 'upgrade' could have been paid by the government, if we'd let A FEW BANKS GO TO THE WALL!

    Seemingly 'hidden' factors like this and the quickly depreciating (desperately being hidden by the govt) UK finances will all contribute to a 'lost decade' of economic hardship and political turmoil.

  • Comment number 9.

    Thanks to GasGuru111 (Nick Grealy) for clarifying and correcting a few items in Douglas Fraser's blog, regarding shale gas' environmental credentials and the availability of fossil fuels. As Nick points out, potential gas reserves are enormous. As for the "highly carbon-intensive process of extracting gas from shale" nothing could be further from the truth. In simple terms, shale gas is extracted from very low permeability (nanodarcy) rock by hydraulic fracturing, a process that uses water and "sand" (more or less) to create cracks in the rock allowing the gas to collect and escape via these cracks. The fracturing process is an old one but its use in such low permeability rock is relatively recent and the results have exceeded most people's expectations. This has opened up the possibility of accessing huge amounts of previously uncommercial gas deposits in these shales. So, we are not in danger of running out anytime soon.

    Re jer1954's comment, sadly there is no way that photovoltaic cells could produce much useful hydrogen under the scenario described, even if they were 100% efficient (most today are only ~15% efficient). At North Sea latitudes, insolation (ie incoming sunlight) is rather low anyway so the amount of power generated from a platform covered in PV cells would be small. Putting windmills on the structures might make more sense! However, the amount of hydrogen generated per day would be small - it takes about 50kW hours of electricity to produce 1kg of hydrogen so you would need several gigawatts of power to produce as much hydrogen volumetrically as the methane gas produced by a typical gas platform today....not feasible, I'm afraid. Finally, while sea water is conductive and will generate hydrogen by electrolysis, it will generate caustic soda and chlorine (rather than oxygen) in vast quantities due to the salt content. I'm not sure they would be welcome or desirable products, from an environmental perspective.

  • Comment number 10.

    It's worth pointing out to #5 (Euroscot) that the Scottish Government's own survey of 3000 people found that Scots support new nuclear power by 53% to 23%.

  • Comment number 11.

    Thanks for the information Simon, #10.

    We are indeed short of energy. It needs to be imported. Therefore geopolitical conflicts, especially in Russia and the Middle East, are the biggest threat to Scotland's future energy - says the Scottish government's report. And in geopolitics Russia's CSTO is challenging Nato more.

    As mentioned earlier, Scotland is at the end of long gas pipelines from Russia. Vital supplies of liquified natural gas are having to be shipped to us, via Wales, from unstable regions such as the Middle East.

    Should we take out insurance against the number one risk to imports? Industry and the Unions are among those who recognise the danger.

    Relax, we are told: Scotland neither needs nor wants new [or replacement] nuclear power generating capability in Scotland [#5]

  • Comment number 12.

    Euroscot #10: And Douglas! Read my post #3.

    We are NOT running out of gas. We are not beholden to Russia, nor even Norway who send us far more gas than anyone else. The world is swimming, floating, up to our ears, glutted and generally has a lot of gas. Wholesale prices for gas are down over 50% year on year and the price for delivery in October is 75% down on the same contract this time last year. A gas shortage is old news!

  • Comment number 13.

    The number one threat to Scotland's energy security - geopolitical conflicts. A recent book Rising Powers, Shrinking Planet warns of intense competition for energy resources between the great powers. The book carries a warm endorsement from the US director of national intelligence.

    But this is not a new warning. Serious energy insecurity was the subject of an address to Nato in 2006 by the chairman of the US Senate's Foreign Relations Committee. Senator Lugar said that some were overly optimistic in hoping that countries with abundant oil and gas resources will reliably supply these resources in normal market conditions to those who need them; that pipelines, sea lanes, and other means of energy transportation will be safe; that energy cartels will not be formed to limit available supplies and manipulate markets; and that energy-rich countries will not exclude or confiscate productive foreign energy investments.

    The alerts from the US reflect the frustration widely felt among European Union and NATO member countries. The EU has so far failed to formulate a common energy policy and supply diversification strategy.

    GasGuru, you should keep plugging away trying to persuade companies to invest in exploring the UK for shale gas.

  • Comment number 14.

    The energy company's spill out excuse time and again for there ever increasing bills, what I dont agree with is that the money we have to pay for furture development into new energies or technology or what ever they wish to call it. why should we pay for them to have a new business ready to take over from there ever declining gas supply and have huge profits as normal, a gas supplier supplies gas only, if they want to supply a new energy or product then let the share holders pay for it's development in full as there the only ones who benefit.
    And why doesn't the government help householders a lot more in getting solar or turbines for there homes. the more people that takes up the scheme it would greatly help ease the situation, I for on would love to have solar but cant afford the cost as like a lot of companies as soon as another solution pops up so does the cost. the government could offer inflation rate homeownwe loans as well as the grants. Or they could just read all the comments on this site there are some fantastic ideas and solutions that could work there is also alot of good information. But I dont even believe anything would be done as it seems the energy comanies have the government in there hands like putty. And where is the energy regulator they do nothing time and again. and since when would anything be done for the general public to benefit them. Everyone involved in allowing prices to be kept artificialy high should hang there heads in shame. paying out hundreds of pounds every month is becoming normal practice for energy and that is unexceptable. Do these companies actualy believe the vast majority in this country believe the rubbish that the company bosses spout about, No we do not but I think its time for the government and the regulators to step up and change the way in which we are treated and relieved of our hard earned money.

  • Comment number 15.

    To learn about emerging shale plays in Europe, visit the blog

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