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ORIGINAL: TheEconomist

Britain's energy crisis

How long till the lights go out?

Aug 6th 2009

Thanks to its posturing politicians, Britain will soon start to run out of electricity. What should it do?

Derek Bacon

IN THE frigid opening days of 2009, Britain’s electricity demand peaked at 59 gigawatts (GW).

• Just over 45% of that came from power plants fuelled by gas from the North Sea.
• A further 35% or so came from coal,
• less than 15% from nuclear power and
• the rest from a hotch-potch of other sources.

By 2015, assuming that modest economic growth resumes, a reasonable guess is that Britain will need around 64GW to cope with similar conditions. Where will that come from?

• North Sea gas has served Britain well, but supply peaked in 1999. Since then the flow has fallen by half; by 2015 it will have dropped by two-thirds.
• By 2015 four of Britain’s ten nuclear stations will have shut and no new ones could be ready for years after that.
• As for coal, it is fiendishly dirty: Britain will be breaking just about every green promise it has ever made if it is using anything like as much as it does today.
• Renewable energy sources will help, but even if the wind and waves can be harnessed (and Britain has plenty of both), these on-off forces cannot easily replace more predictable gas, nuclear and coal power.

There will be a shortfall—perhaps of as much as 20GW—which, if nothing radical is done, will have to be met from imported gas. A large chunk of it may come from Vladimir Putin’s deeply unreliable and corrupt Russia.

Many of Britain’s neighbours may find this rather amusing. Britain, the only big west European country that could have joined the oil producers’ club OPEC, the country that used to lecture the world about energy liberalisation, is heading towards South African-style power cuts, with homes and factories plunged intermittently into third-world darkness.

In terms of energy policy, this is almost criminal—as bad as any other planning failure in New Labour’s 12-year reign (though the opposition Tories are hardly brimming with ideas). British politicians, after all, have had 30 years to prepare for the day when the hydrocarbons beneath the North Sea run out; it is hardly a national secret that the country’s nuclear plants are old and its coal-power stations filthy. Recession has only delayed the looming energy crunch (see article). How did Britain end up in this mess?

A free energy market needs more than one country

To the extent that successive governments had a strategy, it was on the face of it an attractive one: they believed in open energy markets. Beginning in 1990, the state divested itself of control of the energy industry. Power plants were privatised and a competitive internal electricity market was set up. Whereas most continental power providers, often state-backed, tied in supplies through long-term contracts (notably with Russia), British firms happily tapped the North Sea and planned to top up as necessary on the open market. This approach for the most part kept consumer prices down, but practical problems have long been clear.

Most obviously, the rest of Europe (wrongly) failed to liberalise wholeheartedly too. The market is thus a highly imperfect one: Britain was unable to buy gas at any price in 2004 and 2005, for example. Meanwhile, without any clear guidance from the government, Britain’s electricity providers have had little incentive to start adding the sort of capacity that would help the system as a whole function more robustly—let alone diversify the sources. Tony Blair spent most of his prime ministership running around the issue of nuclear power (at the last minute deciding it was all right). Asked about energy, Gordon Brown has tended to waffle on about his (unfulfilled) ambitions for renewable energy. Nobody has been willing to discuss pipelines, terminals and power generation.

To make matters worse, the new capacity that is in the works is probably the wrong sort. With no official energy policy, the power firms look sure to go for the easiest option—building more gas plants, which are cheap, relatively clean and quick to build. Britain’s dependence on gas for its electricity seems set to rise from just under half to three-quarters in a decade. Even if this new dash for gas happens fast enough to keep most of the lights on, which is by no means certain, it would leave the country overly reliant on one power source.

Electricity prices in Britain would be tied directly to gas prices, which can fluctuate wildly. Although many sources of gas are already bound up in long-term contracts, optimists think Britain might be able to get more of it fairly easily. Norway’s North Sea reserves have life in them yet. New technology to capture gas from coalfields has recently boosted supplies, which could help keep prices down. But those sources are unlikely to meet all the extra demand, leaving Britain in a position familiar to many of its neighbours: relying on Russia. It is not just that relations with Russia are at their worst since the cold war; Mr Putin’s crew seem more interested in terrorising their customers than developing new gasfields.

Brown out; then come the brownouts

With gas too risky, coal too dirty, nuclear too slow and renewables too unreliable, Britain is in a bind. What can it do to get out of it? At this stage, there is no lightning-bolt solution, but two things would prevent matters from getting worse.

1. The first has to do with infrastructure. Companies must be cajoled or bribed into building gas storage. At the moment there is barely a week’s worth, so there is nothing to lessen the impact of price rises and the shenanigans of foreign powers. More cross-Channel power cables would help, allowing Britain to import electricity directly from its better-supplied neighbours (and also helping create a Europe-wide power grid, thus improving security for all EU members).
2. Second, carbon must be taxed if firms are to invest in long-term, expensive, technology-heavy projects such as nuclear plants, cleaning up coal and taming renewable sources of power. Carbon is already assigned a price through the European cap-and-trade mechanism, but the system is focused on the short term, vulnerable to gaming and plagued by hugely fluctuating prices. A tax on carbon is hardly going to stop the lights going out in a few years, but it would provide a floor price for power, giving investors a clearer sense of likely profits. In the meantime you know who to blame.