UK energy challenges: generating power
Finding the energy
12 February 2018
The UK faces major energy challenges up to 2030 and the greatest change is likely to be in the way it generates its own power, says Mark Griffiths
The UK’s Clean Growth Strategy, published in October, is driven by 3 primary considerations in relation to energy: carbon reduction, cost minimisation and security of supply. Energy use falls into 3 basic categories: power, heat and transport. So how will these needs be met over the next decade or so?
Burning coal is no longer a viable option in the context of national and international carbon reduction objectives, and is disappearing fast in the UK. Hinkley Point also demonstrates that new large-scale nuclear power plants are not compatible with cost minimisation. It is likely that by 2030, transport will still be dominated by the oil-driven internal combustion engine, though with increasingly impressive efforts to change this in the longer term. Heat generation is expected to still be dominated by gas.
In short, the greatest change in the UK energy mix to 2030 will be in the way it generates power.
Figure 1: Total UK Energy Consumption: since 1990, gas has become the country’s most important fuel, mainly displacing coal. Source: DBEIS
There is broad recognition that coal, the most carbon-intensive fossil fuel, needs to be phased out as quickly as possible. Globally, coal production fell by 6.2% in 2016, the largest decline on record. In the UK, consumption dropped by a massive 52.5%, as coal’s share of electricity generation more than halved, falling to just 9%. The last deep coal mines in the UK closed in 2015, with imports accounting for 46% of remaining coal consumption in 2016, mostly from Columbia and Russia. On one day last April, for the first time since the Industrial Revolution, the UK used no coal at all in electricity production, thanks in part to favourable weather conditions.
In 2016, gas took up the slack from the falling use of coal in UK power generation, rising from 29% to 42% of the share.
Gas is also the primary fuel for heating in domestic and commercial buildings, with the result that it accounted for around 40% of total UK energy consumption in 2016 (see Figure 1). However, although much less carbon-intensive than coal, gas is still a major source of carbon emissions.
The UK’s national target is to cut greenhouse gas emissions, relative to 1990, by 57% by 2030 and by 80% by 2050. The latter is not just an aspiration, but a legal commitment in UK, not EU, law.
A 2017 survey by the Energy Institute found that 4/5 of its members believe the UK will miss the 2030 goal, and that the use of gas for heating will decline only moderately by then. Energy conservation measures can help at the margins, but in the near term there is no easy way to replace gas as the primary source of the nation’s heat.
Along with oil, UK gas production is in long-term decline, down in 2016 to less than 40% of its peak in 2000, when the country was self-sufficient. That left enough production to meet only 53% of demand, with net imports rising 22% on 2015. Around 65% of the imported gas came from Norway and 12% from the Netherlands and Belgium, all by pipeline. The 23% balance was liquefied natural gas (LNG), nearly all shipped from Qatar.
Four-fifths of the Energy Institute’s members believe the UK will miss its 2030 target for cutting emissions
Russia’s state-controlled Gazprom meets around a third of Europe’s gas needs. The UK Department for Business, Energy and Industrial Strategy (DBEIS) calculates that only a small amount of Russian gas normally reaches Britain, coming via the Netherlands from the larger international pipeline network to which it is connected. However, as the need for imports grows, the UK’s location on the extremities of that network is a potential concern. Norway is close by, but a 2016 forecast by Eclipse Energy, an analytics unit of Platts, projected Norwegian gas output falling more than half by 2027.
A further challenge is that the UK has very limited gas storage facilities. An enormous 70% of previous storage capacity is being lost as a result of the decommissioning of the Rough facility in the North Sea, which is no longer safe to operate.
This risk to security of supply will increase as domestic gas production continues to decline and reliance on imports grows. A worst-case scenario by National Grid shows 93% of UK gas demand being met by imports in 2050. There is an aspiration that the development of inland gas fracking could help to mitigate this reliance. However, there are far greater geological, environmental and political constraints in the UK compared with the USA where fracking has become commonplace.
The turn of the century saw the onset of the decline of UK oil production, and by 2016 34% of oil consumption was imported. It also saw the rise of the term 'peak oil' as the oil price climbed during the first decade. 'Peak oil' does not mean that the world is running out of oil; it refers, rather, to the increasing difficulty in producing it at a price that does not cause general economic decline.
The extreme oil price spike of July 2008 was eventually followed by an unprecedented 3-year run to September 2014, when the price of Brent crude averaged more than $100 per barrel. There were a number of responses, the most visible being the adoption of shale fracking production techniques in the USA. However, even though accounting for around just 6% of global supply, US fracking has become a victim of its own success by helping to drive down oil prices.
The result has been a dramatic reduction in exploration and development investment across the oil sector globally. There are important consequences: as investment in new fields has stalled, production from existing fields continues to decline.
A shift towards electric vehicles is expected to reduce demand for oil. But the key question is: by how much, and when? Although demand has been falling in OECD countries due to improved fuel efficiency and continued economic weakness, oil consumption grew globally in 2016 by 1.6%. That is not a marginal figure in terms of bringing forward new supplies, if repeated annually. The International Energy Agency (IEA) reports that conventional crude oil discoveries fell to a record low in 2016, with exploration spending expected to have fallen for a third consecutive year in 2017.
The reasons are relatively straightforward. First, the easiest prospects in the world have long since been tapped. Second, the oil price has simply been too low relative to exploration costs as new prospects become harder to bring online. To put this in perspective, oil discoveries totalled just 2.4bn barrels in 2016, compared with a 9bn average over the previous 15 years. Yet global annual consumption totals more than 30bn.
The typical time lapse between oil discovery and production is 5 to 7 years. Energy consultancy Wood Mackenzie believes the fall in discoveries is likely to produce an oil supply shortage and price spike from 2019 onwards. The IEA has estimated that the equivalent of Iraq’s entire annual production needs to be added to global supplies every 2 years simply to replace the decline in previous output.
Barclays has forecast that 2019 will see the lowest year – since it began keeping records in the 1990s – for new capacity additions, with just 1.2m barrels per day of new supply coming forward. By contrast, a continuing supply decline from existing fields combined with growing demand would amount to a differential of 4m barrels per day, producing an almost 3m gap over new supply. The IEA has also warned of rapid oil price increases by the early 2020s as existing wells continue to be depleted.
Should these scenarios play out, the potential implications are significant. Even with production in the USA greatly improved through the use of fracking, Middle Eastern producers already hold their largest share of world oil markets since the mid-1970s: with 34% of global output, or around 32m barrels per day, this is the highest proportion since 1975. In 2016, the IEA warned of this growing global dependence on production from the region, one of the most unstable in the world.
Fission-based nuclear power has been a reliable baseload generator for electricity production, accounting for 21% of generation in 2016. However, it is becoming increasingly uncompetitive once all costs, particularly environmental and safety ones, are reflected in the price of the electricity produced. Projections for adding new nuclear capacity by 2030 therefore look optimistic.
The commissioning of the UK’s newestnuclear plant at Hinkley Point in Somerset has resulted in developers being offered a guaranteed electricity price more than double recent average wholesale rates. In essence, power from large-scale nuclear fission plants cannot compete with gas without major subsidy, leading the Financial Times to conclude that: “A financially viable nuclear power station looks increasingly like a mirage.” Indeed, Switzerland and Germany have already made the decision to phase out nuclear power. Meanwhile, alternative nuclear fusion technology is estimated to be at least 50 years away from viability.
Figure 2: Eggborough and Drax coal-fired power stations, East Yorkshire
By the end of 2016, there was enough installedcapacity to supply an estimated 24.5% of world electricity from renewables, according to REN21, a global umbrella group for renewables. This was dominated by hydropower – 16.6% of global electricity – followed by wind at 4%, bio-power at 2% and solar photovoltaics (PV) at 1.5%.
For all global energy consumption in 2015, including heat and transport but excluding traditional biomass used primarily for cooking and heating in developing countries, renewables contributed only 10.2% compared with 78.4% coming from fossil fuels. Nevertheless, total global renewable power capacity grew by almost 9% in 2016. Solar PV accounted for around 47% of that growth, followed by wind at 34% and hydropower at 15.5%.
Under EU commitments the UK’s official target is to meet 15% of total energy demand using renewable energy sources by 2020, a figure which translates into a 30% figure for electricity, 12% for heat and 10% for transport.
In 2016, 8.9% of total UK energy consumption came from renewables, representing 24.6% of power generation, 6.2% of heat and 4.5% of transport. This was little changed from 2015, despite an increase in capacity, due to less favourable weather for solar and wind.
Nonetheless, on one Sunday last June, 70% of UK electricity demand was met by low-carbon sources, mostly nuclear, solar and wind; this was not a working day and weather conditions were favourable. On Friday 26 May, however, for part of the day, solar produced more power than nuclear for the first time.
Progress is expected to accelerate as the price at which renewables become viable keeps falling. Last April, Denmark’s Dong Energy announced it would build 2 wind farms in the German North Sea without subsidies, relying solely on wholesale market electricity prices.
Globally, solar prices fell by 62% between 2009 and 2017, with even the UK opening its first subsidy-free solar farm in September 2017. Bloomberg New Energy Finance (BNEF) estimates that for most of the world, solar PV will be the cheapest form of new electricity capacity in the 2030s. In some locations it is already cheaper than coal.
BNEF also estimates the world is within a decade of peak fossil fuels in the power sector, and that by 2040 the price of electricity from solar PV will have dropped by a further 66% and offshore wind by 71%.
However, the need for back-up conventional supplies – particularly fast start-up gas plants – will continue to add to overall consumer costs. In the UK, wind conditions can vary considerably, not only through the year, but from year to year. The Solar Trade Association estimates 12.1GW of solar capacity is now installed in the UK, equivalent to 8 new-generation nuclear reactors, should the weather ever allow it all to be used at once. That, of course, won’t be often.
This problem of intermittency will reduce once storage for electricity can be widely deployed. Though timing is difficult to predict, BNEF estimates that by 2028 affordable batteries will be ubiquitous.
The Cinderella of renewables remains wave- or tide-generated marine power. While the UK has an extensive coastline, development is technologically difficult. However, tidal has one major advantage: it is available every day without fail.
Despite previous policy promotion, enthusiasm for using farmland crops as a bioenergy source for heat, power or transport has been in decline. This is because, first, some analysis indicates that it may not be as carbon-positive as originally thought and, second, growing vegetation for energy can displace other valuable land uses, particularly food production and biodiversity. Energy from other biosources – such as landfill gas, waste food, waste wood or farm and industrial waste – will continue to have a role, but it is likely to be small relative to overall energy demand. In 2016, the total share of UK energy consumption accounted for by low-carbon sources – nuclear and renewables – rose by just 0.6% to 17%, with nuclear representing 8%, bioenergy 6%, wind 1.7%, solar 0.5% and hydro 0.2%. So, much work remains to be done.
Figure 3: A liquefied natural gas (LNG) shipping consignment. Gas has become increasingly important in the UK energy mix. A worst case estimate from National Grid shows 93% of UK gas demand being imported in 2050
There is now a general assumption that global transport systems will transition to the use of electric power, particularly for light vehicles. BNEF’s current projection shows relatively low uptake before 2030, but reaching 33% of the global car fleet by 2040. This displaces up to 8m barrels per day of transportation fuel with additional electricity consumption.
Governments and manufacturers continue to make announcements about the phasing-out of the internal combustion engine. Pricing, however, will be crucial. The most expensive part of an electric car is its battery, sometimes accounting for half the total cost. Lithium ion battery prices have halved since 2014, and some expect a further 30% fall by 2021, and more than 70% by 2030.
Security of supply
Although total energy consumption has fallen around 10% since 1990 (see Figure 1), partly through efficiency improvements, the UK is increasingly a large net energy importer. This follows the closure of most coalmines and the decline of offshore oil and gas production. There are significant national security implications, with indigenous energy production now 58% lower than its peak in 1999.
In addition to oil, gas, coal and uranium, UK energy imports include electricity brought in via interconnector subsea cables, primarily from France and the Netherlands, with net transmissions representing 4.9% of electricity supply in 2016. Including and beyond power generation, total net energy import dependency has returned to levels not seen since the 1970s, accounting for 36.2% of energy consumption in 2016.
The power infrastructure situation is also challenging. In 2016 the National Audit Office reported that 60% of 2015 generating capacity was projected to retire by 2035, including ageing coal and nuclear power stations. With a potential need for almost 140GW by 2035, to include some electrification of heat and transport, this would require the construction of 95GW of new capacity – which would be equivalent to 90% of established capacity.
However, a report from the Institution of Mechanical Engineers had concluded that it would be almost impossible for UK electricity demand to be met by 2025 as a result of the slow build rate for new power stations. It identified a worrying potential supply gap of 40–55% of demand.
Even if overestimated, those figures suggest that old and perhaps unsafe plants may have to be kept going for longer than planned – not a minor matter in the case of nuclear installations.
Property professionals' role
Many property professionals are already involved in implementing renewable energy infrastructure in the UK. However, with only limited prospects for replacing gas as the principal means of heating in the near term, surveyors will need to continue to provide energy conservation measures, particularly for the existing building stock where most heat energy can be expected to be consumed for many years to come.
Nonetheless, the solarisation of existing buildings, linked to on-site battery storage, is an area with great potential. Lightsource is already offering Sunplug, a combined solar PV and battery system, at no upfront cost to consumers, and aims to reach a million UK homes by 2020. Similarly, Nissan plans to store solar-generated electricity in the batteries of electric cars when they are not in use, and then to export it to the grid at times of high demand, with participants rewarded accordingly.
Solar PV paints and plastic film less than 0.1mm thick are also in development for use on roofs and walls, and PV glass for use in windows. With this come opportunities for the localisation of energy systems, either on an individual building basis, or via community-based micro-grids.
Though only a small proportion of the total stock, new buildings can take things to an altogether higher level. Already one 4-bedroom dwelling constructed in West Kirby on Merseyside has energy running costs of just £15 a year, including heat.