Source: BBC Radio 4: Today Programme
URL: N/A
Date: 19/02/2013
Event: Ofgem: "we have a form of near-crisis coming, for our power station stock"
Attribution: BBC Radio 4
People:
Evan Davis: Well, get ready for higher energy prices - it's the message from Alistair Buchanan, the Chief Executive of Ofgem, the energy regulator. In a speech this afternoon, he'll set out why. We'll be relying more and more on imported gas, as we close down coal and oil-fired power stations. Now that leaves us with an immediate challenge. New nuclear power stations look set to be built later but only with phenomenal subsidies - that's hardly a route to cheap power. Well, Mr Buchanan is stepping down later this year and none of it will be his problem, other than as a consumer, trying to pay his bills. But his view of the market is not one that can be ignored. And he's with us now - good morning to you.
Alistair Buchanan: Good morning.
Evan Davis: Thank you for coming in. Let's just start with the next five years, because what appears to be happening is we're closing down quite a bit of capacity. In fact, quite a bit we're closing down in the next couple of months, leaving us with - I don't know, potential energy dangerously close at least to full capacity.
Alistair Buchanan: I mean, "dangerously close" is a very good expression. What we're trying to highlight today to consumers is that 10% of plant - old coal and oil plant - is off the system within a month, and that's coming off early. And effectively, coal is being run as if it's going out of fashion, and it is going out of fashion - it was meant to go out of fashion in 2016, but it's coming off the bars now. And therefore it reinforces our warning - warnings that we've been giving since 2009, when we did Project Discovery, that life could get very tight and uncomfortable around 2015 to 2018, with regards to available power stations. Now, because of that, and because - as you rightly say - we haven't got new nuclear until the 2020s, we haven't got clean coal, we haven't got carbon capture, therefore we're going to have to rely on gas. And indeed so much are we going to rely on gas that gas currently provides 30% of our power stations - it will be providing 60% of our power stations. So where do we get the gas from? Well, we're going to have to go shopping in world markets. So just as we're tight for power station supply, we're going to go shopping for our gas in world markets, which briefly will be tight themselves. So we've got a double squeeze.
Evan Davis: And first of all, I mean, are you confident there will actually be enough supply? I mean, albeit we're relying, perhaps over heavily, on imported gas, but will we actually have enough?
Alistair Buchanan: Well, the government has stepped in with two really important initiatives. The first is in the Energy Bill, which is going through Parliament this year, which should provide incentives for gas generators to build gas plant. The second is a major push - you've seen it in all the newspapers recently - by the government to get us to focus on energy efficiency. For those who are vulnerable or fuel-poor, to take advantage of insulation, and for the rest of us, to look at how we bring our bill down, with the expectation that prices are going to get quite squeezy, as supply and demand converge.
Evan Davis: Right, but it's going to be pretty tight, for the next five years. And as you say, a lot of imported gas - and I think you make the point in your speech that a country like Japan, which entirely imports its gas, the prices there are about 60% higher than they are here.
Alistair Buchanan: That is an uncomfortable fact about where global prices are today.
Evan Davis: Right. We've heard a lot about fracking and how cheap it is in the United States. Why are you not telling us that gas prices are poised to go down, rather than up?
Alistair Buchanan: Yeah, gas shale could be very exciting for us, but the challenges - be they technical, environmental, planning - almost certainly mean that it's not going to affect the time horizon that we're looking at, between the next five to ten years. Now, some of your listeners may well say "Well, why don't we go and get some of America's gas shale?" Well, first of all, America has to agree to export substantial quantities of it - at the moment, they're only preparing to export limited amounts. And then you'll have to hope that it comes to us, rather than the more expensive Asian markets. But even if America did export their current gas shale price - which is very low - to Britain, by the time it gets here, it's going to be much the same price that we pay anyway.
Evan Davis: Right. Okay, so that's the next five years. We've got that rather difficult period, 2015 to 2018, say. Let's look further ahead. In terms of the price of energy, medium to long term, we've got this report in the Guardian today, suggesting nuclear power - the government is struggling to keep the price, with its help and support, struggling to keep the price below £100 per MWh, which I think is 10p a kWh in, sort of, normal money. Just take us through the sort of range of prices that different fuels cost. At the moment, what - it's about 5p a kWh, the cost of electricity.
Alistair Buchanan: That's absolutely right. And we - we've got a major set of initiatives by the government to effectively encourage power plant that is not able to compete on market price. So let's take offshore wind. The current price at the moment is £50 a MWh. If you just hold that in your mind -
Evan Davis: - don't know what a MWh is -
Alistair Buchanan: - but just hold £50. That's what matters.
Evan Davis: - but that's 5p a kWh -
Alistair Buchanan: - so, what are you going to need, to get offshore wind off the ground? Between 150 and 200? And the argument is that in time, you will have enough offshore wind that that price will start to fall.
Evan Davis: Right, but you - you're starting off about three times the current cost of the system.
Alistair Buchanan: It's a substantial cost.
Evan Davis: Nuclear they're trying to keep below about twice the cost of current electricity. What about onshore wind?
Alistair Buchanan: Onshore wind is actually becoming quite competitive, and that's substantially below £100. So if the current price is 50, if you can get planning permission, if you can build your plant, then hopefully you're going to make a good return.
Evan Davis: So, I mean the essence is, I mean, you've got - you're sighting a challenge that faces us for the next five or six years. I mean, it's really all looking pretty expensive further down the line, isn't it?
Alistair Buchanan: Well, hopefully we're going to get to a situation where we have a large amount of renewables, some nuclear power - we will also need fossil-fired power, if nothing else to provide the backup to the intermittent wind power. And that's the vision of the government, and various very important lobby groups, for 2030, 2050. And the argument runs that if you get critical mass, prices will start to fall.
Evan Davis: Hmm. I mean, is anyone to blame? As you look at this - you're going to be stepping out, you can be indiscreet now. I mean, anyone to blame for the predicament facing us, the high bills?
Alistair Buchanan: It isn't a person, or people, to blame. It was, in my view, a single event, and it was the financial crisis. Between 2004 and 2008, the government of the day backed a very visionary approach for energy, which was on wind, water and nuclear, effectively. And we signed international agreements to close down our dirty, coal-fired plants, during that period. That, really, took us to 2008. And then you had the financial tsunami. And so here was Britain, backing very attractive - with regard to environmentally attractive - forms of generation, which were very expensive, at the very moment that you then took the rug underneath our plans. And that has been a major issue.
Evan Davis: Well, we can blame the banks for it. [Laughs.] We normally do. But look, there's an important issue here, isn't it? At the moment, we are actually a low-price energy country. By and large, we're not paying as much as most others for gas, and we're not paying more for electricity.
Alistair Buchanan: It may not feel like it, for a domestic consumer, but on the gas side, we're one of the lowest in the European member states, and on electricity, we're average.
Evan Davis: And where we - if where we fall down, as a nation, is in the fact that we seem to have leaky homes and the bills are high, not because the prices are higher than anyone else's but because we're just burning more of the stuff, isn't that -
Alistair Buchanan: Well, I think you've put your finger on something very important, which is that we have to resolve, as you call them, "leaky homes". We have to focus on energy efficiency, and we've - I think we will be able to put much more focus on this, rather sadly, because we can see that we have a form of near-crisis coming, for our power station stock, in the next few years.
Evan Davis: Near-crisis. Alistair Buchanan, outgoing head of Ofgem, thank you very much for coming in.
Alistair Buchanan: Thank you.