Caroline Hand looks at how the Energy Bill might influence the energy mix over the next two decades.

After a period of heated debate, the Coalition Government finally hammered out an agreement on the scope and direction of future energy investment, and the Energy Bill was published on 29 November. It was closely followed by statements on gas and energy efficiency, which form part of the Government’s overall energy strategy.

The Bill promises substantial subsidies for both renewables and nuclear, but has disappointed environmentalists and the green business lobby by failing to set a target to decarbonise electricity generation. It will now make a lengthy passage through Parliament before hopefully obtaining Royal Assent in 2013. This article seeks to predict the effect of the new policies on the future energy landscape of the UK, and their likely impact on consumers.

First, the bad news

It appears that Chancellor George Osborne and the Treasury finally got their way in the debate over a proposed 2030 decarbonisation target, which would have cut CO2 emissions from the current 486g CO2 to 50g per kWh. Not only the green non-governmental organization (NGOs), but also the influential Committee on Climate Change and sustainable business lobby the Aldersgate Group, had put their weight behind this proposal as being the only way of achieving the statutory targets contained in the national carbon budgets.

The UK has committed itself to an 80% cut in carbon emissions by 2050 — a daunting target bearing in mind that emissions only fell by 7% last year, much of this thanks to the recession and a warmer winter in any case. Instead of making a firm commitment to decarbonise electricity generation by 2030, the Government has deferred the decision until 2016, after the next election.

But good news for renewables

Generous subsidies totalling around £7.6 billion will be made available over the next eight years for low-carbon energy generation, primarily wind, nuclear and carbon capture and storage (CCS). This will enable the UK to achieve its target of generating 30% of electricity from renewables by 2020.

The money will come from consumers’ energy bills, adding approximately £178 to the average annual household energy cost by 2020. It will be paid to the green generators through a system of “contracts for difference” which guarantee the generators a long-term price for their electricity. These contracts will be underwritten by the Government in order to give security and certainty to the developers.

Wind power storms into the lead…

Wind power is likely to be the main beneficiary from the new subsidy. Maria McCaffery, chief executive of Renewable UK, has made a confident prediction that 31GW of wind generation capacity will be available within 15 years. Wind will be the main contributor to the 30% renewables target, overtaking nuclear, and could be supplying 20% of the nation’s electricity.

While some politicians have been vocal in their opposition to additional onshore wind turbines, the offshore wind sector has had a very good year; investment in offshore wind grew by 60% to £1.5 billion. Samsung Heavy Industries was given permission to demonstrate a 7MW turbine off the Fife coast and Siemens’ 6MW machines will be installed at the Gunfleet Sands project early in 2013.

…with a secondary role for other renewables

While wind is viewed as having the greatest potential to provide sustainable energy on a large scale, other renewables will also benefit from the subsidy. Rapid short-term progress can be made through converting power stations from coal to biomass, and through large-scale solar projects. To ensure that such projects do not capture all the funding before new wind turbines have been constructed, these shorter-term options have their own ring-fenced budget.

For all renewables, the contracts for difference will last 15 years: shorter than the 20-year timescale requested by the wind power industry.

Alongside a dash for gas?

At the same time, the Government has given the go-ahead for at least 30 new gas-fired power stations. Some commentators have suggested that the Chancellor believes gas prices will fall as new domestic supplies become available through fracking, and global supplies exceed demand. If so, an increase in gas-fired generation would give the best deal to the consumer.

The Government’s gas strategy, published on 6 December, sets out a range of possible scenarios. One of them assumes the 2030 decarbonisation target of 50g CO2 per kWh will be adopted, and envisages gas chiefly as a backup for renewable generation. This would give the go-ahead to around 30 new gas-fired power stations. However, other scenarios allow for a relaxation in the carbon budget targets and could result in up to 49GW of new unabated gas-fired generation.

Fracking is to benefit from generous tax breaks but as yet it is hard to predict how much additional gas it is likely to provide. One analyst has estimated that 2500 fracking rigs would be needed in the UK just to offset the decline in North Sea gas production.

The Energy Bill places a cap on emissions from fossil fuel generation. Under the Energy Performance Standard, new power stations will be required to keep their emissions below 450g CO2/kilowatt hour (kWh) or install new CCS technology to meet the limit. In consequence, no new coal-fired stations can be built unless they are fitted with CCS. However, the 450g cap falls well below the 50g aspired to under the decarbonisation scenario and makes unabated gas a desirable option from the economic point of view.

And what of nuclear?

A few years ago, the Government seemed to be viewing nuclear power as the only practicable solution to the energy gap about to be created by the imminent closure of ageing coal stations. However, with the increased focus on wind and other renewables, the future for nuclear now seems less certain.

Nuclear generation can benefit from the contracts for difference, but because the lead time for planning and constructing new capacity is so long, much of the pot of money could well have been snapped up by wind generators before the nuclear stations can come on-stream. The Government has a goal of 16GW of new nuclear capacity by 2025, but it is estimated that this would require additional subsidies of between £5.5 and £12.6 billion per year.

Any future for coal?

With all the emphasis on “green” energy, it is easy to forget that 40% of our electricity is still generated from coal. The Energy Performance Standard in the Bill ensures that older, polluting stations will have to close but there is a place for clean coal stations with CCS. Like nuclear and renewables, CCS projects can bid for funding under the contracts for difference and the £7.6 billion was calculated with a view to including the cost of commercialising CCS. Unfortunately this is an area where the technology is not yet fully established and in the various discussions surrounding our future energy mix, the place of CCS remains something of an unknown quantity.

Finally, what of consumers’ pockets?

As already mentioned, the consumer will be picking up the bill for the new green energy mix. For the average householder, this will mean an extra £3 each week. But in the long term, the consumer could well benefit as renewable energy will eventually cost less than the alternative option: more gas-fired generation. The large consumer price increases experienced over the last few years have primarily been a consequence of rising gas prices rather than the subsidies paid to renewables.

Because gas prices are likely to continue to rise, the Department of Energy and Climate Change estimates that bills will be £245 lower in 2030 than they would be without the investment in green energy. And in the long term, the subsidy may be a small price to pay for energy security in an uncertain future.

Last reviewed 15 January 2013