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Britain’s Growing Energy Problems

David Cameron, Britain’s new prime minister, may have succeeded in bridging his country’s political power gap, but another looms that could very quickly short-circuit the Tory leader’s grip on national power, unless his coalition government gets real – and quickly – over energy and environment.

For one thing, the sale of two-thirds of the nation’s power utilities to European competitors has effectively led to Brits subsidizing their EU neighbors’ energy costs; for another, just as the next election season rolls around in five years time, he is likely to find his autocue a little difficult to read as the nation’s lights start going out.

Power Game

Big Oil is the usual whipping boy for the public when it comes to energy. But British energy consumers might feel the time is ripe to turn up the heat on Big Power.

While UK energy prices spiralled upwards by 16.7 percent in 2009, the average increase across the rest of the European Union was a mere 3.8 percent. All of this while global energy costs generally fell by around 40 percent. It is a price differential that could not fail to bite into British industrial competitiveness. And in May it did exactly that, putting an end to a 100-year association between the American owners of Celanese Acetate and its British subsidiary – a company that once employed 20,000 people – now due to close at the end of the year. The Celanese Corporation will concentrate production in Belgium, the United States and Mexico, where energy costs are much cheaper.

Bob Walters, general manager of the Derby-based British company, was compelled to admit that the British arm’s operating costs “remain the highest in Celanese Acetate.” A spokesman for the company told the local media that, “A lot of work was carried out to reduce costs but there was no way to make any inroads into reducing our fundamental energy costs, which are much higher in the UK than overseas.” He confirmed, “The biggest differential in costs between ourselves and other sites in the group is the price of energy.”

George Cowcher, Chief Executive of the Derbyshire and Nottinghamshire Chamber of Commerce, was equally unequivocal, “Our energy prices are substantially higher than in France, Germany and Belgium. Global companies operating here will put information about their sites into a spreadsheet and if the UK operation is the most expensive it will be the one that goes.” Cowcher adds, “The concern is that other multinationals will do the same.”

Conway Standing, managing director of the commercial energy broker, Utility Exchange Online, concurs. “Most of Britain’s energy companies are owned by German, Spanish and French companies which have kept any increases lower in their own countries but allowed the prices in the UK to remain high.” He adds, “Research shows that, since last summer, wholesale energy costs have fallen by 40 percent but most of the big energy suppliers have failed to pass that on.”

Early in 2009 suspicions that Britain’s mostly foreign-owned power utilities were allowing UK energy prices to rise, while keeping prices in their home countries low, appeared confirmed when the OECD Consumer Price Index report showed that the German, French and Spanish owners of four of the UK’s Big Six appeared to be doing exactly that. The Index revealed UK energy inflation running at a high of 12.1 percent in the previous year, though it actually fell by 0.6 percent in Germany, 6.5 percent in France and 7.2 percent in Spain. While the two British owned power utilities British Gas, owned by Centrica, and Scottish & Southern Energy (based in Perth, Scotland) eventually did announce a 10 percent cut in prices, none of the other four followed suit. E.ON and NPower are based in Dusseldorf, Germany, EDF is French and Paris-based, and Scottish Power is owned by Iberdola, the huge Spanish utility company. In the year 2008-9 Britain saw the highest price rises in Western Europe.

But Britain’s energy problems don’t end there.

“Smart grids” is the new buzz phrase in the geopolitics of European energy. In a report published in February 2010 by the EU’s strategic energy technology plan information centre (SETIS), led by the Joint Research Centre (JRC), smarter power grids are central to plans if Europe is to become a low-carbon-energy economy. The report even describes the importance of electricity transmission grids as “the back-bone of the EU’s economy.” With an EU target of reducing CO2 emissions levels by 20% from 1992 levels that would require a return of 20 percent of power from renewable energy sources. That, in turn, translates to 30 to 35% of electricity power consumption from renewables, all by 2020.

Integral to a strategy of constructing a series of “mutually supportive” power grids across Europe, are plans for an offshore grid in the North Sea able to integrate power from the offshore wind farms. The UK, with the natural advantage of being the windiest country in Europe, is duly forging ahead taking the lead in Europe’s offshore wind-farm development. At the beginning of 2009, Britain’s Crown Estate asked for bids, as part of its Round 3 proposals, for up to nine wind farm sites around its coastline. The bid process was concluded at the end of 2009. By late April 2010, when German energy giant RWE announced its renewables arm RWE Innogy had signed on to build up to 4,000 MW of wind power for two of the sites, the blueprint for construction was consolidated. When finally completed the whole project is expected to produce a total installed capacity of 25,000 Megawatt.

Even so, the North Sea Offshore Grid consortium’s were reported in late March 2010 as concluding that the North and Baltic Sea grid would take up to 15 years to be fully operational. But given the enormous technical difficulties and other issues that lie ahead for the development of such a major enterprise in deepwater, it is a goal that may prove optimistic in terms of helping the UK’s looming energy woes.

In addition, in April the Confederation of British Industry (CBI) warned that a new European Directive could well force the closure of up to 14 of the UK’s ageing power plants. The recent decision by MEPs, amending provisions to the Draft Industrial Emissions Directive, will force power plants, says the CBI, to embark on an expensive upgrade programme to help them comply with air pollution targets – or have to close by 2016. With a succession of UK governments shelving the responsibility to green-light construction of a urgently needed new generation of nuclear reactors, gas-fired plants and generators, the timing could not be worse. John Cridland, deputy director general of the CBI, said, “Given these plants are old and due to close in the 2020s, letting them run their course would allow for a smooth transition to new low-carbon energy sources and avoid creating a serious energy gap.” A final vote on the Directive is due shortly.

The bottom line is a stark one for the UK caught between a rock and a hard place. The new EU Carbon Directive will be expensive and most of the new power plants being discussed will take more than a decade to come online. Second, a significant contribution from renewables may be up and running and able to make a contribution, but that too is over a decade away. With North Sea oil declining and with no real oil and gas deals in place and with bids to the UN for access to deepwater in the Arctic and Antarctic Oceans, even with drilling for gas off the Falkland Islands currently under way, no real production return is expected, again, for a decade or so.

And that’s the essential point: The spectre of regular power cuts, within just a few years, is all too real. Last October, Britain’s regulator, Ofgem, published its Project Discovery report which predicted black-outs across Britain by as early as 2014 given the obstacles to bridging the energy gap. Alternative assessments are not much more optimistic.

At the same time, UK consumers find themselves paying far higher energy prices than their European neighbours – effectively, crudely forced, by foreign-owned power utilities, to subsidize their European neighbours.

In short it is hard to see how Britain will be able to ignore the pragmatic energy reality that hydrocarbon fuels will remain the staple of the country’s major energy mix for the next decade. In that case, the nature of the rock and a hard place – Cameron’s real power conundrum – is likely to come down to a straight choice: carbon target cuts or power cuts.

By. Peter C. Glover

Source: Energy Tribune




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  • Anonymous on May 25 2010 said:
    Unfortunatley, the comments regarding energy prices in the article relate to the domestic/sme buisness sector. It's a concern when you have people making comments without fully understanding how the market operates. Celanese Acetate is a large energy user and so would be priced against the half hourly market for power. It would be good to know the actual energy purchasing strategy and decisions of the company to benchmark against wholesale energy prices for the UK through 2009 as they were not the highest across Europe as stated.

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