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UK Banking On Diesel To Maintain Energy Supply

UK Banking On Diesel To Maintain Energy Supply

Dubbed by many as ‘Diesel Dupe’ or ‘Dieselgate, the recent Volkswagen emission scandal has severely dented the German automaker’s reputation in the global market. Besides facing the possible recall of close to 11 million diesel cars, Volkswagen faces a potential $87 billion in losses which is nearly four times the carmaker’s 2014 profit. The VW scandal has put further pressure on diesel, which was already experiencing a glut in the global market. And, thanks to low oil prices, the demand for diesel has reduced with the dampening of industrial activities, reduction in the use of diesel-powered equipment and the shifting of global economy towards the consumer markets (which has resulted in the increased demand for gasoline). So, with a rising supply glut and the fallout from the VW scandal, is there any hope for diesel in the near future?

Britain is set to promote the use of diesel generators to fight its energy supply crunch

Diesel generators are widely used for generating back up electric power, especially in markets where reliable service is spotty. And now, Britain is gearing up to promote the use of this back up power for resolving its upcoming energy supply crunch. Related: IEA Offers No Hope For An Oil-Price Recovery

According to data from the National Grid, more than 10 percent of the country’s power supply will no longer be available in the coming year. With older coal plants about to be taken offline, without the addition of any new power plants to replace them, the supply/demand gap in UK’s electricity market could rise to as high as 5 percent in the near future. The government is now proposing a scheme under which it would grant millions of pounds of subsidies for diesel generators as a way to combat the energy shortage issue. The scheme has received tremendous response so far, as companies have already registered close to 1.5 GW of diesel generation. Even The National Grid is promoting the use of diesel by agreeing to pay hospitals and factories that would be using the diesel-powered electric back up when needed during this winter.

What effect will this have on gas imports?

Although the UK’s domestic gas production has improved since last year (figure below), the country is still importing a sizeable portion of its gas from Norway, the Netherlands and Qatar (for LNG).

NatGasUK

Production and imports and exports of natural gas in UK
ImageSource: UKGov Related: Oil Storage Levels Point To Longer Downturn

Such dependence on gas imports is naturally a cause of worry for the government. However, this situation might soon change as increased use of diesel might reduce the dependence (and the eventual import volume) on gas. “All diesel operators have to do is buy in diesel units in shipping containers from China and plug them into a grid connection. The low capital cost means that they can undercut things like gas”, said Power Sector expert Dave Jones.

How will this affect carbon emissions?

Increased use of diesel would naturally increase carbon emissions as diesel has a higher carbon emission factor (CEF of 20.2) when compared to natural gas. Besides emitting close to 10 million tons of carbon during a full year operation, diesel electricity generation of 1.5 GW would emit the equivalent amount of nitrous oxide as to 24,000 Volkswagen Golfs. Does this mean that the current plan to promote diesel is misguided? Related: Still Plenty Of Interest In Offshore Oil And Gas Exploration

Many in the industry think so. “The only way to avoid this happening is to delay or cancel the 2015 capacity market auction. The government needs to ensure that we as taxpayers are buying the right kind of generation for the future... not wasting Treasury incentives on diesel generation of the past”, said Tim Emrich, CEO of UK Power Reserve. However, a spokesperson at the UK energy department defended the market auction by saying that emission impacts from diesel generation would be limited due to the flexibility of the system. From all this, it seems clear that diesel usage is set to increase in Britain in the near future, thereby reducing the global diesel glut to some extent.

By Gaurav Agnihotri for Oilprice.com

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