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Falling demand gives energy industry time to change

Ted Hopcroft
The Times
17 November 2009

The UK is in chronic need of new sources of power generation — about 30 per cent of our generation capacity will close by 2020 — but progress on new plants has been hampered by the need to move to low-carbon sources.

While the move to low carbon is an excellent ambition, it needs to be supported by the right financial framework. For example, a guaranteed floor to the price of carbon in emissions trading schemes would provide certainty to potential investors. The difficulty of raising finance in the markets is exacerbating this challenge. This has left the UK with the spectre of the lights going out.

The Government’s policy to avoid this threat is a big, and fairly rapid, transition from a predominantly coal and gas-based energy economy to a mixed supply. This would have an increased emphasis on low-carbon energy, based on renewables and nuclear, with targets of 30 per cent of electricity from renewables by 2020, up from about 6 per cent now.

However, implementation will not come cheap. Ofgem estimates that £200 billion needs to be spent to secure UK security of supply — a fourfold increase on the estimated cost in 2003.

Last week the International Energy Agency (IEA) warned that Europe’s annual energy bill would double to £300 billion by 2030 if it could not wean itself off fossil fuels.

Where will this investment come from? Highly illiquid banks are carrying severely strained balance sheets, governments have large fiscal deficits and private equity is a shadow of its former self. The effects of those constraints are already evident, with the IEA estimating that $90 billion (£54 billion) of energy projects were cancelled last year, with renewables hit worst, suffering a 19 per cent fall.

There is, however, a potential silver lining. Energy demand in Britain has dropped by 4.5 per cent year on year as companies and consumers tighten their belts. This resets the energy baseline and reduces the risk of power shortages.

This decreasing demand could give us time to plan and implement the low-carbon energy economy. This creates an opportunity for the British energy industry to re-invent itself as a new, diversified industry.

There may be new financing options. In the United States, the House of Representatives has passed an Act setting up a “green bank”, with $75 billion of loans and $75 billion of equity to fund renewable development and underpin energy security.

The UK Government has announced a number of steps to drive new developments. The third round of offshore wind projects is progressing, procedures to expedite nuclear planning are being put in place and there is increased impetus behind smart metering. If this increased certainty can drive new funding options, then the energy sector could thrive, despite the economy.

Ted Hopcroft is an energy specialist at PA Consulting. This article is the third of five based on, The Zombie Economy: Leadership in times of uncertainty (PA Consulting, £12.99).

To see the original article from the Times Online, please click here.

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