Wood Mackenzie assesses outlook for Britain 's gas and electricity markets and security of supply
Posted: 24 June 2004
Electricity blackouts in the US and Europe last year, along with the realisation that the UK's self-sufficiency in gas will soon be over and the weak financial health of the electricity sector, has ensured that energy security of supply has become a major policy issue. The UK gas and electricity sectors face a number of key challenges including imminent and steadily increasing gas import dependency, carbon emissions trading from 2005, tightening sulphur emissions limits in 2008, and the closure of most existing nuclear power stations by 2015.
Against this background, Wood Mackenzie has undertaken a major new study of the UK gas and electricity markets, entitled “From surplus to shortage?”.
“By 2015 Wood Mackenzie expects that the UK will be almost 75 per cent dependent on gas imports, rising to 90 per cent by 2020”, says Project Director Stewart Gray. “This requirement will be met from a range of sources and transport routes, including Norwegian, Dutch and Russian piped gas and LNG from (probably) Algeria , Egypt and Qatar .”
“Within the power generation sector, gas will account for almost 75 per cent of output in 2015, a share which will be maintained out to 2020. Meanwhile, renewables will make significant progress towards, and will only narrowly miss, the Government's target of 10 per cent by 2010, but in the longer term growth will slow as the easier opportunities are taken up.”
One of the key issues addressed in the study was the outlook for security of supply in gas and electricity. Gray says, “Wood Mackenzie's philosophy is that supply security needs to be analysed on an integrated and holistic basis across both gas and electricity”.
“We concluded that gas and electricity security of supply should be maintained, out to 2010 even in severe winters, although this will require substantial pipeline imports from Europe , and extensive use of generation fuel switching and managed interruption of industrial gas demand. Between 2005 and 2010 the security of supply situation should actually improve, as the various projects for new gas supply capacity - pipeline, LNG and storage - are brought into operation. Beyond 2010, however, the study identified that the UK would need additional ‘strategic' gas supply flexibility, in the form of seasonal storage or equivalent alternatives, in order to meet extreme cold winter conditions”.
Wood Mackenzie believes that the regulatory authorities will need to maintain a watch on the market to determine whether they will actually deliver the gas supply capacity needed. “Vigilance will be needed,” says Gray. “One of the key corporate issues will be whether the UK's six large integrated utilities will be prepared to sign the large, long-term contracts needed to underpin the necessary developments.”
The study also examined the outlook for future wholesale gas and electricity prices. The largest single influence on gas pricing in the UK is likely to remain the Continental European gas price and thus, via the indexation mechanism contained in the principal European gas contracts, the oil price.
“This oil linkage would be weakened or removed if gas-to-gas competition were to break out in Europe, but despite the European Commission's best efforts, this has to be seen as a less than likely possibility”, says Gray.
“Wholesale electricity prices should face a significant step upwards in 2005 with the onset of the EU carbon emissions trading scheme. The exact magnitude of this step is somewhat uncertain - many EU countries' emission allocation plans are yet to be published, and recent events demonstrate the uncertainty on oil prices, which are set to have a major influence on UK power prices. Overall, however, we expect the effects of carbon and oil to be more or less fully passed through into power prices - with potentially intriguing commercial and political ramifications. A combination of high oil and low carbon prices could result in sharply higher power prices but insufficient spark spreads to reward new CCGT construction, which could adversely impact power supply security in a few years' time.”
About Wood Mackenzie
Wood Mackenzie is a global energy and life sciences consulting company which provides a comprehensive range of research products, both qualitative and quantitative, delivered via the new Wood Mackenzie Insights Internet platform. The breadth of Wood Mackenzie's expertise extends beyond its high quality research, with a significant proportion of its revenues generated from specialist consulting.
For more information see www.woodmac.com
Posted by Richard Price,
Editor Pipeline Magazine
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