Clive Moffatt is an energy analyst and former chairman of the UK Energy Security Group
Rishi Sunak’s decision to change his mind and attend COP27 was a sign of weakness. With several weeks of work still to do before Chris Skidmore MP publishes the Government’s review of the cost-effectiveness of net zero, it was wrong for the Prime Minister to conclude , as he did in the Commons last week, that there can be no prosperity without “action on climate change” and “no energy security without investing in renewables”.
In the current economic crisis, improving energy security, and affordability have to take priority over reducing carbon emissions. As a matter of urgency, the Government needs to stress that, for the foreseeable future, natural gas has a critical role to play as a source of both heat and power in the energy mix. Action is also needed to underpin new private investment in both gas production storage and power.
Key priorities should be more gas production, more gas storage, more has demand management, and more gas power.
The decision to proceed with additional gas exploration and development in the North Sea should be welcomed. Fracking also has an important role to play in reducing our dependence on imported gas via our reliance on annual and seasonal gas flows from the Norwegian and EU pipelines and, in volume terms, our reliance on shipments of LNG. Shale gas production is a regular and not demand-sensitive source of gas supply. Consequently, it does not t obviate the need for more short-term flexible gas storage, which can reduce energy price volatility.
More gas storage capacity could be built by imposing an obligation on suppliers and shippers to keep a proportion of their annual gas demand in annual storage combined with a storage capacity market auction. This should also include an allowance for the possible growth in hydrogen production to fuel heat and transport. Nevertheless, the problem is that new storage is expensive and takes time (5 or more years) to build. But it is a safety valve that will be needed in the next 20 years and beyond – especially if hydrogen ever becomes a viable energy source.
Currently, the National Grid does not have responsibility for the real-time balancing of the gas market (unlike its role in the electricity market). So if shippers refuse to pay high prices, or cannot access LNG when required, and suppliers see a shortfall emerging, the effect is not only to raise prices but to trigger a gas supply emergency.
More could be done now to avoid blanket shut downs and increase short-term liquidity in the gas market through a system of Demand Side Reduction (DSR) (as with electricity). This would reward a significant number of industrial users in advance of winter (lowest option price bid in an auction) for voluntary curtailing a certain level of their gas demand at times of system stress.
In the medium term, probably some 10GW of new baseload gas generation is required and this should be provided by unabated gas via a new capacity market auction. This should be built in the next five years to compensate for intermittent wind power and the retirement of existing nuclear capacity.
Carbon capture and storage (CCS) to remove the C02 is still an expensive prototype – requiring more gas, thus raising electricity costs – and so initially some but not all new large- scale gas plant should be CCS compatible. But this should not be compulsory – additional capex and opex incentives and preferential despatch could be available later when the viability of CCS has been proven.
In addition, a separate auction should be run to procure smaller scale (eg 300MW units) through a separate auction for flexible generation with unabated small-scale gas being allowed to compete with batteries and Demand-Side Reduction (DSR) on the basis of strict criteria relating to network locality, reliability and costs with penalties for non-delivery.
Finally, to create a positive investment climate, virtue-signalling, and advocacy need to make way for more rigorous analysis.
The time has come to do away with Ofgem and the National Grid’s role as electricity system operator and create a single, independent Strategic Energy Authority to set long-term and cost-effective investment targets for gas supply and electricity generation transmission and distribution, based on the need to balance emissions reduction against security and affordability.