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UK Government Battles Over New Energy Policy

Whitehall is divided but the Chancellor sees a future for natural gas. George Osborne is determined the lights won’t go out.

The Chancellor has intervened to influence one of the most pressing energy policy issues because he was unhappy that the Energy Department has been ambivalent and too narrowly focused in its efforts to fill the potential gap in electricity generation when the old coal and nuclear plants are phased out.

He is concerned that Ed Davey, Energy Secretary, and his predecessor Chris Huhne, placed too much emphasis on the green dimension of renewable energy and a revival of nuclear power to provide the replacement capacity needed to meet any shortfall and ignored the case for back-up in the event of construction delays.

He believes another dash for gas will provide the insurance needed to avoid the risk of blackouts because of the uncertainties surrounding the renaissance of nuclear power and the problems involved in linking wind farms into a more complex electricity distribution system.

Gas, according to one expert in the field, is often presented as a “necessary evil” to smooth the transition to a low-carbon energy strategy, filling the short-term generation gap, providing back-up when wind farms are idle and essential in the heat market where it accounts for 80pc of business.

Evil or not, gas is back in the generating line-up and security of supply equation after a bruising Whitehall battle between Mr Osborne and Mr Davey, but there are still differences about whether its contribution will be short or long term. A strategy for gas is promised for the autumn with Mr Osborne arguing it will have a strong role well beyond 2030 and Mr Davey wanting to bring down the curtain on the fossil-fuel age.

The current state of the gas market hardly supports the need for a dash or a rush. Gas-fired plants are being mothballed by Centrica and others because they are too expensive to run. Bloomberg New Energy Finance has slashed its estimates of new capacity and analyst Brian Potskowski is among a number questioning the economic case for a bigger role for the fuel because of the uncertainty about electricity market reforms, particularly capacity payments.

Much will depend on price – and just where shale gas fits into the equation is one of the outstanding issues. The US energy market has been transformed by the development of huge reserves of gas trapped in rock formations. Gas prices in the US have tumbled, while the impact in Britain is far from clear.

The Government is expected to pave the way for the exploitation of modest shale reserves by US standards linked to rigorous safety measures following the earthquake scare during the initial discovery off the coast of Blackpool.

Mr Osborne is preparing the ground for a second dash for gas. The first accompanied the discovery of North Sea gas, used to replace coal and oil-fired plants to provide a new and cheaper source of energy and give the environment a breather.

Gas still accounts for around 40pc of electricity-generating capacity but because it cannot match the green credentials of renewables and nuclear, it has not figured strategically in the new set-up needed to accommodate climate change and the low-carbon economy.

Cost has not helped either. The big jump in wholesale gas prices has seen energy bills soar 75pc over a six-year period because of the link with oil and the major role played by gas in the heating market. With all the signs pointing to further increases in the short term, there has been little enthusiasm among Energy Department planners to include a significant contribution from gas in the new generating line up.

There are other issues. A substantial increase in gas demand would have to be met by imports because North Sea production is well past its peak. The Government would also risk missing targets and commitments for wind and renewable energy. Mr Osborne, however, is more interested in economic than green targets.

The economic arguments for and against renewables and gas have been distorted by subsidies. Gas is cheaper than unsubsidised renewables. Combined-cycle gas plants can be built considerably quicker and at a snip of the cost of nuclear. Mr Osborne, supported by Tory backbenchers, felt there was scope for a 25pc reduction in onshore wind-farm incentives but has had to settle for 10pc in return for Mr Davey’s support for inflating the gas bubble.

The Chancellor has not endeared himself to environmentalists by offering tax breaks of £500m to encourage the development of North Sea gasfields in shallow water to reduce the need for imports.

Centrica, the British Gas parent, responded quickly by announcing plans to spend £1.5bn developing the Cygnus field off the Norfolk coast. While Greenpeace described the decision to subsidise gas as “bonkers”.

There should be no supply shortage. Britain currently relies on Norway and liquefied gas from Qatar for the bulk of its imports. A series of pipelines provides links with the continent where a European grid is slowly emerging, while worries about Russia holding the West to gas ransom through its huge Gazprom group have been eased by the shale gas potential.

A European gas trading network is slowly emerging through a series of hubs, opening the way for more competitive markets and cheaper gas divorced from oil and with a life of its own. The age of gas may still have some way to run.

The Daily Telegraph, 22 August 2012