UK WEIGHS ENERGY POLICY OPTIONS

Deb Kelly - Apr 1, 2022

The UK will redefine its energy supply strategy in the coming days. The aim will be to boost energy independence while accelerating the low-carbon transition. Whitehall is weighing various options to incentivize domestic energy supply, with expectations of big new targets for renewables and nuclear. But the war in Ukraine is seen as a “real game changer” given the government’s consideration of a ban on Russian gas imports. And some experts believe there is possibly a case for sustaining European production for a bit longer than originally anticipated.

The Russia-Ukraine crisis has pushed energy security and affordability to the top of the government’s agenda and the UK is keen to ease its reliance on imported fossil fuels and the price volatility that comes with them. The country has a relatively good diversity of supply versus mainland Europe, with access to global LNG markets via three LNG import terminals. But for the first time last year, the UK used more piped gas from a single source — Norway — than it did from UK waters due to a 20% drop in domestic output. And unlike most other European countries, the UK has only limited gas storage after winding down Centrica’s Rough facility in 2017.

That leaves the UK vulnerable to production or pipeline issues in Norway. And in the context of European buyers moving away from Russian imports, it also increases the competition with other gas buyers, says Offshore Energy UK’s (OEUK) head of market intelligence, Ross Dornan.

Domestic Production

Sustaining domestic production requires pulling lots of levers; increasing it is an even bigger challenge. UK Prime Minister Boris Johnson met this month with key North Sea producers, including Shell, TotalEnergies, BP and Equinor, to see what could be done to boost output and investment quickly. In a sign of the push for more gas, Shell recently published a revised environmental plan for its delayed Jackdaw gas field, which if approved could start up in 2025.

But there are few relatively quick fixes. Well interventions could squeeze more gas production out of existing fields. Optimizing planned maintenance outages across the summer could help maintain stable flows. Possible changes to national grid gas entry specifications could provide marginal gains. Combined, this could boost output by roughly 5% this year, giving an “upper range” UK gas output estimate of 30 billion cubic meters, Dornan reckons.

OEUK expects 10 fields to come on stream in the next 12-18 months — mostly smaller, shorter-cycle, near-field tie-backs that should offset declines and keep production flat through 2022-23. But there is little scope at short notice to ramp up production to replace Russian imports, Dornan said. Larger longer-term projects such as Cambo (oil), from which Shell withdrew in December, and Equinor's Rosebank (oil) await investment decisions.

Even before the war in Ukraine, political paralysis and division on upstream policy around issues such as windfall profit taxes and net-zero climate objectives had compounded negative investor sentimentMoreover, activists have leaned heavily on the government to block new greenfield oil and gas developments. OEUK suggests that with more confidence to invest, and if prices hold up, UK output decline could be limited to 5% per year.

Fracking Prospects

While the government is keeping its options open, the prospects for reversing the 2019 ban on UK shale development look slim. Even if Whitehall lifted the moratorium on fracking, which triggered seismic events in just three wells drilled, experts cite several factors that suggest shale will not be part of the solution. The geology is complex, suggesting initial gas-in-place estimates are overly optimistic, and there are concerns around induced seismicity, said Mike Bradshaw, professor of global energy at Warwick Business School.

Moreover, affected communities still remain “deeply unhappy” about fracking on their doorstep. The industry has said it would take 20-40 wells to deliver a meaningful reserves estimate. Even in an optimistic scenario “it’s not something that’s going to deliver this decade,” Bradshaw said. Still, the government this week withdrew an earlier requirement for two of Cuadrilla Resource’s exploration wells to be decommissioned by the end of June.

Turbocharging Renewables

Until very recently, Whitehall was planning for a Europe-wide energy transition with access to all the gas it might possibly need alongside a gradual ramp-up in renewable power generation — at the same time reducing gas demand, for example, through energy efficiency initiatives and heat pumps. “At the moment, energy security perhaps trumps climate change concerns in an emergency, but we need to think about the longer-term consequences,” Warwick's Bradshaw said. “It may be more effective to focus on energy efficiency, demand reduction and electrification to constrain demand for gas more rapidly than seeking to bolster production.”

Industry officials predict accelerated targets for renewables, with installed offshore wind capacity rising from 11 gigawatts now to a 50 GW goal by 2030 via annual auctions (against 40 GW previously) and solar power jumping to 50 GW by 2030 from 14 GW now. The new policy may also propose relaxing permitting regulations to pave the way for more controversial onshore wind development.

Nuclear and Coal

A nuclear revival and coal deadline hang in the balance. Nuclear supporters in Parliament want the government to add 15 GW of nuclear power capacity by 2035 and at least 30 GW by 2050. That’s a tall order given that of the 11 reactors now providing about 16% of the country's electricity, only one will still be open by 2030. Add the first of two reactors now under construction at Hinkley Point C and that would tally to just 4.45 GW of nuclear capacity by 2030.

That means Johnson’s desire for an accelerated nuclear rollout as a means to bolster the country’s energy independence will need government support. The Nuclear Industry Association argues that including nuclear in the UK sustainable investment taxonomy and making it eligible under the Green Financing Framework could help attract the private capital needed to fund EDF’s Sizewell C plant.

One key test of policy flexibility will be whether the government suspends its climate aspirations in the short term in favor of coal. The UK has pledged to end coal-fired generation by October 2024. “We could use coal but replace it very quickly in the subsequent couple of years,” Michael Liebreich, of Liebreich Associates, suggests.

Deb Kelly is an editorial correspondent at Energy Intelligence, based in London. A version of this article originally ran in Energy Compass.

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