Out-Law News 3 min. read

Government to address “barriers to investment” in gas as part of decarbonisation strategy


The Government has committed to addressing “barriers to investment” in clean gas generation as part of its pursuit of significant decarbonisation of the power sector by 2030, it has confirmed.

Its Gas Generation Strategy sets out the steps it will take to stimulate investment in the new gas-fired power stations needed to replace the ageing coal, older gas and nuclear plants set to close over the next two decades.

Up to 26GW of gas generation capacity could be needed by 2030, according to the document. One fifth of the UK’s power generation capacity is set to come off-line over the next decade, while an increasing amount of the country’s power will be generated from intermittent sources such as wind.

Gas accounted for about 40% of UK electricity production in 2011. The new capacity, which could see the construction of up to 30 new power stations depending on revisions to climate change targets, could see this proportion rise to 50%.

“We have always said that gas will have a significant role in our electricity mix over the next two decades - this is not new,” Energy Secretary Ed Davey said. “Gas will provide a cleaner source of energy than coal, and will ensure we can keep the lights on as increasing amounts of wind and nuclear come online through the 2020s.”

He said that the strategy was “consistent” with the Government’s legislated carbon targets, and added that gas could play a “more extensive role” if targets were revised upwards following the Committee on Climate Change’s advice in 2014. The strategy document also reiterates the Government’s commitment to supporting the development and commercialisation of carbon capture and storage (CCS) technology, which will enable generators to capture and store the CO2 released when gas is burned to generate electricity rather than releasing it into the atmosphere.

The publication of the gas strategy follows a call for evidence on the role of gas in the electricity market conducted by the Government earlier this year. The UK already has a significant volume of new gas generation capacity in the planning pipeline, with more than 14GW consented and yet to begin construction with a further 2GW under consideration. As part of the strategy, proposals to simplify and improve the existing regimes for planning and consents in each part of the UK will be brought forward.

Measures to encourage market certainty for gas market investors have formed an important part of the Government’s electricity market reform (EMR) programme since the initial announcements, with the introduction of a capacity market to guarantee reliable energy supplies among them. This will enable the National Grid to purchase the total volume of generation capacity it requires through a central auction, including all providers willing to offer capacity, and to offer incentives for energy companies to invest in new capacity or keep existing capacity operational.

The Energy Bill, published last week, will allow the first auctions to take place from 2014 for delivery of capacity in the winter of 2018-19 if needed. Additional powers included in the Bill will enable the Government to intervene in the energy market if necessary to improve liquidity and encourage competition. It will also support the market regulator, Ofgem, in its ongoing work looking at the case for market interventions to enhance gas supply security.

As well as encouraging more gas generation, the Government will also look at further measures to encourage the storage of gas. It will publish its findings on this in spring.

Energy law expert Euan McVicar of Pinsent Masons, the law firm behind Out-Law.com, described the strategy as a "significant document".

"Gas generation is seen by many as an essential part of the UK's energy mix," he said. "However, at the moment the delta between gas prices and electricity prices – the so-called 'spark spread' – means that generally it is not economic for developers to build new gas projects, notwithstanding the demand requirements set out by the Government. In addition, the EMR has increased uncertainty around pricing which has led to the investment case for new gas-fired generation becoming even more challenging."

"In the main the strategy is a pulling together of existing measures and many will argue that it does not do enough to catapult new gas generation build or help with the crucial questions around has security of supply, which many have argued for a long time that gas storage could help with - provided the system provides the right incentives. At last there is recognition of the need to consider further support measures for gas storage projects, though the findings on this will not be available until Spring 2013."

The document also considers the role of ‘unconventional’ gas, including shale, within the energy mix. The Government will establish an Office for Unconventional Gas and Oil to encourage investment in what it has described as an “exciting new prospect” for energy supplies, while a Treasury consultation on appropriate taxes for the industry is ongoing. However, there was no announcement on whether energy company Cuadrilla would be allowed to recommence their existing ‘fracking’ project. Stating that any development would have to meet “high standards of safety and environmental protection”, Davey said that an announcement on the development would be made “shortly”.

Hydraulic fracturing, or ‘fracking’, involves pumping water at high pressure into shale rock to create narrow fractures, allowing gas contained there to flow out and be captured. The technology has proven controversial in the UK after studies found that it was responsible for minor earthquakes near Cuadrilla’s site in Blackpool last year, however in April a Government-commissioned report confirmed that fracking was safe provided companies took steps to limit the risk of earthquakes.

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