UK Gas Generation Strategy fails to reassure investors

In December 2012 the UK government published its Gas Generation Strategy to provide reassurance to investors in new gas generation, of which 26 GW could be needed by 2030 and 9 GW by 2020 to replace ageing gas and nuclear capacity.

On Feb. 13th the House of Commons Energy and Climate Change Committee (ECC) heard testimony as to whether the strategy has actually provided reassurance and what the impact might be on carbon emissions. Other issues addressed included carbon capture and storage, combined heat and power, and biogas.

All those testifying (from academia, major utilities, and NGOs) agreed to some extent that the strategy was not achieving its aim - at least, not yet.  

The strategy appears to investors essentially as a scenario document, in which different assumptions are made for gas use, with different carbon targets and gas prices. 

In an echo of evidence sessions heard by the same committee on the question of nuclear generation in October 2012, the key word of the morning was clarity.  Investment in new gas plant, as with wind generation, is long term, and will be impeded until policy goals are transparent. A common view was that speed in the government’s electricity market reform is needed to provide such clarity.

Another theme of the day was capacity. The point was strongly made that gas and renewables should not to be pitted against each other. The question is rather how gas can complement low carbon generation.  A capacity mechanism that remunerates the fixed cost of new gas generation (high operating costs but low construction costs) along with renewable generation (with  zero fuel cost but large fixed costs) was proposed by the second panel in particular as the best way to de-risk supply and reduce the price that end consumers pay. The launch of a capacity market for gas in 2014 is intended to be one of the main tools for change.

The committee questioned whether the support given until now to renewable generation was in fact the driving factor for adjustment in the gas market. Whether one supports this viewpoint or not, Datamonitor believes that investors considering the UK will remain somewhat in limbo until the government makes it clear – notably through the decarbonisation target to be introduced in 2016 looking ahead to 2030 – just how much renewable power capacity it intends to have. 

Written by Yasmin Valji

Analyst, Datamonitor Energy Team

Follow Yasmin on Twitter: @YasminV_DMEN 

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