UK: The Energy Review: Balancing Climate Change With the UK’s Energy Security Challenge

The Energy Review published by the UK Government last week has captured headlines due to the green light given for new nuclear power stations. However, the review is much more wide ranging than this and seeks to address the difficulties raised by climate change and carbon emissions while balancing the challenges facing the United Kingdom in respect of energy security over the next 20-30 years. This update summarises the most significant elements of the review.

The Government has reaffirmed its commitment to the reduction of carbon emissions both within the UK and on the wider EU and global stage, setting a target of putting the UK on a path to reduce carbon dioxide emissions by 60% by about 2050 with real progress to be made by 2020. This is a move from the previous targets of 20% by 2020 and 50% in 2050; in fact carbon emissions in recent years have increased. On the global stage, the Government committed to work with international partners to deliever a stengthened international framework for the global carbon market through international agreement at the NU level.

The review also emphasises the often overlooked fact that the EU carbon emissions trading scheme (the EU Emissions Trading Scheme or ETS) extends beyond the 2012, but recognises the need to signal the direction of EU emissions reductions much further into the future. It also recognises the existence of a number of improvements such as greater transparency which should be made to the trading mechanism itself. Interestingly, the Government announced it was working on the inclusion of carbon capture and storage (CCS) within the EU ETS and Kyoto Mechanism (currently the use of such technology would not count as carbon abatement).

As well as addressing the effects of generation (i.e. carbon emissions) and the need for future generation (see below) the review also considers a number of ways in which carbon emissions and the need for new generation plant could be reduced by a reduction in the overall demand for energy by companies, individuals and Government.

The review identifies the main obstacles to the take up of energy efficiency as a lack of information about costs and benefits, an absence of appropriate incentives, and a lack of motivation among consumers. The Government proposes measures that will provide individuals and companies with more information and clearer incentives to make better use of energy. It estimates that by 2020, the measures proposed could produce a saving of 6 - 9 MtC (million tonnes of carbon), around 4 - 6% of the UK's total emissions in 2005.

Measures proposed include building new, energy efficient homes with a further tightening of Building Regulations; Home Information Packs (which will include data on the energy efficiency of houses); a drive to raise basic standards of energy efficiency (e.g. through phasing out energy inefficient light bulbs and white goods); and strong support for the use of on-site electricity generation at homes and businesses as well as smart metering for domestic and commercial customers. The Government plans to lead by example with a goal of making the central government estate of buildings carbon neutral by 2012, with any shortfall 'offset' by payment into a central fund which will be ploughed back into sustainable energy projects. In addition, a new statutory duty is to be imposed on the Greater London Authority to take action to mitigate the effects of climate change and adapt to its unavoidable consequences.

Energy efficient transport is one of the key areas highlighted in the review where energy could be saved. Transport accounts for around 30% of total UK energy use (mostly from oil) and around 25% of UK carbon emissions. The proposals centre on increasing the usage of bio-fuels to 10% of transport fuel sold by 2015, provided certain conditions are met, and encouraging more fuel efficient vehicles. The Government has stated it will continue to press the European Commission to consider the inclusion of road transport and aviation in the EU ETS. However, the latter faces considerable opposition from the USA on the basis that it is in contravention of Article 15 of the 1944 Chicago Convention.

The review highlights distributed energy as a way to change and improve the way energy needs are met in the long-term on the basis that heat and electricity created locally from renewable sources and smaller-scale systems have the potential to be more flexible and to reduce energy losses in networks. Thus microgeneration (such as domestic wind turbines and solar panels) will be exempted from the need for a planning application through a General Permitted Development Order and it is proposed that local authorities include policies in their development plans requiring (where viable) on-site renewable generation. More generally, the Government announced that it supported moves towards carbon-neutral developments and proposed a feasibility study into whether the Thames Gateway could cost-effectively be a low carbon development area within a decade and a carbon neutral area over the longer term.

Such a move to a distributed energy system will have a number of technical implications for the operators of distribution networks such as a need for two way metering and the potential impact on system resilience and stability. The review is not clear how the implications of greater distributed energy would be resolved but announced a future consideration with Ofgem on the issues, including potential regulatory barriers to the sale of energy from small generators.

It is proposed that the Renewables Obligation (RO) which obliges electricity suppliers to source a rising percentage of electricity from renewable sources be amended by extending the obligation level from 15.4% in 2015/16 to 20% (when justified by growth in renewable generation), amending the obligation to remove the risk of unanticipated renewable obligation certificates (ROCs) and adapting the RO to provide greater support for emerging renewable technologies. The Government's preferred option for achieving this is through a banding system, but any new scheme would respect existing rights.

The Government believes that co-firing (the burning of biomass alongside fossil fuels) should be encouraged. In the event that banding of the RO is introduced, co-firing would be given support of less than one ROC per MWh, but the cap on co-firing would be removed. If banding is not introduced, the Government has proposed a further consultation on whether the current cap and restrictions on co-firing are appropriate.

As anticipated, the review concludes that new nuclear power plants (NPPs) would make a significant contribution to meeting energy policy goals. In keeping with a market orientated approach, any new NPPs would be privately built and operated, with the private sector meeting the decommissioning costs and their full share of waste storage costs.

The Government is proposing a streamlined approach to licensing, with the Nuclear Installations Inspectorate (NII) (part of the Health and Safety Executive (HSE)) to take forward proposals to introduce pre-licensing of reactor designs, and the Environment Agency to take forward a similar system of pre-licensing for radio-active discharges. This approach should allow for potential developers to apply for pre-licensing approval for a reactor design before committing substantial capital on planning and construction. Provided the pre-licensed design was then followed in the construction, the developer should, according to the Government, be confident that their application for a site licence would be accepted by the NII/HSE.

The Government expects that nuclear new build would benefit from the streamlined planning process it is proposing for all energy infrastructure (see below). However, a consultation is being held on the creation of a policy framework under which developers will be able to make proposals for new nuclear build. Central to this will be identification of those issues most appropriately covered by a planning enquiry and the development of a nuclear "Statement of Need" which would set out the national strategic and regulatory issues that are most appropriately discussed through processes other than a planning enquiry. The deadline for responses is 31 October 2006. This is one of the number of consultations envisaged under the review. The results of these further consultation exercises are to be set out in a White Paper which is expected to cover not just nuclear issues but those other issues to be subject to consultation in the autumn. It is therefore likely that the White Paper will be published next year rather than around the turn of the year.

The other contentious issue surrounding nuclear new build is disposal of nuclear waste. The review is clear that the private sector would pay its full share of the costs of long term waste management arising from any new build. However, the Government is awaiting the report of the Committee on Radioactive Waste Management before deciding how to deal with existing nuclear waste, but any legacy waste solution will, according to the review, factor-in new build. It is proposed to appoint an individual with senior management or financial experience of major capital investment projects to lead the development of the arrangements for the costs associated with new build decommissioning and waste management. This individual, supported by the DTI, will lead discussion with industry and make proposals based on certain principles set out in the review.

According to the review, CCS technology could reduce the carbon emissions of coal or gas power stations by 80 to 90%. However, while elements of the CCS process are in use, the technology is still largely untested when combined with generation. A possibly greater problem, however, is the international regulatory framework where the London Convention and OSPAR Convention require amendment to allow long term carbon sequestration off-shore. The Government states that it is continuing to work with its international partners to amend these conventions but there is no clarity as to when or how that might be achieved. More encouragingly, the review reports on work being done to clarify the UK regime and on work with Norway through the North Sea Basin Taskforce to resolve other issues to facilitate CCS including its inclusion in the EU ETS and within the Kyoto mechanism.

The review notes that around 90% of the UK's energy needs are currently met by fossil fuels. It also highlights the potential challenges this poses, and the associated need for new infrastructure to meet these challenges, including a need for an estimated 25GW of new generation capacity over the next two decades, grid upgrades and new gas infrastructure, (including gas storage and liquefied natural gas (LNG) import facilities).

In one of the most significant developments in the review, it was announced that the planning process for major energy installations is to be streamlined with a new hierarchical approach. While the detail remains to be seen, this, if implemented, would be an important step in removing a constraint on the operation of the energy markets and the industry's ability to react to the investment signals given by developments in these markets.

The review identifies two main security of supply challenges for the UK:

• managing increased dependence on oil and gas imports (e.g. the UK could be importing as much as 90% of its gas needs in 2020 compared to 10% now having been a net exporter for many years); and

• ensuring that the market delivers substantial and timely investment in electricity generating capacity and networks so that households and businesses have the electricity they need at affordable prices.

To combat these challenges, the Government suggests a strong international agenda to promote more open and competitive markets, together with a market framework in the UK that is positive for investment and diversity of supplies and for the growth of the UK's own home-grown energy. In particular, in addition to the measures already discussed in relation to the UK the review :

• notes that coal-fired generation continues to meet around one third of electricity demand on average and will continue to play an important role in the UK's energy system, provided that its environmental impact can be managed effectively. The Government announced that it intends to convene a coal forum to bring together all interested parties in order to help them to find solutions to secure the long term future of coal power generation and UK coal production; and

• identifies three elements to the Government's strategy for securing the UK's gas supplies: maximising economic recovery from the North Sea; limiting the UK's dependence on gas; and managing the risks in higher gas import dependence by promoting more open and competitive international markets.

Internationally, the review highlights issues arising from rising energy prices and rising imports. As the UK increasingly becomes a net importer of energy, it will be affected by the interaction of the UK's liberalised energy market with the less liberalised energy markets in the rest of the EU. The Government continues to press for the prevention of abusive behaviour and removal of distortions in the wider EU gas market. The Government also proposes to improve the effective functioning of UK energy markets through greater information transparency leading to more informed investments and decision making, improved planning helping to facilitate investments coming on-stream in a timely way and a consultation on whether the UK's gas security of supply framework is fit for purpose as the UK becomes increasingly import dependent.