Osborne’s dash for gas won’t happen – yet

By imposing two rival energy strategies on the UK the chancellor has condemned us to two more years of uncertainty

06 Dec 2012, 00:05

The gas strategy, unveiled yesterday to much fanfare from the Chancellor, was in fact no such thing - it was two gas strategies.

The decision to model two such divergent scenarios for the future of gas in the UK - one based on plans deemed acceptable by the Committee on Climate Change to deliver 26GW of gas capacity in 2030 and one based on plans for an historic surge in gas investment that would deliver 37GW of capacity and almost inevitably breach the UK's carbon budgets - invites onlookers to interpret them for what they are: a strategy developed by DECC and endorsed by Ed Davey and a strategy developed for the Treasury and designed to appease Osborne. Forget Plan A and Plan B, here we have a Plan D for Davey and a Plan O for Osborne.

The implications of this dual energy strategy are as fascinating for political junkies as they are frustrating for both environmental campaigners and gas developers.

On one side we have Davey and the Lib Dems (quietly backed by green-minded Tories and Labour) insisting the 26GW plan, while still too reliant on fossil fuels for green groups tastes, is an entirely sensible means of cutting emissions, enhancing energy security, and reducing long term energy costs.

On the other side we have Osborne and his acolytes on the Tory backbenches who are insistent that while 26GW would guarantee a substantial role for gas in the energy mix a new fleet of just 30 gas-fired power stations is for wimps - "we need more gas, much more, and we need it now", they cry, insistent it will usher in an era of endless cheap energy.

Thankfully, we did finally get a bit more of an insight into why the Chancellor wants to follow a plan that by his own scenario's admission would require a relaxation (translation: ditching) of the fourth carbon budget. He argued that by handing out shale gas tax breaks the UK can emulate the recent history of the US and deliver significant reductions in gas prices that will translate into lower energy costs for households and businesses. We did not get any further information on what makes the Chancellor think the encouraging projections he is seeing for the impact of shale gas on energy prices are more accurate than the projections from Bloomberg, the EU, the CBI and the IEA, which suggest no substantial drop in prices. But at least we do now have an on the record rationale from the Chancellor for his half of the gas strategy.

The problem with running two parallel energy strategies is that businesses and investors have to choose which one they should base multi-billion pound investment decisions on. A recipe for policy certainty it is not.

Davey was as bullish as he has been in months yesterday with a blunt assertion that the Gas Strategy remains a DECC document and he is committed to delivering the 26GW scenario (although it is worth noting that Greenpeace are warning today that even this strategy is far in excess of previous plans for new gas and will put the UK's binding carbon targets under intense pressure by the late 2020s). Osborne's rhetoric and Treasury briefings have made it equally clear the Chancellor will continue to fight for the 37GW scenario and the watering down of carbon targets in the 2020s.

The net result is that while renewable and nuclear energy developers have secured a greater degree of policy certainty through last week's Energy Bill, gas investors and developers face continued uncertainty. Some new gas investment will probably move forward in the next few years. But without the prospect of remarkably generous capacity mechanism payments, which Davey and the Lib Dems won't countenance, and with the prospect that a decarbonisation target for 2030 could yet be introduced for the power sector after the next election there will be no "dash for gas" just yet - it will be more like a determined saunter.

In clinging to his desire for an environmentally and economically reckless level of reliance on new gas infrastructure, all Osborne has managed to achieve is a delay of at least two years in some of the gas investment he wants to see delivered. He may have set up the foundations for a post-2015 surge in new gas, but he can only deliver on it if the Conservatives command a majority at the next election - a scenario that becomes ever more unlikely the more he clings to anti-green positions that a majority of the public dislike, not to mention an economic strategy that is faltering badly.

The tragedy for the UK's energy industry, including the gas sector, is that an effective and ambitious course of action is now clearly available if the Chancellor could just ditch his fixation with a gas boom and settle for a mini-boom instead, a boomlet if you will. This course of action, it will surprise no one to hear, looks a lot like the plan DECC would enact if the Treasury would only let it.

Under this plan, the Energy Bill would enable investment in a mix of low carbon generation technologies and grid upgrades, as well as significant improvements in energy efficiency, while the gas strategy would provide a still substantial 26GW of capacity by 2030. Meanwhile, tax breaks for shale gas developments and an effective regulatory and licensing regime would allow the industry to finally demonstrate whether its predictions of a relatively clean and cost effective domestic energy source are accurate.

Most importantly, this balanced approach would provide a considerable degree of flexibility. If wind or solar energy costs fall as some optimists predict, while energy storage technologies and smart grids start to come online, then we could scale up investment in renewables in the 2020s. If, in contrast, shale gas projects overcome local objections and deliver the cheap gas Osborne promises, we could instead crank up investment in gas, assuming CCS has by that point made gas plants compatible with our carbon targets. We will almost certainly need this post-2020 flexibility, because as Greenpeace argues today even the more modest gas plan means there is a significant chance of the Climate Change Act being breached without either a technology breakthrough or a shift in strategy.

This is an approach that would have remarkably wide business backing and while many environmentalists would continue to oppose nuclear power plants, gas development, and shale gas projects, others, myself included, would acknowledge that they represent a necessary part of the transition to a truly decarbonised economy.

It is also an approach that would provide each sector of the energy industry with a massive incentive to deliver low cost clean energy, in the knowledge that living up to promises on long term cost reductions would allow them to become the dominant energy source for the next phase of decarbonisation during the 2020s and 2030s.

This mature, responsible, predictable, and yet flexible strategy could be adopted tomorrow by the entire government, providing an immediate boost to investment in renewables, nuclear, CCS, and, yes gas and shale gas. But instead the Chancellor and the gas lobbyists who evidently have his ear have got greedy, and delivered a rival strategy that promises at least two more years of coalition in-fighting and policy uncertainty, all in return for the distant hope that a Conservative victory at the next election will give them their gas boom.

Quite why the Chancellor has so unquestioningly bought the argument for cheap gas from shale gas reserves that have yet to be tapped anywhere in the UK and face significant barriers to their successful and large scale exploitation will probably never be explained.

But what is certain is that by delivering two gas strategies, the government has in fact delivered none.

  
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