North East energy sector given boost with Government announcements

Government announcements on renewables, nuclear and shale gas in the last few days have provided a shot in the arm to the region's energy sector

The nuclear industry has welcomed a £10bn guarantee of Government support
The nuclear industry has welcomed a £10bn guarantee of Government support

Subsidy levels announced for offshore wind power generation have been described as “great news for the North East”, by the region’s leading energy experts.

The sector has been clamouring for clarity to encourage further growth and last week’s Government announcement may be the key which unlocks thousands of new North East jobs.

It was not only offshore wind which received a tonic. The nuclear industry has welcomed a £10bn guarantee of Government support for the UK’s first new nuclear plant in 20 years.

And publication of the British Geological Survey (BGS) shale gas report suggests the UK has larger reserves than America – the home of the industry.

However energy watchdog Ofgem once more expressed concerns over the emerging UK energy gap and the increased risk of electricity blackouts by 2015.

This prompted the National Grid to ask companies to consider cutting power use during peak winter periods – a notion which has not gone down well with business.

Last Thursday Treasury Chief Secretary Danny Alexander revealed an offshore wind strike price of £155 per MW/h from next year, declining to £135 by 2018. The prices are 200% higher than the current electricity price.

The contracts will last for 15 years with the Government saying it expects this announcement to spur the construction of 8 to 16GW worth of offshore wind capacity.

Andrew Davison, head of the energy team at Newcastle law firm Muckle, said: “The indicative strike prices for renewables are great news, in that we have been waiting so long for them, and they look to be at a level that will encourage the offshore wind sector.

“At last, the developers will be able to do their sums, to see whether the major offshore wind projects stack up financially. If they think they do – and we must presume that there have been negotiations behind the scenes to ensure that these prices do work – they should be able to start issuing invitations to turbine manufacturers and the rest of the supply chain to bid for contracts.

“When those contracts are let, we should start to see the manufacturers finally committing to establish manufacturing plants in the UK – something that the North East is eagerly awaiting.”

Alex Dawson, chief executive of Teesside-based TAG Energy Solutions and chairman of North East offshore wind group Energi Coast, said: “This announcement, along with recent publishing of the draft Energy Bill, is helping to create the first signs of fresh confidence in a sector that has been affected by indecision and lack of clarity from Government.

“The next stage is to send a clear message to operators that the UK has an effective and robust supply chain that is able to deliver the skills, products and technology required for wind farm construction and maintenance.”

More than 5,000 turbines at £10m a piece are earmarked for the North Sea providing major economic and employment benefits for North East companies.

Andrew Mill, chief executive, of the National Renewable Energy Centre in Blyth, said: “The strike price announcement was an important step towards building long-term security and confidence for the offshore renewable energy industry.

“It helps provide the sector with greater clarity on the Government’s plans and will be an important catalyst for moving the industry forward.”

During the same speech on UK infrastructure investment Alexander announced a £10bn loan guarantee for the proposed new nuclear power station at Hinkley Point.

Ministers have offered the money to French energy giant EDF to help finance the £14bn construction of the new reactors on the Somerset coast.

EDF has already prepared a site, but concerns have remained that it would not be able to attract the level of investment required to support the scheme.

Treasury officials say the guarantee is a commercial loan, not a subsidy, although the taxpayer will be exposed if the deal turns sour.

But construction work on the UK’s first new nuclear plant since 1995 will not start until negotiations between the Government and EDF on a guaranteed minimum price for the electricity from the new reactors, are concluded.

Durham-based NOF Energy says almost 50% of its 423 members have interest in the nuclear sector, and a new round of the investment will have significant positive benefit for many of these businesses.

The strike prices for offshore wind, nuclear and all other renewables will be confirmed in the Energy Bill which is passing through Parliament and is expected to be put on the statute book later this year.

Last week it also emerged that the United Kingdom holds the biggest shale gas basin in the world.

The BGS released a study which says there could be 1,300 trillion cubic feet (tcf) of shale gas trapped in the Bowland shale – stretching from Lancashire to North Yorkshire and as far south as Nottingham.

The BGS’s upper estimate is a 2,281 tcf, which is almost the total estimated American shale reserve of 2,500 tcf, and this does not include the huge shale reserves in the South of England or the Central Basin in Scotland

With UK annual gas demand totalling 3tcf the potential benefits to the UK are self-evident.

Business could secure cheaper power supplies – US gas prices are 75% cheaper than in the UK – and communities close to a shale gas well will receive �100,000 and 1% of revenue. While there are concerns that the shale fracking (rock fracturing) process has downsides, research by Durham University shows fears over earth tremors and water contamination have been overplayed.

The North East has its own reserves in the Pennines and North Northumberland, but these are not expected to catch the eye of prospectors in the initial developments.

George Rafferty, chief executive of NOF Energy, has written to the UK’s major shale players including Cuadrilla exploring the possibilities for its 400-plus members in the emerging industry.

However none of the above energy sources are likely to come on stream in any significant volume for some time, and will be unable to contribute to the National Grid before one quarter of the nation’s electricity generating capacity is taken off line within the next few years.

Last week Ofgem said the margins between electricity supply and demand could tighten to as little as 2% by 2015, although it said disruption to supply was not “imminent”.

Almost 10GW – 10% of the UK’s total generating capacity – will close this year and a further 20GW of coal-fired power from around 15 UK stations, will come off-line by 2020.

Among the measures proposed by the National Grid, which runs the power transmission lines, has been to ask businesses to reduce their electricity use at times of peak demand.

The manufacturers’ organisation, EEF, said the suggestion that energy intensive industries switch off their power between 4pm and 8pm in the winter months in return for financial sweeteners was not feasible for many companies.

Roger Salomone, head of EEF’s business environment policy, said: “This cannot in any way be seen as a substitute for adequate generating capacity.

“It would be a dangerous signal to send to overseas investors that the UK is going to rely on companies turning their electricity supply off to ensure demand is met elsewhere.”

On Monday, Energy Secretary Ed Davey said some generators will be asked to mothball, rather than close power stations.

Andrew Hebden, CBI assistant director in the North East, summed up the current situation for North East households and businesses.

He said: “Our energy supply is likely to be squeezed in the next few years, so it’s right to explore all the options to better balance the UK’s energy grid.

“Thursday’s announcements were a big step in the right direction, but this just shows the urgent need to get the Energy Bill on the statute book and get more major projects under way to boost energy capacity.”

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