Gloom and doom on energy cuts both ways

  • 22 Feb 2012, 16:00
  • Robin Webster

Following the many predictions of gloom and doom from parts of the media about the future costs of green energy, renewable energy company RES has got in on the act with their own version of the story in Monday's Telegraph.

Unsurprisingly they're not warning about rising costs from green taxes, but rather the potential costs of relying too heavily on gas. The article on page 14 (but not online) says:

"Household energy bills could double without a big increase in the use of wind farms and nuclear power, an energy company has warned"

Growing British dependence on imported gas could cost the country the equivalent of more than £1,200 for every household, according to RES, one of the country's biggest renewable energy firms."

The RES forecast, says the Telegraph, is

"....based on an assumption that Britain will need rising gas imports as coal-fired generators are decommissioned. The price of imported gas has trebled over the last decade. RES calculated that if the trend continued, Britain would need to spend an additional £32billion by 2025, equal to £1,261 per household."

Over the last few years, experts agree that it's largely rising gas prices which have driven energy bills up. This is an important fact that has often been obscured in media coverage of rising fuel bills over the past year. But does the argument that gas prices will continue to rise at the same rate stack up?

Gas prices have gone up significantly over the last 10-15 years:

Gas _prices

Of course, in that time the UK stopped being a net exporter of gas in 2004, and became a net importer, largely due to declining North Sea production. This might raise some doubts about whether the trend will continue.

The assumptions behind the figures is laid out in an internal briefing note which the author, economist David Handley, shared with us. It says that

"...if we don't achieve these government objectives [for nuclear, renewables and energy efficiency] and choose to replace everything with gas on the basis that it is the quickest and cheapest power station to build … If we then carry on with this gas 'business-as-usual', replacing the remaining coal generation which will shut down by the mid 2020's with gas, then we could be consuming 120bcm a year, of which 90% will need to be imported."

The suggestion that we could be consuming 120bcm of gas a year by the mid-2020s is right at the outer edges of predictions by the National Grid, cited in DECC's security of supply report, as shown in the graph below. However, the National Grid do not appear to have investigated any scenarios where no effort at all is made to reach our climate change targets.

Gas _Predictions

So it's a high estimate of gas usage - but then this is what RES are warning about.

However, the figures from RES highlighted in the Telegraph are also based on the assumption that gas prices will reach 172.5p/therm by 2025 (three times the current market price of 57.5p/therm).

This is well above other projections for future gas prices given by DECC, Ofgem or any other international energy agency. DECC see costs stabilising at 100p/therm under their 'high' scenario, while in one of Ofgem's 'dash for gas' scenarios the price of gas briefly peaks at 108p/therm, before returning below 100p/therm.

David Hanley argues that Government predictions for future prices tend to vary only 20% from their current level, and have been wildly wrong in the past. For example:

"A decade ago we were predicting gas prices at 24p/therm and now they are at 54p/therm".

He also argues that gas prices have risen partially as a result of China's growth - a factor which shows no sign of slowing, and that gas prices are currently being impacted by the wider economic situation - but that this effect might be temporary. Just a few years ago confident predictions were being made that oil prices (to which gas prices are often linked) would rise to $200/barrel, and Hanley believes this could still happen.

Finally, the RES briefing cites a report by the energy consultancy Poyry for Ofgem as evidence that the impact of shale gas on gas prices will be limited in this country, at least in the short term.

Predicting the future

As with the costs of green policies, predicting the future costs of gas is tricky. RES are not the first group to base future predictions on past trends. Uswitch also tried it for fuel bills (in figures cited in an edition of Panorama) as did Friends of the Earth in a report used to claim that "the nation would face an additional bill of £8billion a year by 2020 to generate electricity, costing the average householder an extra £300" if the UK does not meet its renewable targets. All of these seem somewhat speculative.

It seems clear that the RES assessment rests at one (high) end of the spectrum. Given the many and varying factors impacting on gas prices, it's probably not wise to take it as gospel.

None of this is to undermine the point that when it comes to cutting greenhouse gas emissions, gas is at a serious disadvantage to lower-carbon energy. Whatever gas prices do in the future, the greenhouse gas emissions from burning it are going to remain pretty constant. 

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