The UK needs to get over the idea that megaprojects are the solution to everything, writes David Elmes, Head of Warwick Business School Global Energy Research Network. As the traditional investors in British oil, gas and electricity look smaller and less able to take on large projects, the UK needs an industrial energy strategy centred on a mix of smaller and larger projects. Courtesy of The Conversation.
The board of French energy giant EDF has voted in favour of investing in a new nuclear power station at Hinkley Point in Somerset, England. However, in a surprise move the UK government has delayed a final decision on the project, sparking new debate on what is the right step forward for energy in the UK.
A recent report by the UK’s National Audit Office added to a long-running argument about how much new nuclear will cost in higher bills, higher subsidies or a mix of the two. The deal offered by the UK government had set a price for electricity from Hinkley of £92.50/MWh (in 2012 prices) which is index-linked and runs for 35 years from when the power station starts. That’s roughly double recent wholesale electricity prices.
But what’s missing is a fresh discussion on what to do instead of large projects like Hinkley. This requires a challenge to the mindset that’s led the UK to paint itself into a corner.
Central or distributed?
There’s long been a culture of big is better when the UK considers energy – find the next big gas field or build another big power station and the problem is sorted.
Addressing Britain’s energy shortages traditionally meant finding new gas fields or building more power plants
Locally produced solar and wind energy is now more common. We have all seen how prices for panels and turbines have tumbled with forecasts that costs for solar and onshore wind will fall a further 41% and 60% by 2040 respectively. That’s great news but, as the much-missed David MacKay pointed out, the space for such distributed supplies will become an issue at some point.
Supply or consumption
The big is better culture goes hand-in-hand with a focus on the supply side. Addressing Britain’s energy shortages traditionally meant finding new gas fields or building more power plants, but we’re now seeing a shift in investment to the consumption side with more focus on efficient cars, buildings or industrial processes. Across the world, 32% of energy sector investment in 2015 went on efficiency measures that reduce demand – up from just 17% the previous year.
The UK’s North Sea oil and gas industry’s net rate of return, a measure of profitability, hit an all-time low of 0.6% in the fourth quarter of 2015
UK policy needs to reflect this shift. For the past eight years the government has had a standalone Department of Energy and Climate Change with a remit that often left transport, construction and industry in the control of other, larger departments. The new Department for Business, Energy and Industrial Strategy can aim for a balance between addressing both the supply and consumption of energy.
Governments or Markets
Moving DECC to within the business department raises the interesting question of what role energy might play in any industrial strategy.
EDF’s difficulty securing the investment for Hinkley is a reflection of the financial challenges faced by all of the major European power companies. In 2013, Gerard Mestrallet, the then CEO of GDF Suez (now renamed Engie) led a delegation of the major energy firms to the European parliament and said:
European energy companies are experiencing difficulties for which there is no precedent: the impairment of their European assets, the early closure of power plants, and a reduction in investments amongst other problems. The entire sector’s business situation is under severe pressure.
Results since then have merely illustrated those pressures with mounting losses and plans for companies like E.On and RWE to split themselves into “old” and new” parts.
The UK should think of a new mix between smaller and larger
The oil and gas industry faces similar challenges. Its return on capital peaked in 2008, nearly halved by 2013, and now has slumped with hydrocarbon prices that look to be “lower for longer”. The UK’s North Sea oil and gas industry’s net rate of return, a measure of profitability, hit an all-time low of 0.6% in the fourth quarter of 2015, well below the country’s manufacturing sector at 7.2% or the service sector at 22%. Returns in oil and gas measured this way used to vary between 20% and 60% and consistently outpaced the other sectors.
The traditional investors in British energy look smaller and less able to take on very large scale projects than in the past. The evidence from Hinkley is that the UK government won’t invest up front in such projects.
The UK needs to get over the idea that huge megaprojects are the solution to everything. Instead, it should think of a new mix between smaller and larger, be more joined up in considering consumption as well as supply and think more decentralised than central. That expands the industries, companies, institutions and government departments involved. That calls for an industrial strategy focused on energy.
David Elmes joined Warwick Business School (WBS) as Academic Director for the Warwick Global Energy MBA in 2008 after more than 20 years working in the energy & management consulting industries, including such companies as BP, Gemini Consulting, and Schlumberger. With WBS he continues as Course Director of the WBS Global Energy MBA and leads the WBS Global Energy Research Network. He combines teaching with work on externally funded research programmes that investigate how the energy industry is changing, how management practices across the industry are changing and what new business models are finding success in the marketplace.
This article was first published on The Conversation and is republished here with permission.