Fuel for Thought – 14th Oct

14 Oct, 2011

UK government energy policy conflict: UK Chancellor George Osborne has publicly voiced his concern about the threat of decarbonisation to the UK’s competitiveness.  This is likely to escalate the clash of agendas between the UK Treasury who are focused on driving through austerity measures and DECC who are responsible for delivering the government’s decarbonisation agenda.  We explore the damage this is doing to the government’s credibility with electricity market investors in an article next Monday.  The conflict between austerity and support for low carbon technology is likely to escalate across Europe as deficit reduction measures are implemented against a weakening economic backdrop. 

Tension over UK carbon floor price: The UK’s unilateral approach to carbon price intervention through the Carbon Floor Price is increasingly causing tension.  Not only does it create windfall profits for existing low carbon generators, but it directly undermines the EU ETS price signal.  The distortions introduced by the carbon price floor have been strongly criticized by UK utilities recently, with the notable exception of EDF Energy and Centrica who stand to gain most from windfall profits on their jointly owned nuclear portfolio. 

Collapse of Longannet CCS project?:  A report that the flagship Longannet demonstration project is close to collapse, has thrown the UK government’s CCS support policy into disarray.  The government’s vision of running a ‘competition’ based approach to delivering CCS demonstration projects has always looked to be naïve given the complexity and cost of CCS and the limited number of credible projects.  If the Longannet project fails, DECC will face a serious credibility issue with other potential CCS investors.  This would in turn call into question the government’s aggressive assumptions on CCS contribution to decarbonisation beyond 2020.

The risks around Chinese LNG demand: The balance between growth of Australian LNG exports and Chinese appetite for LNG imports will be a key driver of the evolution of the LNG market this decade.  The Chinese demand side of this equation is very difficult to predict.  Firstly there are increasing concerns over the risk of an economic slowdown in China which could sharply reduce gas import demand.  But China also has enormous potential reserves of unconventional gas and strong incentives to produce this in preference to imported LNG.

Picture of the week:

A gas turbine being transported to Nuon’s new Magnum CCGT plant in Eemshaven, Netherlands.  Nuon had announced its intentions to develop the 1200MW plant into a coal and biomass fired IGCC plant but said in April this year that the IGCC project will be delayed, with an ambition to have the conversion from CCGT to IGCC completed by 2020.  The Magnum project, like the neighbouring RWE Eemshaven coal plant, has faced a number of environmental objections.