Fuel for Thought – Oct 28th

28 Oct, 2011

Report suggests UK politicians haven’t grasped energy security issues: The Energy and Climate Change Committee has made some useful recommendations in its latest report to parliament, including that DECC should adopt a more transparent set of security of supply metrics.  But the report brushes over the risks around generation security of supply this decade, relying on Grid’s assessment that the investment pipeline should safely cover retiring capacity.  As set out here, we believe the risks are much more substantial given uncertainty around market reform, capital constraints and weak gas plant generation margins.  In this environment, it is dangerous to rely on the delivery of generation assets ‘under development’ until major capital expenditure has been sunk.

Do not bank on the latest European bailout: The last few weeks have seen commodity markets rally along with other asset classes as politicians have pulled together ‘one final bailout package’ to resolve Europe’s debt crisis.  But despite the headline grabbing numbers the bailout may well turn out to be a case of too little, too late.  At the core of the problem is a lack of political and public willingness, most importantly in Germany, to push Europe towards tighter fiscal consolidation.  The leverage based ingredients of the latest bailout package are unlikely to provide more than temporary relief and increase the chances of the inevitable sovereign defaults being highly disorderly. 

Wholesale price pass through to customers: As Europe confronts the increasing risk of renewed recession, rising customer bills are becoming a key political issue.  Energy retailers are in a difficult position as they try and pass through a rising cost base driven by previous forward market purchases, while consumers and politicians focus on the recent decline in spot prices.   But retailers to a large extent have themselves to blame, given a lack of transparency and poor communication around how wholesale energy is purchased to meet customer demand.  Providing greater choice and transparency over customer’s wholesale price exposure would help to shift the responsibility for exposure management onto consumers.

UK and Norway energy pact:  The energy pact signed by UK and Norway this week makes a lot of sense.  Their energy markets are already closely tied via shared gas infrastructure and Norway is a valuable neighbour to the UK offering vast reserves of oil and gas and financial and political stability.  The UK offers Norway a liquid gas market in which to hedge its production and monetise its gas supply flexibility.  The UK may also offer a market for Norwegian generation flexibility as the value of this flexibility increases with the growth in intermittent capacity in the UK.

Picture of the week:

A lignite excavator at RWE’s Hambach opencut lignite mine. Rhineland open cut mines produce around 100 million tonnes of lignite a year to feed RWE’s four power stations with the coal delivered to the stations by train. A typical coal seam lies at a depth of 300 metres and is about 65 metres thick. A single bucket wheel excavator shovels about 40 million tonnes of coal a year onto conveyors, which take it to the railhead.