Energy UK (the new trade body for the electricity industry, amalgamating the Association of Electricity Producers, the Energy Retail Association, and the UK Business Council for Sustainable Energy) has just released a very brief preview of a forthcoming Ernst & Young study of investment patterns in the UK energy sector: Powering the UK
Naturally, Energy UK feel obliged to offer an upbeat interpretation, but even a superficial reading shows that the news is in fact mixed.
Ernst & Young estimate that over the next fifteen years the UK needs to invest around £250 billion on capital plant (power stations, grid lines, compressors, gas pipelines, etc.) for the electricity and gas sectors. That's £16 billion a year. However, Ernst & Young's chart shows that in 2011 the industry invested only around £11 billion a year, with about £8 billion of that being spent on power stations and about £3 billion on grid and pipelines for the transmission and distribution.
Two trains of thought are stimulated by these observations:
1. Firstly, that while the study's chart shows a significant growth in investment between 2010 and 2011, it is still well short of the £16 billion a year required. Clearly, investment will have to be heavily back-end loaded, with annual investment in the later years being well in excess of £16 billion. That's a tall order.
2. Secondly, it is probable that the majority of 2011's £8 billion spending on power generation was on subsidised renewables. The full details of Ernst & Young's estimates will doubtless be found in their final study, due out in the early autumn, but some approximate calculations can be made with reasonable confidence.
There is data suggesting, for example, that about 1.7 GWs of new transmission-connected on- and offshore wind has been built in 2011 and so far in 2012. Assuming a cost of £1 million per MW installed for onshore and £2 million per MW installed for offshore we can estimate that over £4 billion has been invested in wind in that period, with offshore wind accounting for about £3.5 billion of that sum.
Investment on distribution connected renewables is harder to estimate, but we know that nearly 900 MWs of Solar PV was built in 2011, costing perhaps some £2.5 billion.
That would give an estimated total investment on renewables in and around 2011 of about £6.5 billion.
By contrast it is common knowledge that rather more modest investments are currently being made in building the thermal generation needed to meet load on demand and guarantee security of supply. Staythorpe (a 1.7 GW CCGT commissioned in 2010), and the new 2 GW Pembroke CCGT (a £1bn scheme according to press reports) are almost alone.
Bringing these two points together, we can infer that not only is the UK failing to invest enough in its electricity and gas industries to secure their future, but that with the current distorted market conditions capital will be invested predominantly in the dark alleys where government is mugging the consumer to provide guaranteed, de-risked, rates of return. This cannot be a stable situation.