End of the Road for the Energy Company Obligation (ECO)?
November 27, 2013
Ahead of the Autumn Statement, which is due to be announced on 5th December, I thought I would take a look at the Energy Company Obligation (ECO).
ECO is just one of a number of Government policies aimed at increasing energy efficiency, however there is currently much media speculation that it could undergo drastic reworking over the coming weeks.
The media speculation may well hold some truth as this autumn, 5 of the big 6 energy companies have put up their energy prices as per the table below (E.ON is yet to announce anything), but one of them – EDF – raised their prices by only 3.9%.
The reason given for only a 3.9% increase?
The firm (EDF) said: “The company has taken action ahead of the outcome of the Government’s review (e.g. the Autumn Statement) of the costs of ECO and other schemes.
“If the Government makes bigger changes to the costs of its social and environmental schemes than EDF Energy has anticipated, the company pledges to pass these savings onto customers.
“However, if changes to social and environmental programmes are less than anticipated, the company may have to review its standard variable prices again.”
So what exactly is ECO?
ECO is the energy efficiency scheme paid for by the energy companies that is primarily designed to help vulnerable members of society like the elderly and those on specific Government entitlements, and those members of society that are the biggest risk of falling into fuel poverty.
In addition the scheme is also being used to target the improvement of solid wall properties and those that have ‘hard-to-treat’ walls (this is the first energy efficiency scheme that has targeted this).
The Office of National Statistics estimated 31,100 excess winter deaths in England in Wales during 2012-2013, and the majority of these people fell into the vulnerable members of society demographic – the demographic specifically targeted by this ECO scheme.
By providing free cavity wall insulation, loft insulation and new boilers, this group of people can then heat their homes for less. To date 270,000 homes in the UK have benefitted from the scheme in this year alone, so clearly as a mechanism for getting energy saving solutions into peoples homes it is working, despite previous reports to the contrary.
So why are the energy companies so against ECO?
The main reason why energy companies are so against ECO is that they have to fund it – and they are doing this by passing on the costs to their customers through increased energy bills.
Obviously in the current economical climate, where the price of such an essential commodity (energy) is increasing way above inflation – the suppliers are going to come under attack from many different quarters.
Every year for the last 8 years, energy prices have risen between 8-10%, so while an average bill in 2004 was £522 it has now reached £1309 – at this point it is important to emphasise that ECO has only been around for 1 year, so one would certainly be forgiven for questioning why the energy companies have been able to get away with their annual price rises in previous years.
Anyway, since ECO is Government policy – it can be changed (unlike for example, the cost of importing fuel from the Middle East). It therefore has become an incredibly easy target for the energy companies.
They argue that if ECO is scrapped, energy prices will come down and the savings will go directly back to the customers.
Is Funding ECO through Energy Price Rises Fair?
I think it is fair to say that more vulnerable members of society need the help of others. They shouldn’t be unable to afford to heat there homes, so I truly believe there does need to be something in place to help them and ECO has worked to date (look at the take up numbers).
Now if these vulnerable members of society don’t take up the measures available to them through ECO, and they pay their energy bills, there are having to pay more to help others in a similar position benefit, so there are quite strong arguments that ECO is a regressive tax.
So it is a tough call to make, I think there is no doubt though that we do need an energy efficiency program to help vulnerable people, whether it should be funded via the companies or through increased tax – that is up for debate and I am sure in the coming weeks we will hear plenty on the subject
Is Energy Efficiency in the best interests of the Energy Companies?
Energy efficiency means that the same quality of heating effort can be achieved for less effort; or to make it slightly more relevant to consumers, they can keep their homes warm by using less gas and so provide cheaper energy bills.
If everyone in the UK were to retrofit their properties with insulation, peak energy demand would dramatically decrease and then in theory the UK could reduce imports of gas and produce less electricity.
Therefore there is no real surprise the energy companies are kicking up a fuss here, if everyone eligible were to take advantage of the scheme, then there would be a lower requirement for fuel (both gas and electricity) and that would bite into their profits even more.
If this type of scheme ceases to exist, homes will stay uninsulated – energy demand will stay constant and since we have to import such a proportion of gas from such volatile areas of the world, gas prices will no doubt go up in the long run, so yes we could see immediate reductions in our energy bills today by Government revoking ECO, the bills would be back up at the same level in a couple of years and no measures would have been installed.
A final Thing to Think about!
The final thing to consider is that the same energy companies that deliver the energy to your homes also produce the energy (from power plants or getting gas out of the ground).
In their bill breakdowns, the energy companies claim that 48% of your bill is made up from wholesale energy costs.
Now despite the energy companies reporting just a 5% profit in selling the energy to you, their energy production arms reported profits of 20% or more for this year (was nearer 25% last year). So they are selling gas/ electricity to themselves at a 20% profit, and then selling it on again to customers at a 5% profit – and they claim that social and environmental costs are the drivers of high bills…
I think not!
Energy Bill Breakdown – The Different components that make up your Energy Bill
November 12, 2013
Wholesale Energy costs
So, starting with the main component of your energy bill; the wholesale energy cost is the price of electricity and gas that energy retailers (British Gas, E.ON, Npower, etc) buy from the energy market. This makes up by far the biggest element of the energy bill – about 48% averaged across the big six energy companies, which on a bill of £1300 a year comes to about £620.
The energy companies have to secure the energy ahead of actually providing it to customers, and this is done by buying it well in advance (sometimes as much as two years) to ensure that supply is not disrupted.
All of the Big Six energy retailers: EDF, E.ON, British Gas, Scottish Power, Npower, SSE, also have generation businesses, which means they have some generating (electricity) and extraction (natural gas) capacity. However this generating and extraction capacity doesn’t unfortunately stop them from having to purchase additional energy to satisfy the demand from customers.
So although they blame the increases in wholesale prices as the reason for increasing the price of the customer’s bill, in theory they are paying themselves twice – increasing the profits of their generation and extraction businesses (which also part of the wholesale price) and then passing on any increases in the market price to homes and businesses. So their increased cost effectively turns into increased revenue twice over. It’s no surprise that the generation and extraction businesses are the most profitable parts of their business portfolios but are ‘glossed over’ and poorly understood by the press and politicians.
The companies say there is strict separation between the different parts of the business – the retail side (selling to you and me) and the generation side (sourcing the energy); and they also tell us they don’t come together and collude on price rises, but when you begin to understand how they operate you begin to wonder what they announce publicly actually stacks up!
One final point is that electricity is generated all over the UK and demand for electricity doesn’t always match the demand. Therefore there is a need to move the electricity around the distribution network to ensure customers can get the electricity when it is needed. The National grid carries out this job and they recover their costs from suppliers through this ‘wholesale energy cost’ element of the bill – this is known as the Balancing Services Use of System.
The Energy Delivery Network
Transmission and distribution is the second largest component of your energy bill. This is the price paid by the energy suppliers to the companies that operate the energy distribution networks. This makes up about 24% of your energy bill and the price paid is determined by OFGEM (the energy regulation body) in conjunction with the energy distribution companies (like National Grid, Scotia Gas Networks, UK Power Networks, etc).
These prices are rising since investment is also increasing as the old network has to be upgraded to ensure that the distribution infrastructure can cope with increases in demand and continue to deliver an uninterrupted energy supply to our homes and businesses.
For example old gas pipework is being replaced by new more robust materials, which means roads need to be dug up and new infrastructure put in place. Also a new power station or wind farm will require new cabling to get the electricity from where it is produced to where it is needed, and this is what is responsible for this component of the bill going up.
Social & Environmental Costs
Social and Environmental costs make up just under 10% of your energy bill, so on an average bill of £1,300, you are paying about £130 towards this element. Despite only being a tiny portion of your bill relative to the other components, this component has been the one that has created the most media attention since this is the one the Government have a real say in.
The background to this component is that the Government have now made it a legal requirement for the energy companies to provide help to vulnerable members of society to ensure they have access to heat and electricity and to try and make this more affordable to them. There are numerous schemes running that the Government enforces to help achieve this and we have detailed a few of them below.
These schemes target in particular elderly customers, customers with disabilities and low-income families that require an extra bit of help. The first example is the Winter Fuel Payment, which provides a tax-free payment of between £100- £300 to any homeowner who was born prior to 5th January 1952. This can also be topped up by an additional £25 Cold Weather Payment for those particularly cold winter weeks.
Another scheme that is in place to try and tackle the root causes of heating and insulation problems is the ECO or the Energy Company Obligation. You can read more about this scheme her but in a nutshell this helps drive energy efficiency among this same group of vulnerable members of society, where if it was left to the market, would priced out and excluded.
Measures available through ECO include new boilers, cavity and loft insulation and solid wall insulation, have click here to see if you can take advantage of this.
So as customers we have to decide where our priorities lie and whether we want to help continue protecting the most vulnerable. As a nation we have always done this, and I expect we will continue to do so! Whether we do this through energy bills or general taxation is another argument altogether.
Finally, the Government also have put in place policies in place to help the UK adhere to its legally binding carbon reduction program. This includes the subsidies that are paid when wind farms are built or solar panels are put on your roof. Despite a few media outlets (see the Telegraph for example!) being incredibly critical of this kind of investment – these renewable technologies will ensure that the amount of energy we need to import from places like Qatar or Norway is massively reduced, which gives us a bit of energy independence and therefore protects us from price volatility but this obviously a longer term view!
This is simply tax paid either as VAT or corporation tax – and is roughly 5%.
Most big companies have overheads to keep the business running, like having to pay wages. If you think that the energy companies are providing a service to many millions of customers unfortunately there is not much they can do here to pass on any savings to us! Even if top management of the biggest salaries were to be paid less, this would be a drop in the ocean sadly. The operating costs represent about 10% of the energy bill you pay.
All the energy companies claim they are making a fair profit – which is roughly 5% across the board. They claim that this kind of profit is broadly in line with supermarkets, another of life’s necessities and since they are all publicly listed, they pay a dividend that helps boost pension funds. They also claim that they are investing in new power plants to replace ageing infrastructure, but to be honest I am yet to see materialise on a grand scale, but that may just be me being cynical!
So there you have it – hopefully everything you need to know about how energy bills are made up. I hope this gives you enough information to reach your own conclusion whether you feel the 10% annual increases are justified. It seems to me that although wholesale costs do go up, the energy companies have not come clean on the vast profits their businesses bring in. It is only when we have full transparency that we will see the tide of trust begin to turn.
To see a pie chart showing the energy bill breakdown please click here
To read some more of our ‘bigger picture blogs – click here – a great read over lunch!
Could Negawatts revolutionise the Energy Industry?
September 9, 2013
What exactly is a Negawatt?
Coined by famous economist Amory Lovins, the term simply refers to avoided energy use, or saved energy.
The simplest way of illustrating this is to imagine a 60-watt incandescent bulb producing light. If you replaced this with an 8-watt LED bulb you have saved 52 watts that can be used elsewhere. With your energy efficient bulb you are producing the same amount of light, but using less energy to do it. The 52 watts you are freeing up are referred to as negawatts.
The great thing about this is that every time we produce a negawatt, the amount of capacity in the grid can in theory decrease. But the idea is that we are not forcing people to cut their energy usage per say, but instead improving the energy efficiency of the appliances they use, which frees up the energy anyway.
For example a new energy efficient appliance should do exactly the same job as its older less efficient predecessor, but it should do it using less energy and hopefully to a better standard providing a better experience / greater comfort etc.
As we have seen in the UK with the proposed new Hinkley nuclear power plant, building new power stations from scratch is incredibly expensive. Producing negawatts is a much cheaper way to go. In fact, they have determined in the US that energy saving programmes have proved to be three times cheaper to implement than installing new capacity.
The importance of Negawatts to the Energy Companies
Historically energy companies have aimed to maximise their profits by producing electricity from the cheapest source available and then selling this at the highest price they can without dampening demand from consumers. Unfortunately the cheapest electricity comes from coal and gas.
This is a problem since the Government are now under a legal obligation to decarbonise our economy as a result of the Kyoto Protocol, therefore they need to exert regulatory pressure or provide an incentive to the energy companies to help achieve this.
Imagine then if negawatts were given a monetary value?
If this were the case, then capacity in the grid would not need to increase despite our energy demand continuing to rise. The theory goes that if one customer uses less energy, then the energy company can use this ‘saved energy’ to service more customers, and they would also still be financially rewarded as a result of producing the ‘negawatt’ for that individual.
In addition, giving negawatts a monetary value would be a far quicker way to resolve the diminishing headroom in our energy producing capacity, as well as being far cheaper than installing new capacity.
The ability to reduce peak demand means less reliance on importing costly electricity from our European neighbours. If you can forego producing a unit of electricity during peak times, and produce it another time, or not at all, you are being far more effective than simply saving energy generally over the course of a day. This is due to the peak load effect – 10% of the grid energy is used providing for the last 1% of demand, and by cutting that peak 1%, we are saving much more nationally than turning our lights off at night, even though as an individual you may save the same amount of money.
Encouraging Consumers to produce Negawatts
For a consumer though, they need an incentive too – this could be via an electricity efficiency Feed-in Tariff. So, similar to the feed-in tariffs paid to households who have installed solar PV, a payment would be made for every unit of electricity they saved. This should encourage unilateral take up of energy efficiency measures and things like the Green Deal would suddenly take off like a run away train. However this obviously kicks up the question of how we measure the amount of electricity saved. It appears we are putting an awful lot of faith into the smart grid! This is simply another requirement of the technology before it gets rolled out across the country.
So to summarise, in March 2013 when Greg Barker announced that ‘The era of the Negawatt has now arrived’ it was welcome news indeed – the only issue is how on earth we go about implementing it!
Why do people hate wind turbines?
September 2, 2013
Over recent years the polarising impact of wind turbines seems to have become an every day occurrence in the media.
But why are people so against wind turbines? And why is the UK so hell-bent on persevering with it as a technology?
In the following blog I am going to look at some of the issues that people have with them and whether they do have a future in our energy mix – but first I am going to provide a quick recap on what they are and why we have them.
On a very basic level a wind turbine comprises of rotor blades positioned at the top of very high towers. They spin as wind hits them, which produces electricity.
The rotor blades are much like the propellers of aeroplanes, however in the case of commercial wind turbines they tend to be much much larger. Blade Dynamics, a company that specialises in making the rotors of wind turbines has recently announced the D49 – with a rotor diameter of 100m, so technology is always advancing and units are getting bigger and more efficient.
The reason for maximising the length of the blades, is that the larger the swept area of a turbine (this is the circle that the turbine produces while spinning) the more wind it will catch and therefore this increases the energy it can create.
The reason for situating the turbines atop high towers, is that wind speeds tend to be higher at altitude and the power contained in the wind is proportional to the cube of the wind speed, so for example if a the wind speed is 3mph then the power is calculated as such 3 x 3 x 3 = 27. If the wind speed doubles to 6mph then the power is 6 x 6 x 6 = 216.
So since wind turbines catch more wind if they are bigger and there is more power in the wind at higher altitudes, companies looking to take advantage of wind energy make their wind turbines huge, for example the one proposed by Blade Dynamics will be 270m tall.
Why are wind farms built in the first place?
Wind farms are just a collection of wind turbines – they are now pretty common across the UK. They are being built as a result of the Government trying to decarbonise our energy industry. In the past we have relied on fossil fuels and nuclear energy to meet our energy demand, and to be honest this is still the case.
But as part of the Kyoto agreement that was signed in 1997, the UK agreed legally binding targets to lower our carbon emissions as part of an effort to combat climate change. I think this then brings the discussion to the first issue that some people feel pretty strongly about!
Why All the Hate?!
Reason 1 – People think that Climate Change doesn’t even exist
In my opinion it probably does – we can see changes in our climate – across the world there are extreme weather situations happening all the time. But climate change still remains one of the most polarising subjects of our time. There are people who will argue till they are blue in the face that the changes in weather are just a natural cyclical event and not the result of anthropogenic carbon dioxide. So these people are obviously questioning the need to decarbonise the energy industry and therefore the reason for having wind turbines in the first place.
This unfortunately is not something I can counter – it is true that you can use science to allegedly prove anything – I once read that men with beards are statistically more likely to get cancer – obviously complete rubbish. This issue is however that even though decent scientists have all written publications on their findings, these scientists sit in both camps – believers and non-believers – so actually how do we know who to believe!
Reason 2 – The landscape gets scarred
I think another major reason that people hate wind turbines is that as I mentioned before they are huge. The wind companies are looking to maximise the energy they can produce so they build them big and people in the vicinity feel that they are a blot on the landscape.
I can’t sit here and argue that they don’t change the way an area looks. I think it is more the issue that people are ingrained to hate change. As a child growing up now, they must see wind turbines when they travel across the country and so these things must now be normal to them. I think this is where we will see a step change in acceptance. As our youth grow up, there will be generational acceptance of wind farms – they are the norm, just as a big coal power plant or nuclear power plant have been for us growing up.
Reason 3 – They are just sat there not spinning
This is the nature of the beast unfortunately – if the wind ain’t blowing, then the turbines ain’t going to be spinning. Therefore people assume they are useless and don’t contribute to our energy mix. This is a bit like a coal or gas power plant having no access to their required fuels – now I know this is ridiculous since we have always had a steady supply of coal and gas, but what if this were to change, the supply was interrupted – we need to have some capacity in our grid that we can use that doesn’t rely on a tangible fuel (e.g. gas, coal or uranium). This means that if everything dropped through the floor – at least there would be some means of making electricity on a commercial scale.
So yes sometimes wind turbines aren’t going to be spinning, but most of the time they are at least contributing something to our energy mix, and let me be quite clear I am not saying get rid of all energy from fossil fuels, I think we need a sensible energy mix and wind in my opinion has an important role to play.
But just for the record in June this year, wind accounted for over 5GW of power – more than 10% of our energy demand – and that number can’t be sniffed at.
Reason 4 – Wind energy is expensive to produce
Currently producing energy from wind costs more than producing it from traditional fuels. This is mainly due to Government grants being paid when the wind turbines are in operation.
The thing is though, in theory once a wind turbine is up, the electricity it produces only requires the wind to blow. If we could introduce economies of scale to drive down the cost of installing the turbines – then surely we are on to a winner – the problem is that to get there we need to increase production to drive down prices so at the moment we are going to have to suck it up and pay higher prices.
On another note, we currently import much of our gas and coal from the world market, but the proportion that we import is going to increase significantly over the next 5 years. As we saw in our extended winter this year, our gas reserves ran dangerously low and we had to spend big to secure additional supplies.
The way it has played out with North Sea Gas in that everyone pretty much now has a gas central heating system. Unfortunately North Sea Gas isn’t there anymore, now you have probably heard about the potential of shale. I think I can say with some certainty that this isn’t an immediate fix. Even if we can access large amounts of gas and the alleged environmental impacts are unfounded, this supply of gas is not going to become plentiful for the next 5-10 years.
Now fuel prices are already ludicrous in my opinion, rising at 10% a year for the last 8 years, and if you think fuel prices are coming down then I think you are probably living in dream world. So how long before the tipping point is reached. Not necessarily by the cost of wind installation coming down (although naturally this will) but rather the price of producing energy from traditional other fuels rising.
As a final thought….
Google recently acquired Makani power, a Californian start up wind Power Company that is trying to harness wind speeds thousands of meters up in the air by tethering ‘wind kites’ to the ground. The theory being: that if these wind turbines sit at such altitude then they can be much smaller in size, because they would then utilise higher and more consistent wind speeds. The Google bods tend to make fairly sensible investment decisions – so it must point to wind having a future, it just might be in a much more evolved form!
James and Nick discuss the potential impending energy crisis!
August 13, 2013
So last week, Nick and I sat down and he asked me my thoughts on this much discussed impending energy crisis. If you can’t stand to watch us on video (can’t blame you!) then read the two of these blogs below – they should give you a flavour of what we discussed.
We would love to get your thoughts – so please comment below or share this video.
Carbon Dioxide levels hitting 400ppm – what’s the problem with that?
June 2, 2013
400ppm, What’s the big deal?
It’s been widely reported over the last couple of weeks that Carbon Dioxide levels in the atmosphere have exceeded 400 parts per million. It’s a big deal, for several reasons:
1. Levels have been rising on an upward curve and its all down to us
We have measured CO2 concentration in the atmosphere from Mauna Loa in Hawaii for 55 years now, and every year it has been increasing. When we first started recording the CO2, back in the 1950’s, levels were well below 320ppm. Even in 2009, levels were at 386ppm, so it is clear that the upward trend is accelerating.
Using palaeoclimate records, such as ice cores from the Arctic, we can look back past these instrumental records. They show levels of carbon dioxide in the atmosphere have not been this high for at least 800,000 years. So it’s a pretty big deal historically.
And it has been conclusively proved that this is all down to man-made carbon emissions. Not even the fiercest climate sceptics debate this point – we are 100 percent certain that CO2 is increasing because of our activities. There just isn’t another possible source of such huge levels of emissions. To demonstrate, emissions from fossil fuels and cement production is 9.14 gigatonnes / year at the moment, but was almost half this 25 years ago.
2. It puts us right on course for the catastrophic climate change that has been predicted by the IPCC
The more carbon dioxide in the atmosphere, the greater the greenhouse effect, and the greater the increase in global temperature. And unfortunately the current rates of emissions fall in line with some of the worst predictions that scientists have made in the last few IPCC reports. It means that if we carry on like this, the temperature could increase by a catastrophic five or six degrees plus.
Even at the current concentrations, we are guaranteed climate change of 2 degrees or more. And it is of course going to be difficult to turn the world economy around quickly enough to stop carbon dioxide levels from peaking at much greater levels. How quickly we act now can drastically alter this upward curve in emissions.
Not only does the carbon dioxide we emit enter the atmosphere and cause global warming, it also enters the oceans and leads to ocean acidification. Over the past few decades there has been a measurable increase in the acidity of the oceans, so this is not just a theory, it is happening right now. Why is this important? A change in the acidity of the ocean means much of the biodiversity of the oceans will be lost – shellfish will no longer be able to grow their shells, fish will have their life cycles affected and the net product is huge damage to marine ecosystems. Some seafood could be off the menu permanently.
3. It could act as a rallying call
So we know it is important, but what can we, the average consumer, do about it? Well, there’s plenty we can do to reduce our carbon footprint and cut our energy use. Every little change can help slow the upward curve of CO2 emissions. Take a look around the GreenAge site and get some ideas.
Author: Alan Bouquet
Who Turned Out All the Lights – Part 2
April 2, 2013
Energy Crisis in the UK
It has been just 4 months since I wrote my first ‘who turned all the lights off’ article. In it, I explained about our impending energy crisis, but if you missed it, the headline figures are as follows:
In 2015, nine of our coal power plants would have shut down as a result of an EU directive on carbon emissions.
By 2019, our nuclear power stations will have come to the end of their useful life and will be forced to shut or turn down operations.
As of this morning (26th March 2013), our electricity demand is currently 48.09GW, of which coal is meeting 17.32GW and Nuclear is providing 6.36GW. Obviously the closure of these plants will make a significant dent on our energy capacity, as the two fuels combined account just under a half of all electricity production.
Now, unfortunately this issue gets a little bit worse, since a nuclear power plant (i.e. the once recently announced in Hinkley, Somerset) will not actually begin producing power for the best part of 10 years. It seems the Government must have all but abandoned its long-standing ambition to have 16GW of new reactors running by 2015.
Capacity is going to drop.
I presume most of you can see the issue here, but as energy capacity drops over the coming years, our demand for power will not. We live in a digital age, where 76% of the UK population have access to the Internet, and 92% of adults have a mobile phone. We use electricity on a daily basis to watch TV, read the newspaper, communicate with friends and even shop for goods & services.
Demand is not going to drop – simple as that.
That creates a problem, as at the moment we have the luxury of a bit of headroom between peak capacity and peak demand, but for how long?
Only a week ago, the boss of Energy Company, Scottish and Southern Energy (SSE), Mr Ian Merchant, warned that the lights may go out in the near 3 years. This is the boss of one of the 6 largest energy providers in the UK. He should know!
This view was supported by Alistair Buchanan, the CEO of OFGEM, the guy that oversees our energy regulatory body. One would also hope that he has his finger on the pulse too.
Now I can only hope that they came to this conclusion from reading my initial blog, but I suspect their army of clever analysts deduced this all by themselves.
The UK is Full of Gas
I have painted a pretty bleak picture so far and unfortunately I think the problem could be even worse. Currently the UK imports much of the gas that we use for power generation and for our domestic use, heating and producing hot water. In 2011, for the first time since 1967, UK gas imports exceeded our production. This is the result of our production capacity dropping off a cliff since 2000 with North Sea gas running out. In 2005, the UK paid less than £10m to import gas from Qatar since the amount we need was very little, but in just 7 years the accumulative payments to Qatar have totalled over £4bn. £10,000,000 to £4,000,000,000 is a lot of extra noughts.
In a recent memorandum, submitted by Centrica to Government, it was predicted that the UK would import 70-80% of our gas by 2020. Now in theory this is not a problem, as many countries import all their gas, however the UK is already particularly dependent on the stuff, with 40% of our energy requirements coming from it and the fact we are going to become ever more dependent on an imported energy source to power our country should set alarm bells ringing amongst us all. If they turn off the taps, we are in deep trouble so they have us over an (oil) barrel – we will be forced to pay whatever it costs!
You may have also noticed that it is bloody freezing outside. I biked into work this morning and I arrived like a little icicle. This ‘freak’ cold snap has taken us all by surprise, this time last year it was 200C warmer, but it appears that this freak weather maybe a new feature of the world we live in. I am not going to use this blog to preach about climate change, but simply point out that if we get lots of this ‘freak’ cold snaps, then we are going to use more gas.
The UK Government have recently come out and settled everyone’s nerves by reassuring them that gas will not run out. Whether or not you can take much comfort in Government promising anything these days is up for debate, but if they are right then, it means they are simply going to need to import even more gas.
Now the BBC reported on 25th March 2013, that a giant gas tanker has been diverted to Pembrokeshire to top up dwindling gas supplies depleted by unseasonable cold weather. This ship, the Zarga, carries about 266,000 cubic metres of LNG (which would power the UK for 6 hours).
Zarga sets out from Qatar and essentially delivers to whoever will pay the highest rate. Currently the highest bidder is the UK. Bear in mind we are going to be importing 80% of our gas. I am slightly worried.
Back to the issue of capacity / demand
John Hayes (when he was Energy Minister), gleefully announced the UK would be relying on new gas power plants to get us out of our current pickle, to help increase capacity (he really really hated renewables as far as I can tell). The problem is, unless shale gas and fracking become our saviours, we are going to have to import all the gas in order to run these power plants.
Unfortunately David Kennedy, CEO of the Committee on Climate Change, has quickly come out to quash reports that shale gas will drive prices down dramatically since it only has the potential to increase our domestic supply by about 10%, which will make little difference to our overall import issue.
So that leaves us with only 2 economically viable options.
Put in capacity quickly.
Reduce our demand.
Wind farms, solar PV, converting coal plants to run on biomass (so they can continue to operate). All of these are easy and quick implemented solutions, which would help reduce our reliance on importing price volatile fuels (such as gas that goes to the highest bidder). Also once they are built, they will operate over 20 years plus and produce free environmentally clean energy.
Increase energy efficiency throughout the UK and use energy smarter (through the smart grid). The Green Deal is a great scheme, although the 7% finance charge is turning off a lot of people, but energy efficiency is key to keeping our lights on and has an additional benefit of creating a huge raft of jobs to stimulate our faltering economy.
We need to change path
HM Opposition continually talk of the Coalition changing path on its plan for the economy. Surely, much more importantly is changing our path on energy policy. It needs to be made transparent to encourage investment from overseas and we need to cut the red tape quickly otherwise we genuinely are going to be serious trouble in just a few years.
It can be done; I just wonder whether it will take a couple of blackouts to give the Government a suitable kick up the arse.
Today, almost everyone is reliant on oil in some way or another. Many of us rely on petrol cars and buses to get to work as well as taking flights to go on holiday.
However, there are 1000s of other products we use daily that are derived from crude oil including: plastics, synthetic rubbers, cosmetics, perfumes and industrial solvents to name but a few. Petroleum is also key when making fertilizer, so the cost of food is indirectly linked to the cost of the black stuff too!
At today’s prices, if you were to buy one barrel of crude oil it would cost you about $100 dollars. One barrel is equal to 42 US gallons, which is just shy of 159 litres.
Unfortunately you can’t simply take the oil from the ground and use it in a car, plane or bus. First it needs to be refined, this actually produces numerous other products that we use today – below I have split out the main products that you can get from one barrel of oil:
73 litres of petrol
40 litres of diesel / heating fuel
16 litres of Jet fuel
6 litres of Liquid Petroleum Gas
+ small quantities of numerous other products like lubricants, kerosene and asphalt.
If you add up the volume of all the products from refining a barrel of oil, you actually get about 10 litres more than is put in, due to what’s called the ‘processing gain’ which results from processing and chemical changes decreasing the density and hence increasing the volume of the refined components.
Why The Government Love Petrol
People might be struggling to pay for the price of petrol now, but for the Government it is an absolute gold mine.
If you fill your car with £50 of fuel, the Government will get £30.
(1 litre of unleaded petrol in the UK currently costs about £1.37, with the Government getting about 60%, the petrol itself accounts for 34% and the other 6% covering the refining costs and the retailer margin.)
In total the UK Government estimated that it would bring in £592 billion worth of revenue from various taxation (income tax, corporation tax, VAT etc.) during 2012/13. It calculated spending of £683 billion on social welfare, the NHS, education and defence etc. Now you can see there is an issue here – they are short by just under £100 billion. This deficit is what the Government are trying to bring under control.
They have a challenge trying to balance the books while not increasing fuel duty too much to choke off demand. So, bringing this back on topic, what is the effect of fuel on the tax receipts?
Well via fuel duty, the Government get about £27 billion a year and the VAT element of the fuel gets them a further £10 billion. So fuel makes them about £37 billion of the £592 billion worth of revenue they are expecting (or in percentage terms 6.25%).
Based on the fact the Government are already under enormous pressure to cut the deficit, it seems to TheGreenAge, they are absolutely reliant on the petrochemical industry contributing to tax receipts.
A Bit of History
Back in 2000, fuel cost about 80p per litre from the petrol forecourt, made up of £0.48 of duty and £0.12 VAT. This meant the Government at this point in time were receiving over three quarters of the total cost of fuel back via taxes.
The ridiculously high duty prices led farmers and lorry drivers to block oil facilities leading to massive petrol shortages across the UK.
The cost of a barrel of oil in 2000 was ‘only’ $27 (remember it is now just shy of $100)
In 2007, oil prices had increased to $64, and this saw fuel prices in the UK exceed £1 per litre for the first time. This again led to blockages of oil facilities, but not to the same extent as in 2000.
In the summer of 2008, oil prices reached a record $140 per barrel and this saw fuel prices reach £1.20 per litre of petrol and £1.33 per litre of diesel, but by the end of the year the prices had dropped back to sub £1.00 for both as a barrel of oil dropped to $48.
Since 2008, despite a global recession, the value of oil has been steadily increasing and is now approaching the $100 a barrel mark.
You can see in the table below all the numbers discussed above, and hopefully appreciate why it paints a scary picture. The price of oil is likely to continue to increase. As the Government is under pressure to increase tax receipts the duty and VAT is unlikely to decrease. These two factors will drive the price of fuel up, which will directly hit the pockets of consumers.
The average car in the UK has a 65 litre fuel tank, which to fill up at today’s prices costs about £87. Ten years ago, an equivalent tank would have only cost £47 to fill up.
There are stabilisers in place (enacted the Treasury) to prevent the price of fuel mirroring the erratic changes of crude oil. Unfortunately, if prices of crude continue to increase, no government stabiliser will be big enough to offset the price rises in petrol.
What is Causing the Price of Crude Oil to Increase?
There are several interlinked reasons why crude prices are increasing. The first is that while demand continues to grow (as the worldwide economy recovers and China continues its 10% + growth), supply is failing to grow at the same rate. Oil comes from many different places, but much of it is concentrated around the Middle East and Northern Africa, which has seen much political unrest in recent times. This has led to worries about supply interruption, which of course leads to short term spikes in oil prices.
There have been very few significant oil finds in the last few years. The super oil fields in Saudi Arabia are now over 50 years old, and while there is still plenty of oil in them, the oil coming out tends to be polluted with water so is less valuable (the water is used to keep the pressure up in the well). It has been speculated that we have even reached ‘peak oil’, ie reached a maximum global output of oil. No matter what new technologies we develop to get the oil out of the ground, it is highly unlikely to come out at the rate and volumes it once did.
In addition, much of the oil in existence today is not in the easy to use form that you see flying out of oil wells in cartoons, instead it is held within oil sands, or it is much deeper in the ground. Wells will need to be dug significantly deeper, therefore the price of extracting the oil is now significantly higher than previously.
High oil prices can also be driven by a number of external events, for example when things go wrong in the stock markets. In 2008 we saw the housing market in the US burst; this resulted in a large sell off of traditional shares and savings bonds. People then moved a large amount of money from those investments to commodities like oil and gold. This event resulted in a massive spike in the price of oil, driving it up to $140 a barrel.
There is a potential saving grace on the horizon in the form of shale oil, but I am not going to give my two pennies worth on this until more research has been released on the environmental impacts of fracking.
Impact of Oil hitting $200 a Barrel
So taking this into account, what would be the impact of crude oil hitting $200 plus? Petrol could work out somewhere between £2.50 and £2.80 per litre, a pretty harrowing picture for consumers.
I began this blog by saying that in 2013 people are struggling to pay for fuel. I used to have a car, and it cost about £70 to fill up the tank, which lasted about a week and a half. I sold it. It was not worth it; my bike gets me around for free (aside from the food I need to eat to power it!).
I assume the thought of filling up a car for £180 or more fills most of you with dread (£2.80 multiplied by average 65 litre fuel tank). When household budgets are already tight, and with water and other utilities surely going to increase too, this might be too much for many people.
I appreciate that for many people cycling is simply not an option, but there are a growing group of people out there who will not use their car if there is only person in it. Can we change the culture in the UK, working to improve our budgets and health.
The True Cost of Oil
If you calculated the ‘work’ that can be carried out using the energy in one barrel of oil and compared it to the equivalent amount of work that a human could do, it would take a human about 10,000 hours to complete the same amount of work (based on the assumptions here. If you then take an average hourly wage of $6.60, then oil should be worth $66,000 a barrel (if you just took the UK, with an average wage of $20, then it would be worth $200,000 a barrel).
Maybe, if we really appreciated what oil does for us and the bargain price that we pay for it, we perhaps wouldn’t be quite so frivolous and drive 500m to the newsagent to buy a pint of milk.
In September 2012, the UK Energy regulatory body, OFGEM, speculated that the UK might suffer from blackouts as soon as 2015 – but why?
The UK recently signed up to the Large Combustion Plant Directive (LCPD), which is an EU directive introduced to cut the amount of sulphur dioxide and nitrogen oxide entering the atmosphere. All combustion plants built after 1987 must comply with the emission limits set out in the LCPD. They can do this by installing solutions to reduce the emissions, or they can opt out of the directive. If they chose to opt out of the LCPD, then since 2007 they would have been operating under restricted conditions and by 2015 they will be required to close altogether (either that or be restricted to a lifespan of 20,000 hours in operation – whichever comes first).
Seven power plants have chosen to opt out of the LCPD, so will need to close in the near future. These seven are: Didcot, Fawley, Littlebrook, Tilbury, Grain, Kingsnorth and Ironbridge. As a result OFGEM has forecast that the reserve margin (the difference between supply and demand) will therefore be between 0 and 9% in winter 2015.
0% is not good news! That means that within three years there might not be electricity available for you to watch the Queen’s speech on Christmas Day (maybe not such a bad thing). To bring this even closer to ‘home’, this is not some doomsayer predicting this event from occurring, but actually it is coming from our national energy watchdog!.
Furthermore, if we take into account the number of nuclear power plants in the UK that are due to be decommissioned by the end of the decade, then it all paints a very bleak energy picture in terms of electricity supply being able to meet energy demand.
How Can we Keep the Lights on?
So there are four options that we may be able to take to prevent this situation from occurring:
Fight this EU ruling.
Increase new capacity (build more power stations).
Decrease national demand.
Better manage the current supply and demand.
Option 1 – Overturn the EU ruling
Fighting the EU ruling might be the short-term answer, but what if doesn’t work? The UK will be forced to pay out further money in fines that it can ill-afford and we are already resigned to handing over an increased contribution to the EU budget (despite austerity measures being in full swing in the UK). Our Prime Minister clearly doesn’t want to rock the boat in terms of our relationship with the EU.
If we were to overturn it, it would be a short-term fix and would also come at the expense of the environment. The plants that are due to be closed are being closed because of the amount of pollution they create, so allowing them to stay open will be detrimental to the UK reaching the ambitious emission reduction targets agreed to under the Kyoto Protocol.
Option 2 – Introduce new capacity
Perhaps the most obvious long-term solution would be to increase capacity in the grid. How do you meet increased demand? Well you can simply build more power stations. This seemed to be the thinking behind the 2012 budget, when the UK Government turned its back on its election slogan of being ‘the greenest ever’ and proposing that we install a new generation of gas power plants.
Although combusting gas is slightly cleaner than burning coal and oil, we should really hold onto more of these natural resources as they are vital to produce goods like plastics, which we are so reliant on in the 21st Century.
New nuclear plants are also being planned – with Hitachi taking over the Horizon nuclear power contract (which is also bringing in UK companies such as Rolls-Royce as part of the deal). I believe that nuclear power is an important element of our energy mix, but there are two issues. Firstly, it needs to be economic and decommissioning costs need to be factored in prior to any contracts being signed off. Secondly, installing a nuclear power plant takes time – it may be as much as twelve years before we see any power being produced from the proposed Wylfa plant on Anglesey, North Wales, and the Oldbury plant in Gloucestershire.
Renewables are obviously not universally popular (just see the Telegraph comments section!), but they are a becoming a proven viable solution and producing just over 10% of the UK’s energy in 2011.
What’s more, many renewable sources can be installed rather quickly. For instance, a wind turbine can be installed in a matter of months. Homeowners can install a solar PV installation on their roof very easily, which will cover the vast majority of their electricity requirements. Installing solar PV can be seen either as increased capacity for the grid (since you can sell it back) – or a reduction in demand, since the homeowner requires less energy. However, producing energy from renewable sources works, and renewable energy is here to stay.
Option 3 – Better manage demand
The best short-term solution in my view is to reduce demand, since many of the solutions can be installed very quickly and simply. There is also funding available for installing these measures, with initiatives such as the Green Deal that is set to launch at the end of January 2013. But even if you don’t get funding, walking to your local DIY store and picking up a couple of rolls of loft insulation for a few pounds should see you save that money by reducing some of your heating bills in the first year. If all homes and businesses were to increase their energy efficiency by installing things like energy-saving light bulbs, energy-efficient boilers and insulation, then the issues of decreased supply in the grid would become irrelevant.
If we reduced the overall UK energy consumption by 20% through installing energy efficiency measures, then the Government wouldn’t need to react with extreme measures such as suggesting using gas to meet our energy shortfall. It would also give us more time to make slightly more educated decisions. The technology involved with things like solar panels is improving rapidly, so with this extra time, the logical economic choice could become more obvious in the next five years.
Option 4 – Utilising the existing grid
The final way to reduce the chances of these outages is to move from a centralised grid (such as the one we have now), to a more decentralised smart grid, where we better manage the supply and demand that we currently experience.
Energy is produced in the middle of the night at the moment, simply because we can’t turn off power stations very easily (nuclear mainly). At these times demand is incredibly low, because the vast majority of us are tucked up in bed, and we have all this energy produced, but we can’t store this power in an efficient way.
We already have things that take advantage of this ‘spare capacity’ such as pumped storage, where the electricity is used to pump water back to a top reservoir (see the Dinorwig case study), where spare electricity is cheap. Also in the home, there are things like night storage heaters, where electricity is used at night (since demand is low and cheap) to heat clay bricks that then release the heat energy during the day.
But what if things were taken to the next level, by using new technologies in appliances and altering some of our day-to-day behaviours.
For example, by doing things like turning your fridge off for three hours at peak electricity demand times. The fridge is well insulated and it wouldn’t warm up much internally, your food wouldn’t be spoiled, and if you opened the door it would have an override function that would switch it on and cool it down.
Imagine you drive an electric car that takes six hours to charge. At 6pm you arrive home and plug it in, but you don’t decide at what point it is charged over night. You simply set the fact the function, that is needs to be fully charged by 7am the next day. Through smart meter technology you could then use your energy operator to send instructions and decide when best to charge you car. This would all be affected by existing demand load on the grid.
Or what if your house ‘learned’ your energy usage patterns? For example, it knows when you are there (from sensors in the house), it knows when you normally take showers – so it can ensure there is only hot water as and when you need it, or it turns off your heating when you open a window to conserve energy.
These are just a few examples of where, with technology and better data about supply and demand, we could better utilise the electricity in the grid.
The problem is – as we saw when we went to EcoIsland a few weeks ago – this technology is still a long way off. We know how we want it to work, but the technologies that will enable it need to be agreed across the industry (does anyone remember Blu-Ray versus HD-DVD?). Despite the Government’s intention of installing smart energy meters across the country by 2019, it still seems a long way off.
Without wanting to sound too negative, I think it is fair to say that the UK is due to head into energy difficulties in the near future. Therefore in the short term we need to go about decreasing energy demand through efficiency and simple education (turn lights off when you leave a room). In an effort to decarbonise our economy and the country as a whole, I think we should look to install cleaner, renewable electricity generation solutions. These will not only provide a boost for the Green economy (which is one of the major growth areas in the UK), but it could help us become world leaders in the industry and allow us to export our expertise.
It will take time for the smart grid to become established, but it will come and will certainly make a big difference. But what’s evident, by some of the negative press in the USA, is that it needs to be done carefully and the Government need to make it clear what they are going to be doing with it. For example, it cannot be seen as a way of energy companies and the government invading people’s lives by exploiting their personal data.
It’s quite evident that the Government can’t simply just do one of these things – it needs back a sensible blend of all of them (except maybe fighting the EU ruling), but they need to quickly establish a plan of action and stick to it to avoid the power shortages. The reasoning? Well I, for one, am looking forward to my 2015 Christmas movie (provided the BBC hasn’t completely disintegrated by then).
Author: James Alcock
A Call To Arms
July 6, 2012
‘Treat the earth well: it was not given to you by your parents, it was loaned to you by your children. We do not inherit the Earth from our ancestors, we borrow it from our children’
I have a lot of time for this proverb; I think it wonderfully captures the necessity for the duty of care that we should have for the world around us. After all, we are here for 70-80 years, which, in the grand scheme of things, is simply the blink of an eye. We are mere visitors on this planet, to hopefully enjoy all that is around us and leave it in reasonable shape for the generations to come that were so kind to lend it to us.
The world is roughly 4.5bn years old (as far as we can tell), and humans, as we recognise them now, have only been wandering around for 200,000 years. So what is the issue? Well, I am ‘visiting’ earth in a seemingly turbulent time; while we push frontiers of science (like this week’s finding of the Higgs boson we also have on-going arguments (to put it nicely) about how religion should shape our lives, disagreements over oil reserves and so forth, some of which have been going for decades, while others are relatively new.
I don’t think my arrival on the planet is the only one that has coincided with unrest. My father was born in 1941, slap bang in the middle of the 2nd World War. I think the lessons learnt from this event in particular, allowed humans to gain a spiritual perspective and wisdom that had perhaps not been present before. It provided us with the ability to draw a line and start afresh, all pulling together to rebuild fallen countries and forge new relationships with people who years before had been considered adversaries.
The challenges facing us 70 years later are obviously very different, but once again we all need to pull together, working to protect the planet albeit in a different way to that which was done all those years ago.
As the current lessees of the planet, we have the chance to pull together in the same direction, all of us, transcending faith, politics and even our own limitations. As Al Gore puts it, we are one of the lucky few generations to be given a ‘Generational mission – the thrill of being forced by circumstance to put aside the pettiness and conflict that so often stifle the restless human need for transcendence; the opportunity to rise’.
So, since we have been given this mission, and we are all in it together, why are we so slow to act? We talk a lot; we have governments who could debate the same topics 24/7. They seem obsessed with setting up enquiries; someone burned their toast – how did this happen? What can we put in place to stop it happening in the future? Maybe there should be a new governmental body?
All these debates and enquiries seem to be disguising what is in effect, simply procrastination. We need to take action; as Martin Luther King put it ‘Procrastination is the thief of time. Life often leaves us standing bare, naked and dejected with lost opportunity’.
Unfortunately, the mission we have been given has a time limit, we are fast reaching a tipping point, one that we won’t come back from; if you go to Co2 Now.org, it illustrates how we are adding CO2 to the atmosphere, roughly increasing by 2ppm / year.
This CO2 and other man made greenhouse gases increase the ‘thickness’ of the atmosphere. As a result it traps the infrared radiation that would otherwise be reflected off the surface of the planet back into space. This results in a heating of the planet, known simply as global warming.
It is now relatively well understood that human activity over the last 100 years has led to much higher levels of CO2 in the atmosphere. A growing population and increased demand for electricity per person has resulted in increased CO2 levels to 397ppm as of May 2012, and in the next year or so we will see this level go through the 400ppm barrier.
The last time this occurred was 15 million years ago according to Aradhna Tripati, a professor at the University of Calafornia (UCLA), when global temperatures were 5 to 10 degrees warmer than they are today. Prior to the Industrial Revolution in the late 19th and early 20th century, the carbon dioxide level was about 280ppm.
Obviously these readings ignore the estimated 48% of CO2 we have released into the atmosphere as a result of burning fossil fuels that have been absorbed by the oceans since 1800. Every day the oceans are thought to absorb an additional 22 million tonnes of CO2, which is approximately 1/3 or our daily output. This CO2 is changing the chemistry of the water, making it more acidic. The acidity is affecting the growth of coral, which use carbonate ions in the sea and prohibits the development of shell dwelling organisms living in the sea.
No one yet has been able to intrinsically link climate change with warming temperatures & less predictable weather. However the patterns do fit; glaciers melting, nine of the ten hottest years on record since 2000 (records began in 1880), increased flooding across the world and the list goes on.
Our mission, should we choose to accept it, should be a global effort to combat climate change. We have the technology to allow us to do just that, we cancapture carbon, and make useful products (not just store it), we can produce clean electricity, using renewable sources such as wind, solar, geothermal, hydroelectric and new techs that are being developed all the time.
We need less procrastination by our Governments; someone bold enough to make the big calls and implement new legislation to get the ball rolling. Legislation is present now, but we need to go bigger, brasher and better.
Now is the time for a unified generational mission so that our kids and their kids can enjoy the world that they have so kindly lent to us. After all, the actions that we carry out now will have an impact that lasts well beyond our lifetime.
As always, thanks for reading – and let us know your thoughts in the comments box below.
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