Chapter 11 Energy security
Energy security is a widely used but poorly defined term. Even the government has no categorical definition1, despite having published an energy security strategy in November 2012.2 More generally, the phrase is taken to mean the lights will stay on, homes remain warm and vehicles keep moving in all but the most exceptional circumstances.
Conditions that weaken a country’s energy security include a high level of import dependency; over-reliance on a single type of energy, supplier or delivery route; low stocks of fuel; and lack of redundancy or spare capacity in energy supply infrastructure such as refineries or the electricity grid. More concrete threats range from political events such as the Arab Spring, the Russia-Ukraine gas transit dispute and the UK petrol protests; natural disasters such as Hurricane Sandy or the tsunami that destroyed the Fukushima nuclear reactors; and technical faults, such as those that reduced supply from the Langeled gas pipeline from Norway in early 2010 and led to industrial gas customers being cut off.
Although the government has not precisely defined energy security, a report3 for DECC by the late Malcolm Wicks MP in 2009 identified three different aspects:
- Geopolitical security: avoiding undue reliance on specific nations so as to maintain maximum degrees of freedom in foreign policy.
- Price security: avoiding unnecessary price spikes due to supply/demand imbalances or poor market operation.
- Physical security: avoiding involuntary physical interruptions to consumption of energy.
The three categories are clearly closely intertwined, and a threat to one form of energy security may well imply a threat to the others. But the reverse is not always true; strategies to strengthen one form of energy security may weaken the others. For example, building large amounts of renewable generation may improve geopolitical security by reducing imports, but worsen physical and price security by increasing intermittency and price volatility. However, at first glance it seems liquid air could strengthen energy security under all three headings (Table 11.1).
1. Geopolitical security
Energy security does not require self-sufficiency; access to international markets helps diversify sources of energy if domestic production is interrupted by, for example, an event such as the Piper Alpha disaster. However, a high level of import dependency raises the proportion of the energy supply over which we have far less control. A recent study by the UK Energy Research Centre identified lower imports as a key indicator of energy system resilience.4
By this yardstick, UK energy security has been getting worse since the turn of the century. Oil production on the UK Continental Shelf peaked in 1999, and gas production in 2000, and since then output of each has fallen by around 60%.5 Production has declined at about 6.5% per year on average, although gas output slumped by 21% in 2011 alone. The UK, previously self-sufficient in hydrocarbons, became a net importer of gas in 2004 and of oil in 2006. In 2011 we imported 29% of our oil and 44% of our gas.6 National Grid and Ofgem expect gas import dependency to reach some 90% by 20307, and the gas generation strategy8 announced with the 2012 Autumn Statement is likely to exacerbate this trend, despite the government’s decision to allow the resumption of shale gas exploration.9
Rising gas imports are vulnerable to a range of geopolitical, physical and price or market risks. In 2011 a fifth of UK gas consumption was supplied by pipeline from Norway, while almost a quarter arrived in the form of LNG from Qatar. However, since the UK traditionally buys gas on short term contracts, there is no guarantee supplies will arrive when needed. During cold periods when demand for gas is greatest, Norway tends to favour European customers who have committed to long term contracts. This could be critical in any resurgence of the Russia-Ukraine gas transit dispute, or any interruption to other supplies to mainland Europe.
LNG supplies are vulnerable to competition from buyers in Asia, where prices are typically higher, because UK contracts usually have no ‘destination clause’ that would prevent Qatar from redirecting shipments to the highest bidder. Qatari imports also come with geopolitical risk: Lord Howell, who served as Energy Secretary under both Edward Heath and Margaret Thatcher, has described the threat to Qatari gas from a potential Islamist insurgency in forthright terms.10
Oil imports are rising more slowly than gas, but are also vulnerable to a range of geopolitical risks, the most obvious being any conflict around the Straits of Hormuz, which carries some 20% of global oil supplies, and natural hazards such as Hurricanes Katrina and Rita in the Gulf of Mexico in 2005. Concern about approaching geological shortage of oil (‘peak oil’) has abated somewhat following a resurgence of US production, yet there is still a strong case for a structurally tight global oil outlook, in which prices continue to rise and remain likely to spike in response to short term outages.
2. Price security
A working paper from economists at the IMF has argued that the dramatic increases in oil prices so far this century were almost entirely explained by the increasing geological difficulty of producing oil, and that meeting global demand would require real oil prices to rise to $180 by 2020.11 Financial analysts at Barclays Capital have predicted $185 per barrel in 2020 for some time. At the same time, highly subsidised domestic consumption among oil producers is cannibalising exports, and on current trends Saudi Arabia will become a net importer of oil by 2038.12 Combined with relentless demand growth among developing economies, this has kept oil prices at historically high levels in spite of recession in much of the developed world. Brent crude recorded its highest ever annual average at just under $112 in 2012.13 The impact of high oil prices goes far beyond any narrow definition of energy security; the spike to $147 per barrel in 2008 is estimated to have cost the global economy $150 billion.14 Some analysts argue that economic growth is simply unsustainable oil prices higher than about $120.15
In Europe, the link between oil and gas prices loosened in the wake of the financial crisis, but the majority of pipeline imports to the continent are still bought under oil-indexed contracts. In recent years European spot prices have traded closer to the oil-indexed level again and UK prices have tended to track those in Europe.16 LNG cargoes, as noted earlier, are subject to competing demand from Asia and elsewhere, and last year UK imports fell by almost half, in part because Qatar found higher bidders elsewhere.17
If shale gas production were to develop in the UK it might moderate the rapid decline in UK gas production and bolster energy security. However, it would be unlikely to affect materially the wholesale price of gas in Britain, which would continue to be set by the need to attract large volumes of imports from Europe and further afield and by European demand for British gas.
The overwhelming consensus among energy experts is that shale gas production will not make a significant impact in Europe before 2030. A study from the Oxford Institute of Energy Studies has concluded there will be no significant shale gas production in Europe before 2020, and that “unconventional gas will not be a price setter at a European level”.18 Research by VTB Capital concludes that European shale gas looks geologically and commercially “challenged” compared to the US, and that “Shale gas will not be transformative in Europe”.19 BP predicts Europe’s net gas imports will rise 48% by 2030 because shale output is too small to offset the rapid decline of conventional production.20 A report by the Energy Contract Company concludes “shale will not be a ‘cheap’ source of gas and there is unlikely to be a repeat of the US experience”.21 And a study by Pöyry suggests that if UK shale production were to reach 20% of GB supply by 2030, prices would be just 2-4% lower than if there were no shale production.22
However, prices are still expected to rise in absolute terms. In the International Energy Agency’s ‘Golden Age of Gas’ scenario, which assumes the most favourable conditions for unconventional gas production, European prices rise from $7.4 per million British thermal units in 2009 to $10.9/MBtu in 2035.23 Rising gas prices could be further inflated by high carbon costs, according to the Climate Change Committee, the government’s independent advisor, which concludes “the average annual household bill in a gas-based system could be as much as £600 higher in 2050 than in a low-carbon system if gas and carbon prices turn out to be high”.24
3. Physical security
While rising imports lead to lower levels of geopolitical and price security, at home the physical security of the electricity system is also worsening, as a result of the closure of coal and nuclear plant and the growth of intermittent renewable generation (chapter 1). Physical security is threatened by both the increasing complexity of balancing the grid over minutes and hours and by the impact of longer-duration threats such as a winter anticyclone producing a windless week in February.
The UK has committed to generate 15% of its energy from renewable sources by 2020, and this implies around 30% of our electricity will need to come from renewables by the end of the decade, the bulk of it from wind.25 As renewable penetration increases, more balancing capacity will be required. National Grid estimates that balancing capacity (‘operating reserves’) will need to rise from 3.5GW today to 8GW by 2020.26
However, Ofgem’s most recent Electricity Capacity Assessment shows that the physical security of the grid will worsen at least until the middle of the decade. It forecasts that derated capacity margins (spare generating capacity as a proportion of peak demand) will fall from a comfortable 14% today to just 4% in 2015/16, and warns, “the risk of customer disconnections will appreciably increase from a negligible 1-in-3300 years event at present, to a 1-in-12 years event by 2015/16”. Margins would fall to below zero if high European power prices caused interconnectors to export at full capacity, resulting in an energy shortfall of 30GWh, equivalent to the annual consumption of 9,000 homes.27
Declining capacity margins also seem likely to worsen price security, particularly for industrial customers, by increasing the volatility of electricity prices.
4. The potential impact of liquid air on energy security
It is hard to avoid the conclusion that UK energy security has worsened significantly since the turn of the century and will continue to do so in the absence of remedial action. Import dependency continues to rise in spite of falling oil and gas demand in recent years, increasing our vulnerability to supply disruptions and price spikes, and at home electricity capacity margins are falling towards precarious levels. In these circumstances, liquid air could help improve energy security by:
- Reducing gas imports by storing excess off-peak wind power to displace gas fired peaking plant. This would a) reduce vulnerability to any geopolitical, technical or weather-related interruption to gas imports, b) reduce vulnerability to high and volatile gas prices, and c) reduce the gas import bill in any event.
- Reducing imports of oil, petrol and diesel by converting low carbon electricity into a transport energy vector/fuel. This would a) reduce vulnerability to any geopolitical, technical or weather-related interruption to imports, b) reduce vulnerability to high and volatile oil prices, and c) reduce the oil import bill in any event.
- Improving the physical energy security of the electricity grid by mitigating intermittency of renewable generation. This would reduce the risk of power cuts, smooth price volatility and reduce average power prices.
- Providing strategic electricity storage. Since liquid air or liquid nitrogen storage capacity is cheap, substantial amounts of liquid air could be stored against a windless week in February, and other longer-duration threats. A single cryogenic storage tank of 190,000m3, such as those used to store LNG, filled with liquid air would represent about 16.6GWh, equivalent to more than 15 minutes of UK peak electricity consumption.28 Alternatively, if the UK had 30GW of wind capacity whose output suddenly dropped by 5GW, such a tank could potentially make good the shortfall in power for three hours.
- Improving price security by reducing the need to invest in flexible generation and grid reinforcement, and reducing wind wastage. A study for the Carbon Trust led by Professor Goran Strbac of Imperial College found the total benefits of storage to the British electricity network could amount to £10 billion per year by 2050.29
- Increasing ‘autogeneration’ among British companies:
-
• Existing commercial users of nitrogen who store it as liquid but use it as a gas could use the regassification process to generate electricity, especially where there is a source of low grade waste heat. Increased autogeneration could reduce demand on commercial generators at peak times, and/or more generally.
-
• Companies with large amounts of emergency diesel generator capacity, such as water companies, could replace it with cryogenic generating equipment and liquid air/nitrogen storage. This would provide the same level of energy security to the companies concerned but with lower emissions, provided the liquid air/nitrogen was produced from excess off-peak low carbon generation. It would also reduce imports of petrol and diesel and exposure to volatile oil prices. Such cryogenic generating capacity could potentially also be used to help balance the grid on a more regular basis, through STOR or any future arrangement introduced through the EMR.
Table 11.1: Potential energy security benefits of liquid air
Endnotes
1
UK Energy Supply – Security or Independence?, Energy and Climate Change Select Committee, 10 October 2011, http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/1065/106502.htm
2
Energy Security Strategy, DECC, November 2012,
3
Energy Security: A national challenge in a changing world, Malcolm Wicks MP, August 2009,
4
Building a Resilient UK Energy System, M. Chaudry et al.,UKERC, 31 March 2009, http://www.ukerc.ac.uk/support/tiki-index.php?page=ResiliencePaper
5
BP Statistical Review of World Energy 2012, http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481
6
Ibid.
7
Ofgem presentation to UKWEC workshop on security of supply, London, 29 November 2012,
8
Gas generation strategy,
9
New controls on seismic risks permit a resumption of shale gas exploration, DECC, 13 December 2012,
10
Lord Howell’s remarks were made to an undercover reporter during surreptitious filming by Greenpeace, published online 15 November 2012, http://www.greenpeace.org.uk/energygate?utm_source=ebulletin20121114&utm_medium=email&utm_term=energy&utm_campaign=energygate
11
The Future of Oil: Geology versus Technology, Jaromir Benes, Marcelle Chauvet, Ondra Kamenik, Michael Kumhof, Douglas Laxton, Susanna Mursula and Jack Selody, IMF Working Paper WP/12/109, http://www.imf.org/external/pubs/ft/wp/2012/wp12109.pdf
12
Burning oil to keep cool, The Hidden Energy Crisis in Saudi Arabia, Glada Lahn and Paul Stevens, Chatham House, December 2011, http://www.chathamhouse.org/publications/papers/view/180825
13
Shale revolution will not dent $100 oil, 1 January 2013,
14
Oil, energy and the world economy, Oxford Economics, December 2008,
15
Oil and the economy, presentation by Steven Kopits, MD Douglas-Westwood, to the Federal Reserve Bank of San Francisco, 25 July 2011, Kopits has now revised his ‘carrying capacity’ oil price for China from $110 to $120.
16
Gas: Recovery Advancing, VTB Capital, 21 September 2011.
17
The LNG Industry in 2012, GIIGNL, http://www.giignl.org/fileadmin/user_upload/pdf/
A_PUBLIC_INFORMATION/LNG_Industry/GIIGNL_THE_LNG_INDUSTRY_IN_2012.pdf
18
Can Unconventional Gas be a Game Changer in European Gas Markets?, Florence Gény, OIES, December 2010, http://www.oxfordenergy.org/2010/12/can-unconventional-gas-be-a-game-changer-in-european-gas-markets/
19 Shale Gas in Europe – A Slow Burn, VTB Capital, 24 May 2011.
20
BP Energy Outlook 2030, January 2013, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/
reports_and_publications/statistical_energy_review_2011/STAGING/
local_assets/pdf/BP_World_Energy_Outlook_booklet_2013.pdf
21
UK will miss US-style shale gas transformation, Financial Times, 25 September 2012, http://www.ft.com/cms/s/0/287378ee-0708-11e2-92ef-00144feabdc0.html#axzz2Ev7NYnqN
22
How will Lancashire shale gas production impact the GB energymarket, Pöyry, November 2012, http://www.poyry.com/sites/default/files/imce/files/shale_gas_point_of_view_small.pdf
23
Are we entering a golden age of gas?, IEA, 2011,
24
Energy prices and bills – impacts of meeting carbon budgets, Climate Change Committee, December 2012,
25
Planning our electric future: a White Paper for secure, affordable and low-carbon electricity, DECC, July 2011,
26
Operating the Electricity Transmission Networks in 2020, National Grid, 2011, pp8 et seq., http://www.nationalgrid.com/NR/rdonlyres/DF928C19-9210-4629-AB78-BBAA7AD8B89D/47178/Operatingin2020_finalversion0806_final.pdf
27
Electricity Capacity Assessment, Ofgem, 5 October 2012,
28
UK peak demand in 2012 was 55,761MW, http://www.nationalgrid.com/uk/Electricity/Data/Demand+Data/
29
Strategic Assessment of the Role and Value of Energy Storage Systems in the UK Low Carbon Energy Future, Goran Strbac etAl., June 2012, http://www.carbontrust.com/resources/reports/technology/energy-storage-systems-strategic-assessmentrole-and-value