New index contradicts Ofgem's gloomy UK energy security outlook

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31 October 2012, Gas, Electricity

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The Ofgem report cited the possibility of lower electricity capacity margins in 2015 in light of older coal and oil power stations coming offline under the European Union (EU) Large Combustion Plant Directive. However, in a recent article "The lights will stay on in the UK" Datamonitor expressed the opinion that the actual likelihood of blackouts is slim. The possibility of such an outcome has simply been exaggerated by the media and those with an interest in receiving rapid approval for capacity construction in the short term.

The low risk of electricity blackouts is reinforced by impartial analysis from outside of Europe. An offshoot of sorts from the US Energy Security Risk Index, the first edition of the International Index of Energy Security Risk ranks 25 developed and emerging countries according to 28 metrics. The quantitative index - which covers 1980-2010 and focuses on larger energy users - was put together by the US Chamber of Commerce Institute for 21st Century Energy.

In general, countries with large energy resource bases and efficient economies enjoy the greatest comparative energy security in the index. Metrics included the resources available for a wide range of fuel supplies, the amount of fuel imports, environmental emissions, energy intensity, price volatility, consumption levels, reliability of generation, and geopolitical risk to name a few.

The index underlines the fact that energy policies matter greatly, as they influence energy efficiency, technology development, and how resources are built or used. Despite its shortcomings - for example, each metric was assigned a weight aligned with that in the US index - it does provide insight into the opportunities and options that a government must consider to maintain or increase its energy security.

Anyone having read the press of late may be surprised to see that the UK was ranked the second most energy secure country in the whole group, making it the most secure European nation. Not only does the UK have a relatively stable political environment, but its high score (and thus low energy security risk) is due to the fact that it still has relatively high quantities of oil, gas, and to a lesser extent coal relative to its EU neighbors. Only Norway has more crude oil than the UK, and only Norway and the Netherlands have more gas.

However, year-on-year change shows that the UK's security risk has been increasing since the early 2000s, at a rate comparable with the rate change of the Organisation for Economic Co-operation and Development average.

This higher risk in the UK is due to the larger amount of fuel imports, especially oil and natural gas. Future risks will stem from even higher expected import levels. In particular, gas imports will be a source of insecurity if the UK turns to gas-fired electricity generation as a backup source should new nuclear investment fail.

Even so, there is little cause for concern. On the basis of natural resources, the UK should remain one of the most secure countries if it can exploit new and existing oil and gas fields in the North Sea and its reserves of shale gas. The new brown field tax allowance approved by the government in September 2012 to encourage investment in older oil and gas fields in the North Sea indicates that the government has no qualms about maintaining energy security through hydrocarbon-based energy.

Looking at it from a resource viewpoint, lights in the UK will stay on. While Datamonitor acknowledges the danger of a simplistic resource-based view of energy security, it also points out that policy decisions - influenced by public opinion on prices, carbon emissions, and perceptions of safety - are just as important in understanding the UK's real energy security now and in the future.

Source: MarketLine

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