12-08-04

The UK must face up to its dependency on gas imports for power generation. The UK's move to net gas importer status has raised concerns over the country's dependence on gas as the principal fuel for power generation.

Given that demand for energy is increasing, the UK now has two choices: focus on developing a broad mix of generation including nuclear and renewable sources, or maintain the dependence on gas with its inherent vulnerability to increases in import costs.

The UK has historically been one of the EU's larger users of gas for power generation, principally due to its indigenous resources from the Irish and North Sea. However, with demand for gas outstripping domestic supply, gas imports linked to the continental gas price (itself linked to oil prices) are now a reality for the UK power generators.

In terms of utilizing gas for power generation, the UK and The Netherlands have the highest dependency on gas in Europe. To put this in perspective, France is expected to use gas to generate just 3.2 % of its power demand in 2005, and Germany around 10 %. By 2020 the France's gas dependency will have grown to 11.5 %, but this is far lower than other major EU countries: the UK figure in 2020 will be 75 % (up from 50 % in 2005); and in The Netherlands 76 % (against 59 % for next year).

It is the startling difference between France and Germany against the UK and The Netherlands that needs to be considered, as the comparative positions make the UK's dependency on gas more worrying. In a European context, it is unlikely that Germany and France will ever reach the dependency on gas presently seen in the UK and The Netherlands.

The choice for UK power supply is simple: continue to meet growth in power demand through gas alone, or secure power through gas and another key fuel, with nuclear being the obvious option.

The first scenario will lead to the UK becoming dependent on imports of a single fuel, as Italy was when it decided to remove nuclear from its power supply mix. Italy's decision had major ramifications: its power prices are now more than 50 % higher than the EU average.

The same could happen in the UK unless the market is encouraged to invest in other generation capacity besides gas fired stations. On the other hand, the UK can follow the French route by utilizing nuclear power, and then face a huge, unquantified decommissioning liability. Either way, the outlook points to more expensive power supplies.

Source: Datamonitor