Speech

EUA/IGEM Gas Awards: Speech by Michael Fallon

Speech by Michael Fallon at the EUA/IGEM Gas Awards

Introduction

I am delighted to be here this afternoon to discuss the future of gas; and the prominent role that it will play as part of the UK’s future energy mix.

Over the last few months the Government has made major announcements affecting the future of gas in the UK, including the Energy Bill, measures to promote shale gas in the 2013 Budget, the Gas Generation Strategy and the Carbon Capture and Storage competition.

Importance of gas

I want to start by celebrating the role of gas in our energy mix today. In 2011, gas provided 37% of Great Britain’s final energy demand; around 40% of our electricity generation; and more than 70% of our heating. Without gas, the UK would be cold, and it would be dark.

And the UK gas sector has much of which to be proud. We have a competitive, open market which has provided a model for many countries around the world. We have seen an increase of more than 500% in our import capacity over the last 10 years and a 25% increase in our storage capacity. We have a diverse range of gas suppliers and sources ranging from domestic UK production, to Norwegian pipelines and continental interconnectors to liquefied natural gas. And, most importantly, we have a resilient system which saw us through the winter of 2010 – one of the most severe on record – as well as the tail of last winter which saw the second coldest March on record.

But the Government are not complacent. Given the UK’s reliance on Gas, we must ensure that supplies remain both secure and affordable. While a range of studies – including Ofgem’s last year – have shown that UK gas supplies would be resilient to all but the most extreme shocks, the impact of an undersupply would be severe. We are therefore considering whether there is a case for further intervention in the market to improve gas security of supply. Our decision will be made in the coming months.

The future of gas

What of the future? How does Government view gas in the long term? Some claim that the Government is ‘anti-gas’, ignoring our domestic reserves in a bid to push through nuclear and renewable projects. Others say the Government is too ‘pro-gas’, rushing head-on to build new gas plants, and develop shale sources, while abandoning our carbon commitments in the process.

I want to make it clear that neither of these statements is true. We are pro-gas, and we are pro-low carbon. As Energy Minister, it is my responsibility to ensure that the UK has an energy sector with three essential features:

  1. Security: a range of energy supply sources and no over-reliance on any single fuel type or source. This means gas. This means renewables. This means nuclear. And this means CCS, all complementing each other.
  2. Low-carbon: energy which is consistent with our legally-binding Carbon Budgets; and
  3. Low-cost: delivering 1 and 2 at the lowest cost possible to consumers.

Consider electricity, an industry facing unprecedented challenges. By the end of the decade, around a fifth of our 2011 electricity capacity will have been retired and we have to meet ambitious national and global carbon commitments in order to curb dangerous climate change. And all the while, our electricity demand is expected to grow as we move towards electricity for heat and transport.

So, by 2020, this means that we will need more than £110 billion of investment in our energy infrastructure. This is bigger than Crossrail. It’s more than the Olympics. In fact, it’s nearly half of the investment needed in UK infrastructure taken as a whole. And this will deliver jobs and growth to the economy.

Where does gas fit into this electric future? Gas is our cleanest burning hydrocarbon, and it is flexible. Gas has around half the emissions of a coal-fired power station per kilowatt hour of electricity generated. I see unabated gas playing a crucial role in the generation mix for many years to come. The flexibility of gas is its greatest asset – delivering power when it’s needed.

A continuing role for gas alongside low-carbon technologies is completely consistent with our legally-binding carbon targets. In our Gas Generation Strategy, published in December, we identified the need for up to 26GW of new gas generation by 2030. That’s a net increase of 5GW compared to today—albeit operating at lower load factors. In the long term, the development of cost-competitive CCS should ensure that gas can continue to play a full role in a decarbonised electricity sector.

So how will Government incentivise developers to construct and operate gas power stations? Firstly, the Energy Bill is making good progress in its passage through Parliament. The Bill provides for the introduction of a Capacity Market. This is our ‘insurance policy’ to ensure continued security of electricity supply and through it, if initiated, we can offer steady payments to capacity providers to guarantee their availability in the event of a crisis. We will be announcing further detail on the design of the mechanism in the coming weeks.

Secondly, because of its lower carbon emissions, a rising carbon price will gradually increase the economics of gas generation compared with coal, helping in the transition to low carbon.

Thirdly, our Emissions Performance Standard will propose a regulatory back-stop limiting the amount of carbon power stations can emit. This has been set at 450g of CO2 per kilowatt hour: over the level for modern gas stations but much lower than the average emissions of unabated coal, furthering the UK Government’s commitment to no new coal without CCS. Grandfathering this level out to 2045 will provide further certainty for investors in new gas plant, and help bring forward the capacity we need.

Carbon Capture and Storage

And the final word on the power sector should be our total commitment to developing a cost-competitive CCS industry. We have one of the world’s best offers for CCS: with £1 billion in capital funding for our competition; fixed revenue Contracts for Difference in the Energy Bill; and £125 million available for research and development. CCS should see gas – and coal – playing an important role in the long-term future of UK energy

Shale

Now to maximising production from the UK’s indigenous resources – on Shale gas development, we believe it is important that we do not hold back unnecessarily – we need to build momentum. That is why we have set up the Office for Unconventional Gas and Oil, are taking forward work on a new onshore licensing round, and the Chancellor announced Budget plans to incentivise shale gas development in the UK.

Shale gas could have the potential to add to our indigenous energy supplies with significant benefits to the UK economy, to employment and to our energy security.

We are still at a very early stage here. We need to move forward to enable the necessary exploration and prove the potential, while ensuring that the activity is safe and the environment is properly protected. We have now put in place appropriate control measures to address seismic risks.

We are working on a scheme for community benefits. It ensures that communities that accept shale production enjoy benefits, either in cheaper energy bills, or direct local benefit.

Heat

I’ve spoken a lot about electricity generation today, but it should not be forgotten that over half of the gas we consume in the UK goes towards heating our homes, businesses, and industrial process. Our Carbon Plan showed that gas would remain the dominant fuel for heating in 2030 even as we incentivise renewable forms of heating.

Our latest Heat publication, “The Future of Heating”, reaffirms this position and our belief that natural gas will play a critical part, at the heart of the transition to low carbon heat, for example - through increasingly efficient gas appliances, and innovations such as gas absorption heat pumps; as fuel for CHP powered District Heating networks; and to continue to meet the needs of many of our vital industrial processes.

Conclusion

So, what is the government’s vision for gas? We see gas playing a key role in our energy mix now and long into the future. This role is complementary to our low-carbon goals and sits alongside the role of renewables and nuclear, not in conflict with them.

I’ve set out how our reforms to the electricity market and our Carbon Plan take a pragmatic approach to delivering a diverse, low-cost and low-carbon energy system and how we are making the right conditions for new investment. Gas is central to that, alongside other low carbon fuels. Thank you.

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