Energy Review: the mind is willing, but the policy is weak
August 1st 2006

The UK government's PR machine has won a significant victory in bringing business energy buyers broadly behind the measures proposed by its latest energy review;supporting new nuclear build, significant renewable investments and energy efficiency measures.However,much more work remains to make the review's aspirations a reality.

According to a current survey of 600 of the UK's largest energy consumers by independent market research agency Datamonitor,major energy buyers give a strong thumbsup to the Energy Policy Review's focus on efficiency,nuclear power and renewables with support at 75%, 66% and 55% respectively for these technologies.The support for nuclear in particular is a turnaround from Datamonitor's research among the same group of buyers last year,which showed scepticism of its value.

However, the review proposes few real changes to the current underlying policy framework,which was designed primarily to promote competitive markets. If the UK is to meet both its security of supply and environmental targets, the government must provide incentives to turn around several current countervailing trends; the low cost of carbon emission credits in the ETS, the increasing attractiveness of coalfired generation,the dominance of gas-fired plant in new generation build and insufficient levels of renewable capacity additions.

For the past two decades the UK government has followed a policy of aggressive energy market liberalisation which has delivered arguably the most competitive and open energy market within the EU. These market conditions have also given UK consumers among the lowest energy costs over the last 10 years as energy companies have had the freedom to react to prevailing supply and demand conditions. It should not really be surprising that in the current economic climate, where coal is cheap relative to gas and renewables face uphill battles on both economic and planning fronts that suppliers are making the investment decisions that they are.

Of the total UK gas volume traded so far in 2006, only 3% was traded more than 1 month into the future. For energy companies that must make decisions about generation assets such as nuclear power plants that have operating lifetimes of 30 years or more, there is considerable price risk attached to their investment while they have such limited forward visibility, says Datamonitor energy and utilities managing director David Shaw.

"Unless nuclear plants have a clear price advantage across a range of possible future scenarios, the market will not build them,"he says.

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