Lacking energy

BryonyW4x3.jpgBryony Worthington on the short-termism that characterises the government’s energy policy

Today, the last day before Parliament rises for the summer, sees the Second Reading of the Energy Bill in the Lords.  A slender Bill (compared to the last one from DECC) intends two things: to give new powers to the Oil and Gas Authority (OGA) to oversee economic activity in the North Sea, and remove support for on-shore wind. It’s an odd juxtaposition, given rapid changes in the global energy sector.

The discovery of off-shore oil and gas in the 1960’s, and its commercial exploitation which began in earnest in the 1970’s has served the UK economy well. It has raised large sums of tax revenue, sustained many thousands of jobs, and provided us with skills and expertise in high demand throughout the world. But activity in the North Sea looks set to change significantly.

Revenues from oil and gas production fell by 40% between 2012 and 2013, and as the oil price crashed by 60% between June 2014 and January 2015, the price of oil fell to around $48. UK tax revenues are expected to tumble again from £2.1bn last year to just £0.7bn in 2015-16. Future scenarios of rising receipts are predicated on a return to oil prices of between $70 and $100 per barrel. Although it is plausible that more capital investment will see production levels rise in the future, it is also possible that they might not – as global fossil fuel supply and demands remains uncertain. The OGA will have to navigate some difficult waters.

Rather than the incumbents, it is likely that new entrants will be the ones seeking to invest in the North Sea. This presents a challenge, since much of the infrastructure is owned and operated by companies already planning their exit. For example, for new entrants to make use of existing pipelines, new arrangements will need to be negotiated. Not least in relation to who will pick up maintenance costs and how decommissioning will be handled. Yet another key test for the OGA.

One other test will be managing the beginning of a potentially important new source of economic activity: the storing of waste CO2 in depleted reservoirs. The OGA will take over licensing from the government but the Energy Bill contains little in the way of additional guidance. A missed opportunity. The timing of decommissioning, if left to the private sector, may not line up with the needs of still to be commissioned Carbon Capture and Storage (CCS) projects. There could be a crucial role here for the OGA in ensuring that a hierarchy of need is established that puts re-use for storage ahead of decommissioning.

The Bill could and should have represented an opportunity for the government to do far more to advance CCS, particularly for industrial sectors. There is as yet no policy support mechanism for CCS investments in the steel, cement and chemical production sectors – a serious gap that should be moved to the top of the government’s priority list. We need to work out how to fund the production of primary materials in ways that do not emit large volumes of greenhouse gases. Otherwise, we could see more shifting of industrial production overseas, as legally EU-wide binding caps on emissions tighten the risk. There are plenty of innovative ideas out there but Ministers have been slow to act to support them.

The closing of the Renewables Obligation a year early is the not only the most controversial aspect of the Bill, but an example of the worst kind of tawdry politicking. The move will achieve little, as most projects are likely to qualify for exemptions. But the knock on effect of a government using primary legislation to move the goal posts so soon after a comprehensive legal process was completed (under the last government) will seriously undermine investor confidence. No wonder the oft heard complaint has become, ‘If they can do this to on-shore wind, which technology will be next?’

Baroness Bryony Worthington is Shadow Energy and Climate Change Minister in the House of Lords. She tweets @bryworthington

Published 22nd July 2015

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