London Energy Gap: losing the Energy Game?

One of the inherent structural problems of the UK economy is its growing reliance on imported energy.  North Sea oil has provided a great comfort blanket for the country since it has been pumped ashore from the mid-1970s. It helped plug the gap in the balance of payments created by the relative decline of manufacturing, while paying for tax cuts by Tory governments and spending increases by Labour governments.  Unfortunately we did not have the good sense and foresight to put away the North Sea oil revenues into a sovereign fund, as Norway did, which could have been used to re-tool and rebalance the economy in a way many have been advocating for a long while. Instead this money was spent some time ago and more recently since 2005, the UK has imported more energy than it has exported.

This dependency could not have come at a more difficult time, as the era of readily available cheap crude has passed with the recent hiked oil prices holding strong.  The reasons for this continued price rise are a combination of factors including stronger demand from the fast-growing emerging economies, the long anticipated arrival of peak oil (the phrase often used to describe the situation when global oil supplies reach a peak) and no doubt, speculation from hedge funds.  All these factors are set against a backdrop in which it is becoming more difficult to extract oil from even more dangerous deepwater fields for example, along places like the Blackpool coast, (which allegedly caused an earthquake in the seaside resort recently) using increasingly difficult technology such as “fracking” (the procedure of creating fractures in rocks and rock formations by injecting fluid into cracks to force them further open.  In the long run countries will have to find ways of making fossil fuels cleaner, going nuclear, or investing heavily in renewables.  All are expensive and potentially controversial, as Germany is discovering following its decision to abandon nuclear totally.  However, at least they’ve been preparing to face up to issues which the UK has ducked.

So what about the implications for London?  The London Assembly Environment Committee recently investigated the growing energy gap asking the question whether we are losing the energy game.  This is given the Mayor’s own assertion that we risk having a gap of some 576,000 MWh by 2020. It is suggested that with energy demand reduction programmes like energy efficiency programmes for Londoners homes & work places; energy supply programmes including decentralised energy and waste to energy schemes like anaerobic digestion, then we may have the potential to reduce London’s energy gap.  We also have the bonus of the worlds largest coastal wind farm in the Thames Estuary known as London Array kicking in and making a difference.

But will this all go far enough? Well this year alone we had an energy price hike of just under 7% at the start of the year by energy companies, and very recently, Scottish Power announced a an increase of up to 19% for its tariffs with expectations of a similar announcement by the country’s biggest energy supplier, British Gas.  There is also mounting speculation that the cluster of timely announcements made by the big energy suppliers is “cartel” like behaviour, leaving consumers little choice about where to go for their energy and forcing them to pay the higher prices, thus maintaining profits for the energy companies. This is happening at a time when average annual incomes have dropped in real terms by about £700 resulting in creeping but stubborn fuel poverty in London with the strong likelihood of an ever widening energy gap as a result of even further price hikes before 2020.

Are there other lessons to be learnt from other parts of Europe? Copenhagen comes to mind and the journey from Copenhagen to London takes you from one end of the energy use spectrum to the other. Copenhagen is a city that heats itself by burning its own waste whereas London unfortunately makes a business of wastefulness on this front.  For example Copenhagen boasts one of the most advanced waste-to-energy plants in the world, having the capacity to convert hundreds of tons of garbage a year to heat.  The city aims to free itself from fossil fuels with wind, biomass and waste incineration playing a major role by 2025.  Not surprisingly, therefore, the fastest growing Danish exports are in the clean-tech sector with new technologies that improve the energy efficiency of buildings, reduce loss in energy transportation and turn waste into an energy source. The UK, on the other hand has yet to exploit the huge global business opportunity resulting from the clean-tech sector.

In short, if global cities like London are going to shield themselves from further price hikes, a widening energy gap and achieve energy security, then plugging the gap with renewables and demand reduction measures will require immediate attention and investment into low carbon energy sources. The Office of Gas & Electricity Markets in the UK (OFGEM) estimates that up to £200 billion of investment is needed over the next ten years to replace the UK’s ageing infrastructure to meet energy needs and to move to a low carbon energy supply system. That’s more then twice the amount invested in the last ten years. It is still unclear how such large-scale financing will be generated and where it will come from.  What we do know is schemes like London Array are being funded by companies all of which have their headquarters outside of the UK (Dong Energy in Denmark, E’ON in Germany and Masdar in Abu Dhabi) probably a sign of things to come, or else we risk playing and losing the even more dangerous game of energy complacency.