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Energy: Power play - the challenge of keeping Britain’s lights on and electricity bills down

The contrast couldn’t have been more stark. For a while last year, energy boss-bashing almost became a national sport. When the big six energy firms announced price rises in the Autumn, consumers and politicians queued up to vent their outrage.

Yet just a few months before, Ofgem had warned that unless Britain dramatically improved its power generation capacity, the country could face blackouts and power-rationing as early as 2015.

The energy regulator now estimates that to secure energy supplies and meet carbon targets, the industry will have to invest up to £200bn in the next 15 years.

“Herculean” doesn’t come close

So suffice to say the industry faces a huge challenge – ramping up generation capacity while keeping price rises to a minimum.

The National Infrastructure Plan seeks to help, by providing the investment climate and funding model needed to attract foreign investment.

Last October’s announcement that Chinese investors are to fund the construction of Britain’s first new nuclear power station in a generation at Hinkley Point in Somerset was a major win.

Energy secretary Ed Davey has predicted that a “massive” wave of investment from China, Japan and Korea will secure UK’s power supply into the future.

But wherever the money comes from, the energy mix adopted by the industry is sure to change.

Is offshore wind running out of puff?

Building a new nuclear power plant is not a quick process – even barring any glitches, the new power station at Hinkley Point is not due to generate for five years after the first concrete is poured.

Such long timescales and complex logistics mean that nuclear cannot solve the immediate need for more energy capacity. It’s a similar picture with fracking – which despite the controversy it has attracted, is still a long way from providing the cheap and plentiful domestic source of gas that its supporters predict it will.

Many in the industry had pinned their hopes on offshore wind. But after a period of extraordinary growth – Britain now generates more electricity from offshore wind farms than all other countries combined – interest is cooling.

RWE and Scottish Power have both stalled plans for huge wind farms off the West Coast of the UK, and SSE has announced a review of its offshore wind strategy. Only this week, plans for a second phase of the London Array wind farm in the Thames Estuary were shelved.

All of this makes Britain’s target of generating 30% of its electricity from renewable sources by 2020 look an increasingly long shot.

Mind the energy gap

Most pressing of all is the need to boost the country’s generation capacity quickly enough to avert the “energy gap” that Ofgem predicts will peak in 2015 when several coal-fired power stations are due to be decommissioned.

With offshore wind and nuclear unlikely to deliver results fast enough, gas will play a key role in Britain’s energy mix over the next few years. Gas currently accounts for more than 40% of UK electricity production – and that figure is rising steadily.

But relying on existing gas-fired power stations alone will not suffice, and the government has a crucial role to play in providing the climate and the stability needed to unlock further investment.

A string of gas-fired power stations capable of generating a combined total of 16GW of electricity already has planning consent in England and Wales – but to get them built quickly and efficiently will require not just attractive funding models, but also good contracting strategies, robust supply chains and effective project management.

 

And don’t forget the knowledge and skills gaps either

It’s vital that the power companies developing these new stations do so after conducting a thorough assessment of the project risk profile.

Clearly for a power company to invest many millions in a project that won’t make returns until it starts generating power, the number one thing needed is certainty.

The best way to provide this is through the analysis of comprehensive data, looking at everything from the cost of materials to the developer’s organisational capability and that of its supply chain.

Finally, the contractors employed to build such large and complex structures should be contracted intelligently around risk and not simply against a baseline cost and schedule.

But we should beware the danger of focusing only on funding models. While the government has to create the environment to attract investment, we as an industry have a crucial role to play in rising to the challenge – working collaboratively and incentivising outperformance, to ensure that the energy gap does not become a gulf, and Britain’s lights continue to burn brightly at a fair and reasonable cost to the consumer.

  • Mike Pigott is the power sector lead at Turner & Townsend

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