Rising Energy Prices and their impact

As the United States continues through the interminable process that will end with the national elections in November, the continued poor state of the economy is playing an increasing part in the debate over the likely outcome. What seems to have slipped from the discussion, however, is the contribution that energy costs are making in their impact on the different economies around the world including that of the United States. That awareness is becoming more evident in the UK, particularly in the debate over Scottish Independence. The recent Uswitch report notes:

Energy bills have more than doubled in the last 8 years – if this trend continues bills could reach £1,582 a year by 2015 and £2,766 by 2018. But almost six in ten people (59%) say that energy will become unaffordable in the UK if the average bill hits £1,500 a year, with the average household bill today already £1,252 a year.

Yet the increasing reliance on “green energies” in the United Kingdom, and particularly Scotland, are already recognized as leading to major current and future cost increases, with consequent impacts on the strength of the economies that they support.

Figure 1. Relative energy sources for Scotland and the UK in 2010 (Scottish Government)

 The growth of renewable energy in Scotland has been remarkable over the past decade, and has received consistent support to grow beyond the current levels. The major growth has been in the use of wind turbines, which – as I saw in a recent trip to the UK, are now more prevalent than ever. (And, more encouragingly, were also turning in greater proportion than I had seen in the past).

Figure 2. Installed capacity for renewable energy in Scotland through 2010 (Scottish Government)

  Current plans and projections would increase capacity from the roughly 4.4 GW shown above to a total of 28.8 GW being possible with pipeline and projected other projects. And in 2010 Scottish turbines produced more power from turbines than from hydro power for the first time.

Figure 3. Scottish electricity from renewables by source (Scottish Government) 

 Of these, however, only 3.3 GW have progressed beyond the planning stage. Yet, given that renewable sources have supplied nearly 20% of the need at present, this suggests a much greater role in the future, with less need for more conventional fossil fuels. Currently Scotland gets most (around 75%) of its electricity from five power stations, there are the two coal-fired power stations at Longannet and Cockenzie, one gas-fired station at Peterhead, and two nuclear power stations at Torness and Hunterston. These stations will be phased out as the transition to greater reliance on “wind and wave” with a target of 16 GW to be contributed in 2020.

Figure 4. Path to a Scottish Renewable Energy Future (Scottish Government ) 

 (A. Deployment projection based upon an extrapolation of the annual deployment levels experienced in 2007-08. 

B. Deployment projection based upon an extrapolation of the annual deployment levels experienced between 2009 and the start of 2011. 

C. Deployment projection, based on Scenario B above, adjusted for the improvements in the planning/consent system that were introduced in recent years but which have not yet impacted upon actual deployment rates. 

D. The 100% target line is a straight line extrapolation between current installed capacity and the estimated levels of capacity required to achieve 100% of gross consumption from renewables in 2020. 

This hypothetical line is incorporated to identify and acknowledge the scale of the challenge. In reality, it is recognised that deployment will not follow a straight line and would be expected to accelerate towards the latter part of the decade, particularly given the potential magnitude of offshore wind deployment.) 

 The political beliefs of the Scottish National Party (SNP) now in power, which include a desire to reject nuclear power and move to greener sources of electricity is, however, bumping up against the realities of cost and practicality. The Institution of Mechanical Engineers in the UK has released a report that concluded:

The Institution’s findings suggest that the original renewable energy target split for Scotland of 50% electricity, 11% heat and 11% energy for transport, making the overall 20%, and subsequent revision of the electricity generation target to 100%, did not appear to be supported by a rigorous engineering analysis of what is physically required to achieve a successful outcome in the timescale available. 

During the research for this report, First Minister Alex Salmond announced that the Scottish Government had increased the overall percentage target for energy from renewable sources to 30% by 2020. In light of this report’s analysis, this aspirational target appears to represent an ambition that cannot be justified from an engineering perspective.

The Scottish Government has responded, in part, by emphasizing the goal of reducing energy consumption in the country by 12% by the year 2020. Yet significantly raising energy costs and demanding that society reduce demand are not obvious ways of immediately stimulating economies to return to national prosperity. About 750 million British pounds (BP) ($480 million) worth of power came on line in 2011, but the investment required to meet targets in the future will be much higher. The estimated cost for the next 17 GW of capacity is $70 billion (46 billion BP). The Scottish GNP runs around $225 billion (145 billion BP) and there is increasing question over the ability of the country to be able to attract the funding needed to achieve its targets. 

 Yet the concern that worries me more as these debates continue is that while an increasing reliance on renewable energy sources may well be politically promoted, the financial and technical ability to reach those goals is becoming increasingly unavailable. (See particularly the IME report). For, while the focus of the debate remains on that side of the supply, the construction of alternate power sources to meet the anticipated demand are not being properly addressed.

 In Scotland there is now talk of a new coal-fired power station at Grangemouth following the cancellation of a carbon capture and sequestration project at Longannet. The Cockenzie coal-fired plant will close next year, though there are hopes that it might be replaced with a natural gas-fired plant. But these things take time to permit and construct, and should the required pace of renewable sources falter, then the conservation of energy that the Scottish Government would like to see as a voluntary activity might come to be an involuntary need instead, with consequent significantly more severe impact on industry and the Scottish economy. 

 Why is this relevant to the American election? Well unfortunately, though at a slower pace, there seems to be a similar argument being made in the United States to speed up the phase-out of coal-fired power, as perhaps evidenced by the recent decision to close the Big Sandy coal-fired power plant in Kentucky, under EPA pressure. There is a presumption in discussions of the future energy costs for the country that cheap natural gas will be an easy replacement for coal. However, much of that future relies on the low prices of natural gas, and as Chesapeake are finding, just because there is a market, does not mean it is a profitable one. You can’t make up the difference between producing natural gas for $5 a thousand cu ft (kcf), and selling it at $2/kcf by increasing the volume that you sell, and thereby realize a profit. When all the dust settles it is likely there will be less natural gas on the market, at a greater price, but that is a different story. For now one can only be concerned that the failure to recognize that energy prices are playing their part in restraining national economies seems to have become a neglected part of the national discussion, which is a pity – both in Scotland and in the USA.