• In the midst of reports of growing tension between the Department for Climate Change (DECC) and Treasury, DECC published its Gas Generation Strategy (the "Strategy") on 5 December 2012.
  • DECC has increased its estimate of the level of new gas generating capacity required to be installed by 2030.
  • The Strategy provides an overview of current Government policy aimed at incentivising investment in gas plant and sets out proposals which DECC is currently considering.
  • DECC has also stated an intention to set up an Office for Unconventional Gas and Oil to facilitate shale gas development in the UK.

Revised estimate of new gas generating capacity required

DECC has upped its initial estimate of new gas generating capacity which will be needed by 2030 in order to avoid power shortages from 10-20GW to 26GW, or approximately thirty power stations.  This increase is in part owing to the fact that DECC has revised its demand projections in respect of future population and electric transportation upwards. 

The Strategy also considers an alternative decarbonisation model with a trajectory to around 200g CO2/kWh in 2030.  In this scenario up to 37GW of new gas plant capacity is projected to be required by the end of the next decade.

Replacement for coal plant

DECC emphasises the role that gas plant will play in replacing more carbon-intensive coal plant (as well as nuclear plant) which is due to come offline over the next few years, owing to the operating limits imposed by the EU's Large Combustion Plant Directive.  The UK has experienced a recent renaissance in output from coal plant, in part because of low coal prices in the US, stemming from its shale gas boom and low carbon prices.  DECC highlights the relative environmental benefit of gas (in particular plant employing CCGT technology) as the cleanest fossil fuel, which will help the UK meet its decarbonisation targets.

Increasing importance of gas plant in balancing market

Alongside demand side response, electricity storage and interconnection, the Strategy notes the increasing importance which will be placed on gas plant to balance the UK's power supply.  The need for additional balancing capacity is set to grow with an increased reliance of intermittent renewables power and inflexible nuclear power; gas plant is capable of providing fast and flexible response.

DECC reiterated its commitment to tackle uncertainty for potential gas plant investors, citing its current proposals for the Capacity Market, for which it has sought powers in the recently published Energy Bill and has issued preliminary design proposals.  The Strategy notes that DECC has sought a power in the Energy Bill to be able to implement wholesale liquidity measures and that it is working on ways in which to improve the current planning regime.  It also mentions Ofgem's ongoing Significant Code Review of the current imbalance settlement pricing system (cash out). 

With no firm and detailed decisions or policy released, however, it is unclear how reassured potential investors in gas plant will be.  In particular, Government has not yet determined the format or operation of the proposed Capacity Market.  DECC has at least confirmed that plant constructed from May 2012 onwards will be treated as "new plant" in the Capacity Auction, should a distinction between old and new plant be made.

Security of gas supply

In terms of work to ensure security of supply, the Strategy notes Ofgem's intention to work with industry to consider the case for interventions to enhance gas supply security through improving the operation of the market.  DECC has also pledged to review whether there is a need to implement additional measures to incentivise gas storage, with an aim of publishing a response in spring 2013.

Office for Unconventional Gas and Oil to be established

The Strategy states DECC's intention to establish an Office for Unconventional Gas and Oil to coordinate Government shale gas policy, create a single point of contact for the industry and streamline unconventional gas and oil regulation. 

Reiteration of tax breaks announced for gas

As regards conventional gas production, DECC reiterated the tax breaks it announced earlier this year for large shallow-water gas fields and brown field sites.

The Strategy also refers to DECC's plans to consult on an appropriate fiscal regime for shale gas exploration, on appropriate licensing requirements and on an updated Strategic Environmental Assessment for further onshore licensing.

Useful Links

Gas Strategy

Our e-briefing on the Energy Bill