Much has been made of the amount the UK will need to invest in its energy infrastructure in the coming decades just to keep the lights on. The transition from carbon intensive power generation to more diversified, flexible and environmentally friendly ways of producing electricity will cost hundreds of billions of pounds, and will create some significant investment opportunities.
But the renewable energy industry is still in its infancy and struggling to convince the powers that be that huge upfront costs represent value for money in an age of austerity. Even the argument for new nuclear is beginning to fray around the edges. Coal-fired power is being phased out until carbon capture and storage can be proven, leaveing gas as the clear winner in the UK's energy mix for the coming decades.
Gas-fired power already accounts for 44 per cent of the UK's energy generation and, as coal and the existing nuclear fleet are phased out, this contribution is only likely to grow. The Department for Energy & Climate Change (DECC) recently confirmed that emissions limits on power plants will be held at 450 grams of carbon per kilowatt hour. Gas power plans already meet this requirement, so the ruling effectively enshrines gas as the baseload fuel of choice for the next three decades.
|Energy source||Percentage of UK fuel mix 2011|
But the UK is currently a net importer of gas and, as such, can find itself beholden to the vagaries of the international markets and the whims of major exporters, such as Russia. This places increasing emphasis on the UK's ability to produce its own gas from offshore fields in the North Sea, where the likes of
Onshore gas production in the UK is relatively small scale and has actually fallen sharply in volume since peaking around the turn of the century. But this could change if the UK is able to exploit its shale gas reserves in the way that the US has - it has transformed the extraction industry there. Just recently, the Department for Energy a& Climate Change indicated its willingness to back onshore hydraulic fracturing, or fracking, which is the process used to release shale gas from underground reserves. Fracking in Lancashire has been on hold since last year when two small-scale earthquakes were recorded close to
Cuadrilla estimates that its fields in Lancashire alone could hold 200 trillion cubic feet of shale gas and there are several other regions of the country where onshore shale reserves are believed to be substantial. And, looking further into the future, offshore UK could hold significantly more shale gas. A report by the British Geological Survey published earlier this month suggested that the UK could be sitting on offshore shale gas reserves of more than 1,000 trillion cubic feet, a figure that would allow the UK to become self-sufficient in gas once again.
Quoted companies with exposure to UK shale are few and far between at present, so one way of playing the expected boost in gas extraction both onshore and offshore in the UK would be through investment in oil and gas services companies such as
But what of the UK's other, cleaner sources of energy, in the form of nuclear and renewables? The new nuclear programme is purely the domain of multi-national utilities with pockets deep enough to fund the huge investment required. And, even here, some are cooling on the idea, with the German consortium of
The renewables and clean energy sector is in a state of flux, too. Large-scale projects, such as the huge offshore wind arrays growing around the coast of the UK, are the domain of major utility players such as
Beyond wind, the government has already nailed its colours to the mast as far as solar is concerned by slashing subsidies for both large- and small-scale solar power after its initial feed-in tariffs proved to be hugely popular. Many other forms of distributed generation remain effectively in the laboratory and investors in clean energy companies have suffered a torrid time in a sector described by Peel Hunt analyst Andrew Shepherd Barron as "a graveyard for investors". Macro headwinds, shrinking government support and competition from low-cost rivals have hammered performance and shredded sentiment.
A prime example is
But there could still be value to be had in the clean energy sector for the brave. Investors need to be more realistic, though, and to look for companies that are already established, enjoy some barriers to entry and are less reliant on government support. Areas such as energy efficiency have potential and LED lighting specialist
True, renewable energy targets remain in place and in some cases are enshrined in law. If such targets are achieved, we could see one-fifth of UK electricity provided by renewables during the third decade of the millennium. But supporting renewables is costly, and the government is strapped for cash, which puts the onus on the private sector. Gas appears to be the fuel of choice for the current government and this is where the most reliable opportunities lie.
|Its almost a case of 'take your pick' from the alternative energy and clean technology sector, where the likes of Ceres Power and
How the UK will satisfy its future energy requirements remains uncertain. With North Sea oil and gas running out and 25 per cent of our current generating capacity to be retired or decommissioned by 2020, we are increasingly dependent on imported gas, with its associated concerns around price volatility and security of supply. This means there is a real need to find new sources of power and ways to use energy more efficiently.
One such source is shale gas, of which Cuadrilla estimates 200 trillion cubic feet is to be found under the UK. However, this can currently only be accessed through the hugely controversial process of fracking, meaning we cannot rely on these unexploited reserves alone.
There is also a real need to establish a clearer, more cohesive and more balanced energy strategy. Onshore and off-shore wind power, solar and, in the future, wave and tidal options will be supplemented by more complex but more reliable sources, such as biomass and energy from waste, as well as smaller, localised baseload generation.
There are already investment opportunities on this front. Alkane Energy is using methane extracted from derelict coal mines without the need for fracking, while GreenGen, a new start-up by ex-Spice chief executive Simon Rigby, is producing biogas from agricultural anaerobic digestion with a pipeline of over a dozen sites.
Utility-scale storage, except for pumped hydro, is still in its infancy, but pumped heat storage and large-scale battery technologies are now in development.
In the nearer term, energy and building control companies such as Matrix Sustainable Energy Efficiency Limited are pioneering even more innovative ideas. Matrix's total energy control systems allow 'load-shedding', enabling high-demand users to turn equipment off during high-demand and high-cost periods. Even more radically, larger clients can generate local power at high-demand periods, which they then sell to the grid for their clients at a profit.
While the government struggles with regulation and large-scale infrastructure, the future lies with small, nimble entrepreneurial companies developing groundbreaking solutions. It is this innovation that means we may not be heading for a blackout after all.
Adrian Reed is Head of Energy, Waste and Renewables at Altium Capital