Overview_of_the_Uk_Energy_Industry

Business Research Skills Course Assignment: The UK Energy Sector To: Investment Company From: Research Executive Title: The UK Energy Sector [pic] 1.0 Introduction Professor Abdul Bayes suggests, “Energy is an integral input to modern life” (2008). Such claim tends to be attractive in terms of empirical adequacy. In the UK energy security is currently high on political agenda and, despite the current economic crisis, Energy Sector may seem as an attractive depository for investment with its firm position in the market. Energy Sector is difficult to outline as it encompasses a wide range of products and services, hence during this report we will focus on the UK primary energy consumption and energy production from renewable resources. The research has been conducted evaluating a number of statistical data on energy and the report will include some legislative announcements and technological news. Finally, I will conclude with a recommendation on investment in energy sector and give an outline of risks and opportunities that may be important to look out for in the future. 1.1 Primary Energy Consumption Helweg-Larsen and Bull report that Coal, Oil and Natural Gas account to 88% of the World’s commercially traded primary energy (2007 p. 26). In the UK energy consumption pattern resembles that of the global market and the economy is highly dependant on the primary energy. The data derived from the Department for Business Enterprise and Regulatory Reform (BERR) website supports the former and shows that energy made from Solid Fuel, Petroleum and Gas constitute the majority of total energy consumed in the UK. Domestic and Industry Sectors are the biggest Solid Fuel and Gas consumers in Britain, whereas Transport Sector is the leading petroleum consumer. (Table 1.7. Energy consumption in the United Kingdom. 2008 Update.). The Central Intelligence Agency (CIA) confirms the latter statement that Energy Sector plays and important role in the economy and reports that primary energy production constitutes 10% of total GDP (The World Factbook 2008). BERR states that compared with a year earlier in the second quarter of 2008 “transport sector energy consumption fell by 4.5 %”, which was resulted by the record high oil prices in August (Energy Trends: September 2008 p. 3-5). Despite this insignificant change, the paramount consumption of primary energy in the UK has been reducing British energy reserves steadily over the years. Figure 1 indicates that the UK Oil reserves have been depleting rapidly since 1997. Similarly to Oil the Gas reserves have been falling sharply since 1997 as shown in Figure 2. “Sooner or later the North Sea’s gas depletion will put Britain in the same boat as Germany-reliant on imported gas.” claims Helm (2003 p. 372-373). [pic] Figure 1. Oil Reserves and Production from 1979 to 2006 (source: BERR) [pic] Figure 2. Gas Reserves and Production from 1979 to 2006 (source: BERR) As mentioned earlier, domestic sector is one of the biggest energy consumers and could be called mainly responsible for the depletion in Gas reserves. Therefore, the government has initiated the energy saving campaign ‘Act on CO2’, which aims to teach consumers how to save energy through insulating homes or using energy saving light bulbs (Directgov n.d.). BERR reports that, for households less well off the government offers support through recently announced £1 billion Home Energy Saving Programme, which should help reduce need for energy consumption (What's New 2008). 1.2 Alternative Energy Resources The depletion of Oil and Gas reserves pushes the UK to look for alternative energy options. Powerful winds and waters surround the UK and there is a big potential to produce more energy from renewable resources. It seems that the diversity and the power from renewable energy in the UK is on the rise. All of the main energy suppliers in the UK, Npower, Scottish Power, Eon UK, Centrica, Scottish and Southern Energy and EDF Energy, have diversified their supplied energy sources with wind power and expressed interest to expand their renewable energy business in the near future: (Bream, 2008). Moreover, all over the UK there have been reports about the projects or development of other types of alternative energy power stations: “Hutton waves ahead tidal energy project in the Humber”, “Biomass power station to be built in Lincolnshire” (What's New, 2008). The BBC reported that a company in Wiltshire could turn waste into hydrogen-rich gas, which is then used to produce electricity. It uses highly sophisticated technology developed in Swindon and sends back only 1% of waste to landfill (Renewable energy made from waste, 2008). On the other hand, BERR reports that energy generated from renewable sources increased by 6.1% since last year and constitutes 6.6 % of the total electricity supplied (Energy trends: September 2008 p. 14). In the context of total energy production this is a minor change and there is still a great potential for renewable energy development. The transition towards renewable energy in transport sector is quite challenging due to the technological and economic reasons. The increase in food prices was driven by the demand for bio-fuel, which made the industry to look for better alternatives. Electric cars are known to have been running the roads for decades, however, since they do not use any type of Oil fuel, the Oil producing companies have come up with a ‘better’ idea. Hydrogen is another alternative to petroleum and it is a low-carbon synthetic fuel. British Petroleum (BP) explains that hydrogen is captured in the process of producing electricity from oil, which can be stored underground. BP’s project in Abu Dhabi will capture up to 1.7 million tonnes of CO2, which will be used instead of gas to extract more oil (BP n.d.). The market seems to have found a compromise and the car producers are known to have been launching hydroelectric cars, which should keep the Oil industry in the business. On the plus side, hydroelectric cars are much cleaner alternative to the traditional cars and will help to retain jobs in the Oil industry. 1.3 Political and Economic Challenges and Nuclear Power ‘Revitilisation’ As one of the biggest greenhouse gas producers, the UK, together with another 166 countries has signed The Kyoto Protocol 1997, under which it legally committed to reduce its emissions by 12.5% by 2012 (International action - The UN and the Kyoto Protocol, 2008). As the EU member, in January 2008, the UK was set a target of 15% of total energy to be produced from renewables by 2020 by the EU commission (EU reveals energy plan of action, 2008). The EU target the commission is 20% which could be explained by the motivation to reduce the EU’s dependence on energy imported from Russia and the Middle East and due to obligations under the Kyoto Protocol. The decision seems to have gained strength in credibility when Russian exercised its military power over Georgia, which raised potential threat of energy transportation cut from the Caspian region to the EU. In view of economic climate challenges, on 3 October 2008 the Department of Energy and Climate Change was established “to tackle the twin challenges of energy security and climate change” (News provided by the NDS, 2008). The department has released a consultation paper “on carbon units, the net UK carbon account and carbon accounting” which will determine the details of carbon emission regulation and how the emission will be estimated under the Climate Change Bill. (Consultation on carbon units, the net UK carbon account and carbon accounting 2008). This will be an important change in regulatory legislation in the forthcoming years and might encourage more companies to intensify the expansion of energy production from the renewables. As part of the strategy to meet the energy targets, the UK Government has decided to revive it’s nuclear energy production. In January 2008, the HM Government released ‘A White Paper on Nuclear Power’, which concludes that Nuclear power is a low-cost, reliable and clean alternative to primary energy sources (The White Paper on Nuclear Power 2008). Eight months later EDF announced a £12.5b takeover deal of the British Energy, the UK nuclear power supplier. EDF is planning to build 4 new nuclear power generators in the UK, which “would help EDF to stick to its commitment of reducing carbon emissions by 2020” says EDF chairman Pierre Gadonneix (EDF agrees to buy British Energy 2008). Should the merger be approved by the European Commission as proposed by the British Gas and Electricity Regulator Ofgem, EDF will become the biggest electricity supplier in the UK, which is depicted in Figure 3. [pic] 1.4 Recommendations In conclusion, Energy Sector has a strong established position in the market: the primary energy consumption dominates in the market; this year saw the revitalisation of the UK’s nuclear power and the UK is moving towards low carbon economy. Despite the fallen Oil prices, which tend to make the renewable energy less attractive, in the long run, the renewable energy might offer moderate returns on investment. The political, economic and environmental challenges are pushing the UK towards more renewable energy, which is supported by the national and international legislative policies. On the other hand, Oil producing companies have a strong position in the market and low Oil prices offer a bargain investment in the commodity. If an alternative fuel will ever replace the petroleum it has to be the hydrogen fuel, and Oil producers are re-affirming their positions as the main suppliers. Word Count: 1529 List of Figures Change in Oil Reserves and Production from 1979 to 2006. Webber, J. (2007). UK Oil Reserves and Estimated Ultimate Recovery 2007. Retrieved November 9, 2008, from https://www.og.berr.gov.uk/information/bb_updates/chapters/Table4_3.htm Change in Gas Reserves and Production from 1979 to 2006. Webber, J. (2007). UK Gas Reserves and Estimated Ultimate Recovery 2007. Retrieved November 9, 2008, from https://www.og.berr.gov.uk/information/bb_updates/chapters/Table4_4.htm Electricity Suppliers in the UK. EDF agrees to buy British Energy. 2008. Retrieved November 16, 2008 from http://news.bbc.co.uk/1/hi/business/7632853.stm BIBLIOGRAPHY Production of indigenous primary fuels. Energy Trends September 2008. Retrieved November 15, 2008 from http://www.berr.gov.uk/whatwedo/energy/statistics/publications/trends/index.html Final energy consumption by fuel, by sector, in primary energy equivalents 1970 to 2007. Energy consumption in the United Kingdom: overall data tables. 2008 update. Retrieved November 11, 2008, from http://www.berr.gov.uk/whatwedo/energy/statistics/publications/ecuk/page17658.html Bayes, A. 2008. Why invest in energy' The missing milepost. The Daily Star. [online]. Available from: http://www.thedailystar.net/story.php'nid=45403 [Accessed 16 November] Green, easy and wrong. 2008. The Economist. Vol. 389. Iss. 8605. 8 November. p. 15 OPEC daily basket price stood at $47.73 a barrel Thursday, 13/11/08. OPEC NEWS. 2008. [online]. Available from: http://www.opec.org/opecna/Latest%20Stories/DORB.asp [Accessed 16 November 2008] Act on CO2. [online]. Available from: www.direct.gov.uk/actonco2 [Accessed 16 November 2008] The White Paper on Nuclear Power. 2008. [online]. Available from: http://www.berr.gov.uk/whatwedo/energy/sources/nuclear/whitepaper/page42765.html [Accessed 16 November 2008] Renewable energy made from waste. 2008. [online]. Available from: http://news.bbc.co.uk/1/hi/england/wiltshire/7649324.stm [Accessed 16 November 2008] What's New. 2008. [online]. Available from: http://www.berr.gov.uk/whatwedo/energy/new/page31567.html [Accessed 16 November 2008] Bream, R.: Big six suppliers out in cold over turbine progress. Financial Times [online]. 4 February. p. 4. Available from ABI/INFORM Global [Accessed 16 November 2008] EDF agrees to buy British Energy. 2008. [online]. Available from: http://news.bbc.co.uk/1/hi/business/7632853.stm [Accessed 16 November 2008] Helm, D. 2004. Energy, The State, and the Market: British Energy Policy since 1979. New York: Oxford University Press Inc. News provided by the NDS. 2008. [online]. Available from: http://nds.coi.gov.uk/environment/fullDetail.asp'ReleaseID=380457&NewsAreaID=2&NavigatedFromDepartment=True [Accessed 16 November 2008] Consultation on carbon units, the net UK carbon account and carbon accounting. 2008. [online]. Available from: http://www.defra.gov.uk/corporate/consult/carbon-accounting/index.htm Q&A: EU green energy. 2008. [online] Available from: http://news.bbc.co.uk/1/hi/world/europe/7657414.stm [Accessed 16 November 2008] EU reveals energy plan of action. 2008. [online] Available from: http://news.bbc.co.uk/1/hi/sci/tech/7203514.stm [Accessed 16 November 2008] International action - The UN and the Kyoto Protocol. 2005. [online] Available from: http://www.defra.gov.uk/environment/climatechange/internat/un-kyoto.htm [Accessed 16 November 2008] Digest of UK Energy Statistics 2008 [online]. Available from: http://www.berr.gov.uk/whatwedo/energy/statistics/publications/dukes/page45537.html [Accessed 15 November 2008] Energy trends: September 2008 [online]. Available from: http://www.berr.gov.uk/whatwedo/energy/statistics/publications/trends/index.html [Accessed 16 November 2008] The World Factbook [online]. Available from: https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html#Econ [Accessed 9 November 2008] Helweg-Larsen, T. and Bull, J. Zero Carbon Britain. An alternative energy strategy 2007. [online] Available from: http://www.zerocarbonbritain.com/images/process.php'file=zerocarbonbritain.pdf [Accessed 9 November 2008]