Centrica says gas alternatives are vital

Monday, March 01, 2010

For the man in charge of British Gas, Sam Laidlaw has a strikingly cautious outlook on the fuel’s future.

The hot topic in the energy industry is the flood of previously uncommercial gas coming onto the market.

Technological advances have brought down the cost of extracting gas from difficult rocks such as shales, producing a boom in US production. Tony Hayward, chief executive of BP, has described it as a “game changer”, transforming the outlook for energy in America.

Mr Laidlaw, chief executive of Centrica, is not convinced that it has the same significance for Britain.

“When you look at the UK, we are different from the US. We are running out of gas,” he says.

“While hypothetically we could import cheap spot market gas for a long time, for security of supply reasons it is hard to believe that politicians will willingly commit to a single source of supply which has had a very volatile price history.”

While shale gas is undoubtedly “a significant new phenomenon”, he says, Britain still needs investment in nuclear and wind power to meet its objectives for cutting greenhouse gas emissions and securing energy supplies.

Centrica is still investing in gas production, announcing a £246m deal on Thursday to buy assets in Trinidad and Tobago, a significant exporter of liquefied natural gas, from Suncor of Canada.

Following the £1.3bn ($1.98bn) acquisition last year of Venture Production, a North Sea oil and gas company, Centrica is also aiming to become the “leading consolidator of mature and orphaned assets in the UK continental shelf”.

However, nuclear and wind power will account for a significant proportion of its planned investment of £1.5bn a year on average over the coming decade, up from about £900m in 2009.

In wind power, Centrica last year gave the go-ahead to the Lincs offshore development, a 270 megawatt, £750m project off the Lincolnshire coast. It also took the largest single position in Round Three of the government’s award of offshore wind licences, taking exclusive rights to an area of the Irish Sea that could generate 4,200MW.

In nuclear, it is working closely with EDF, the French group that aims to be the first company to build a new nuclear power station in Britain for three decades. Centrica has an option to take a 20 per cent stake in the first plant, expected to cost about £5bn, and then 5-20 per cent in subsequent projects.

The question is whether it will be able to make a significant return on this power generation. Mr Laidlaw on Thursday set out an aspiration of consistent earnings growth from its investments, but this will depend on political support.

Nuclear and wind are attractive investments only with support mechanisms that add to consumers’ bills. Offshore wind is supported by the Renewables Obligation, and the cost of that support is set to rise. Nuclear is likely to need some new mechanism.

The weakness of the carbon price in the European Union’s emissions trading scheme has undermined the competitive advantage of low carbon electricity such as nuclear. “If the target of end 2017 for the first new nuclear plant is going to be met, [then] above all, the commercial framework – some form of carbon price support mechanism – needs to be in place by 2011,” Mr Laidlaw says.

Centrica hopes that improved energy efficiency, and hence reduced consumption, will ease the burden on consumers, but it may not fully offset the rise in prices.

This story was featured on the Financial Times website.

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