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Westminster EnergyTM

Energy Security Strategy

Key Challenges for the UK Energy Sector Post-Election

Simon Virley CB

02 July 2015

UK Chair, Energy and Natural Resources

3 © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Energy Trilemma The balance between priorities is shifting…

Security of supply


Security of Supply – import dependence Britain’s import dependence is rising…

Source: DECC ‘Digest of UK Energy Statistics 2014’ (31 July 2014)

Net exporter

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North Sea oil & gas Prices below breakeven for many operators…

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Brent price required for upstream portfolio to be cash flow neutral

Average 2015 price to date

Source: Capital IQ, Wood Mackenzie, KPMG analysis


Power margins Capacity margins are tightening…

Loss of load expectation

Source: Ofgem ‘Electricity Capacity Assessment Report 2014’ (30 June 2014)


Decarbonisation – carbon budgets UK Carbon Budgets are legally binding…

UK GHG emissions against legislated budgets and 2050 target

MtC

O2e

2050 target (inc. IAS) UK GHG emissions Legislated carbon budgets

Source: Committee on Climate Change, Reducing emissions and preparing for Climate Change: 2015 Progress Report to Parliament, July 2015


Renewable electricity Deployment is increasing…

Source 1 (Actual): DECC Statistics Source 2 (Forecast): Target range for 2020 is based on DECC estimates

Target range for 2020

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Renewables share of electricity generation

Actual Forecast


Affordability – CfD costs The race is on…

Source: KPMG estimates based on first CfD auction outcome (February 2015)

140

114 115

79 90

82.5 89.5

160 160

[CELLRANGE] [CELLRANGE]

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Carbon capture and storage

Tidal

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Costs of different renewable technologies under the CfD regime

Estimated range


Levy Control Framework (LCF) The cost of green energy on energy bills…

Source: DECC ‘Annual Energy Statement 2014’

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CMA recommendations Potential outcomes….

CMA ‘Statement of Issues’ in February 2015:

•  Vertical integration – no major competition issues

•  Wholesale liquidity not distorting competition

•  Generators do not have ability or incentive to exercise market power

But CMA have expressed concerns about:

•  Weak competitive pressure on standard variable tariffs (the ‘sticky customers’)

•  Regulatory complexity may be a barrier to entry

•  Some market rules may be distorting competition


Technology Disruptive change is coming…


Conclusions

•  ‘The State is Back’ in energy

•  Affordability is key

•  Real challenges ahead on security of supply

•  What is the plan now for decarbonisation?

•  The ‘Agile Utility’ – can the utilities respond?

•  Solutions may be both local and international

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Click to add title

Strategic energy challenges for the UK: a research perspective

Jim Watson, Director, UKERC

Westminster Energy, London, 2nd July 2015

3. Innovation systems & development

Analysis of Committee on Climate Change emissions pathway to 2030: §  Methods for appraising uncertainty §  Instrumental uncertainties for CCC

pathway in power, heat and transport §  Systemic uncertainties: natural

resources, public attitudes and ecosystem services

§  Some attention to ‘alternative’ higher carbon pathway

Energy strategies under uncertainty

3. Innovation systems & development Energy strategies under uncertainty

Source: Funtowicz and Ravetz

Click to add title Energy strategies under uncertainty Instrumental uncertainties, e.g.

Complexity Impact Actions By who? Commercialise low carbon electricity technologies

•  Long term policy support

•  Demonstration funding for CCS

•  Evaluations and learning

•  Govt and innovation funders

•  Businesses •  Research

community

Heat pump performance

•  Demo & deployment incentives

•  Learning & engagement with consumers

•  Government •  Innovation

funders •  Citizens /

businesses •  Research

community

Click to add title Energy strategies under uncertainty Instrumental uncertainties, e.g.

Complexity Impact Actions By who? Commercialise low carbon electricity technologies

•  Long term policy support

•  Demonstration funding for CCS

•  Evaluations and learning

•  Govt and innovation funders

•  Businesses •  Research

community

Heat pump performance

•  Demo & deployment incentives

•  Learning & engagement with consumers

•  Government •  Innovation

funders •  Citizens /

businesses •  Research

community

Click to add title Energy strategies under uncertainty Systemic uncertainties, e.g.

Complexity Impact Actions By who? Fossil fuel availability and price

•  Energy efficiency •  Diversity •  Carbon pricing

•  Governments and regulator

•  Businesses •  Citizens /

businesses Ecosystem service impacts

•  Stronger evidence base

•  Decision making tools

•  Government •  Businesses •  Research

community

Public attitudes to energy system change

•  Genuine engagement with public on energy system change

•  Government •  Citizens






businesses Political commitment to a low carbon transition

•  Reinforce long-term policy framework with specifics

•  Confirm the fourth carbon budget

•  Government & Parliament

•  Businesses •  Citizens









businesses Political commitment to a low carbon transition

•  Reinforce long-term policy framework with specifics

•  Confirm the fourth carbon budget

•  Government & Parliament

•  Businesses •  Citizens




Click to add title UK energy security assessment



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Thanks

http://www.ukerc.ac.uk @UKERCHQ @watsonjim2

Energy Security ‘defined’…

•  ‘There is no perfect definition of energy security’, DECC 2012 •  Energy security has different dimensions

–  Short-term vs. long-term –  Physical vs. price –  Different fuels vs. electricity –  Production/generation vs. transportation/transmission –  Demand volatility / predictability short and long term for transport,

power and heat

•  ‘When discussing energy security the Government is primarily concerned about ensuring that consumers have access to the energy services they need (physical security) at prices that avoid excessive volatility (price security)’, DECC 2012

WEF 2015-16 Structure & Actions

WEF Network Industry Members Trade Associations NGOs Academia

Government liaison DECC BIS + Infra UK Cabinet Office Ofgem

Parliament liaison DECC SelCom EAC SelCom POST All Party Parl. Groups

Policy Pillars for Energy Security

•  Resilience to systemic and network shocks

•  Energy efficiency measures and innovation

•  Maximising economic production of oil & gas •  Reliability of global energy markets

•  Reliable, diverse networks for reliable supply

•  Decarbonising the strategic supply mix

WEF Series 15-16: Issue Coverage

1 - Cross-Cutting Policy Preview 2 - pre-COP-21 Carbon Assessment 3 - Annual UK Oil & Gas Review 4 - Supply Risks, Security & Resilience 5 - Review of Nuclear Delivery & Risk 6 - Review of Smart Energy: Smart Cities, 7 - Review of Renewables Deployment 8 - European Energy Risk Summit

Westminster EnergyTM

Energy Security Strategy

UK Energy Security Strategy – key questions WEF has raised around risk: The suite of risks which affect UK energy security are becoming increasingly dynamic and interconnected. The need to understand and to manage an increasingly interconnected range of energy security risks also raises a number of questions for policymakers and industry: 1.  What risks lie outside business-as-usual planning that would materially shift UK energy

security? 2.  What fundamental industry and market shifts could create new risks? 3.  To what extent are similar risks, or patterns of risks, affecting a number of UK energy

sectors? 4.  How can policymakers, industry and NGO sectors better identify and share information

concerning the range of strategic risk factors affecting UK energy security? 5.  What political and corporate actions does the UK have the capacity to take to manage

these risks?

Outputs from ‘Risks to UK’s International Gas Supply Security’ Research (May ‘15)

Top 5 Issues to track // for HMG to focus on in the next 6 months… •  We cannot yet be confident that UK Continental Shelf (UKCS) gas production will

develop, or even endure, at the levels aspired to by Government or industry.

•  We are confident that, overall, the UK will be well-supplied with gas in the long term given its diversity of supply sources. However, there is a risk that key elements of the UK’s gas network may deteriorate in the next 5 years.

•  There is a risk that significant declines in investment in Russia’s existing gas infrastructure could result in gas supply interruptions and / or shortages within parts of Europe during the next 5-10 years.

•  There is a risk that the UK’s unconventional, shale gas industry will not develop at a

commercially viable rate. •  There is widespread concern that the new Parliament’s ‘knowledge base’, and time

constraints, may hinder the balanced analysis and support that UK energy strategy requires, given the complexity of the issues ahead.

Questions to address in today’s discussion

Market challenges

Research focus

Upstream: production & decommissioning

Refining challenges

Downstream, and the demand side

Cost & Operational challenges

Talent & Skills requirements

Regulatory challenges

Policy priorities

Production & Decommissioning

Challenges for the UKCS

Westminster Energy Forum 2nd July 2015

Wood Review -‐ Production

From 4.5 to 1.5 mmboepd since the millennium

Wood Review -‐ Investment

Capex grew from £4 to £15 billion in the same period

Wood Review -‐ Uptime

ProducEon efficiency fell from 81% to 60%

Key Reason for Decline •  Ageing infrastructure

•  Designed for 25 years, has been in place for 40 years •  Working in a hosDle marine environment •  Much equipment is obsolete

•  Decommissioning liability remains largest barrier to transfer of key infrastructure plaIorms •  Decommissioning Deeds have lowered security requirements by reducing tax uncertainty

•  Cost uncertainty remains huge •  Need for comfort to current owners makes security provision more burdensome

North Sea Cost Estimate

•  EsDmates of UKCS spend on decommissioning tripled in five years •  $16bn in 2006 •  $50bn in 2011 •  Oil & Gas UK Survey

•  AcDvity will ramp up to 2020 •  Timing is becoming less sensiDve to oil price

•  Survey for 2012 shows 15% increase in costs

•  This equates to $90bn for the whole of the NW Europe

One Reality A major part of the decommissioning cost will come from the UK tax payer in the form of PRT refunds and CT allowances. This reality has come into sharp focus with the

recent issue of Decommissioning Deeds securing current levels of tax relief.

Two Responsibilities We have a responsibility as an industry to decommission the North Sea as cost effecEvely as possible. This will only happen if we opEmise learning between projects and maximise co-‐ordinaEon

of facility removal campaigns.

Two Responsibilities We have a responsibility as an industry to maximise recovery from the North Sea before we remove its precious infrastructure.

This will only happen if we can reduce the amount of dead capital Eed up in

decommissioning security.

Three Questions

How do we maximise the learning from all decommissioning acEvity to the benefit of all Operators?

Three Questions

How do we ensure that human resources and major equipment are deployed efficiently in well co-‐ordinated campaigns of acEvity?

Three Questions

How do we build on the Decommissioning Deeds to further reduce the cost of

decommissioning security?

A Radical Solution

•  A new generaDon of Owners of super-‐mature fields •  Primary business is decommissioning •  In-‐house capability for:

•  Well P&A •  PlaIorm Removal and Disposal

•  Li]le or no outsourcing of key acDviDes •  Ability to provide adequate decommissioning security to previous owners without hindering investment

Has it been done before?

Hurricane Downers •  Hurricane Katrina summer 2005 •  Seven bp plaIorms destroyed •  Grand Isle and West Delta fields GOM •  Operator managed recovery for a year •  Then brought in Wild Well Control Inc. • WWC managed recovery & remediaDon •  Turnkey contract •  Transfer of operatorship and license

Bullwinkle •  Gulf of Mexico •  Green Canyon Block 65 •  Installed in 1988 •  150 miles from New Orleans •  1,353 c water depth •  Shell operated

•  Deepest fixed leg producEon pladorm on the Outer Shelf •  A total of 29 wells to plug and abandon

Bullwinkle

•  Superior Energy Services took 100% ownership in Feb 2010. •  Superior is Wild Well Control parent company. •  Field was producing 4,000boepd. •  Sold 49% to Dynamic Offshore Resources. •  Dynamic operate the field. •  At the end of economic field life:

•  Superior will P&A 29 wells. •  PlaIorm will be removed. •  Shell will pay Superior a pre-‐agreed undisclosed amount.

What is needed for it to work here?

Current Heavy Lift Stock

Vessel Lic capacity Build date

Hereema Thialf 14,200t 1985

Saipem 7000 14,000t 1983

Hereema Hermod 8,100t 1978

Hereema Balder 6,300t 1978

• The heavy lic vessels acDve in NW Europe are:

• By 2015, every vessel will be beyond its 30 year design life • The lic capaciDes shown are maxima at minimum load radius

• None of these could remove the 3000t Dunlin main support frame • These vessels can only lic small jackets clear of sea level • They cannot lic jackets designed for barge launch

• NW Hu]on jacket removal required >40 lics •  TML could accomplish this with 2 lics

• An average jacket and topsides requires 150 days of barge Dme •  Limits a barge to one asset per summer season

The TML System

•  The Twin Marine Licer System (TML) is designed to install and remove topsides, jackets and subsea structures

•  The system has a maximum licing capacity of 34,000 tonnes •  PlaIorms are removed in far fewer lics than with crane barges •  Offshore manhours are reduced by about 80% •  Cost overrun risk is constrained •  HSE exposure is significantly reduced

•  Water depth independent with a 2.5m significant wave height •  TML can remove almost all North Sea topsides in a single lic

Role of Insurance

•  TML transfers most deconstrucDon from offshore to onshore •  Cost overrun risk is significantly reduced •  The Decommissioning Company has an insurance product:

•  designed and led by Munich RE •  provides performance guarantee for system capability •  underpins fixed price plaIorm removal offering

•  Price certainty will be used to build TML market share: •  a]racDve to Operators both large and small •  can be used to fix financial security provision •  can be purchased by buyers or sellers of mature oil producDon

United Kingdom Petroleum Industry Association

2nd July 2015

Issues of refining in the UK: challenges ahead

A key issue is that to 2030 and beyond, oil is a major source of energy in the UK..

Industrial

Transportation

Power Generation

Nuclear

Coal

Energy security and resilience risk: UK

Net imports

Net exports Net exports

High Risk MOSES line

% inland consumption required to be covered by imports in a 6 refinery scenario after 2015.

% inland consumption required to be covered by imports in a 3 refinery scenario after 2015.

Net imports

Scenarios based on the IEA's Model of Short Term Energy Security (MOSES) -‐ 'net import' indicator -‐ developed to evaluate national energy security risks and resilience. 45% import dependence benchmark = high risk

A burdensome legislative background for UK refiners

Crude costs and income from products UK refining operating costs

Indicative graph. Margins shown are indicative, obtained under favourable market conditions. Source: UKPIA, Wood Mackenzie

By the end of 2016 UK Refining capacity will have reduced by one third compared to 2006.

Closure of UK refineries increases global emissions

(Source: VividEconomics Report “Carbon leakage prospects under Phase III of the EU ETS and beyond”, Refining Case Study, June 2014. CO2 emissions calculated using methodology and factors included in JEC – Joint Research Centre-‐EUCAR-‐CONCAWE collaboration report “Well-‐to-‐tank Report”, Version 4a, April 2014.)

UK and EU refining is on average less emissions-‐intensive (0.21 tCO2 per tonne of product) than non-‐EU refining (0.29 tCO2 per tonne of product) = Carbon leakage exceeds output leakage: every 100 units of CO2 emissions reduced in the EU are replaced by 135 units outside the EU

Quantity leakage

Emissions intensity differential

Emissions leakage

Thank you.

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

NaEonal Grid | Balancing the System

Cordi O’Hara, Director UK Market OperaDon, System Operator

Commercial and DomesEc Customers

Electricity DistribuEon Networks

NaEonal Grid Gas DistribuEon UK

Other Gas DistribuEon Networks

NaEonal Grid Transmission UK (Electricity & Gas)

NaEonal Grid | who are we?

Electricity Generators Gas Producers and Importers

System Operator

Engagement | broad consultaDon to develop suite of industry led documents

2014/15 | a milder winter than expected

§  Mild weather; lower than average demands at peak Dmes

§  Actual demand vs available generaDon was adequate across winter

§  Full imports from Europe §  New balancing services were not

needed §  Gas Supplies from the UKCS and

Norway close to our forecasts and similar to levels experienced in 2013/14.

§  Tension between Russia and Ukraine did not lead to any disrupDon to supplies to the UK.

2015/16 | it was always going to be Dghter…but we have the right tools

1 Market Actions

Communication (NISMs) Interconnector trading

Market provision of capacity

Non BM STOR

2 New Balancing Services DSBR and SBR

3 Emergency Actions

Voltage reduction

Max gen service

Interconnector emergency assistance

Demand reduction

Demand

Margin

De-rated Generator capacity

Tools & products available

§  Secured 2.56GW of addiDonal electricity reserve (DSBR/SBR)

§  Lower cost per unit than the previous winter.

§  The tender round also shows growth in the market for demand side balancing reserve

Embedded GeneraEon

Demand Side Response

Industrial DomesEc

Passive Demand

DomesEc Industrial

Future balancing | challenges and opportuniDes

ConvenEonal GeneraEon

Inflexible GeneraEon

Intermioent GeneraEon

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Our world is changing| so is the energy system that powers it

§  NaDonal Grid led demand side seminar – a significant audience from the demand side market

§  We will revoluDonise the way we balance the UK's electricity system -‐ by 2030 we will rely on well over 50% of the Dme on demand-‐side measures for securing supplies

To conclude|the UK’s energy future is changing

§  Stakeholder engagement is key to ensure a wide range of scenarios are planned for.

§  We have the right tools in place to balance the system.

§  There are opportuniDes for innovaDve soluDons e.g. power responsive

https://www.youtube.com/channel/UCcZqYXrPP5W1Y7lKYKKTa4g/feed

VIDEO LINK HERE !

Talent & Skills: Availability and needs across the sectors

Neil Robertson, Chief Executive

We’re all doomed!

DOOMED!

Current workforce

Age profile of the power sector •  Overall, 33% of the power

sector’s workforce is aged over 50 years

•  This proportion increases for higher skilled job roles

•  The contractor supply chain employs about half as many people as the asset owners

•  Two-thirds of them in Level 1 and 2 roles and with a slightly younger age profile

Leavers from power sector (technical & engineering workforce only)

•  The number of retirements during each year will double by 2026

•  From 345 in 2015 to 700 in 2026

•  Natural wastage is modelled to run at a steady 2.6% per year

•  But this could increase as competition for scarce skills intensifies as capital investment programmes crank up across a number of adjacent sectors

•  Added to this increasing replacement demand year-on-year will be the additional labour demands by smart grids, electric vehicle infrastructure, etc. in the early 2020s

Skills shortages already exist...and more to come??

•  Increasing competition for talent •  From within the energy

sector •  £275bn investment over 8

years in infrastructure new build and refurb

•  From outside of the energy sector

•  Engineering and infrastructure construction

•  Rail electrification •  Advanced manufacturing

•  From overseas •  Many developed countries in

the same situation as the UK •  Developing countries

building energy infrastructure for the first time

•  Job titles on the UK’s Shortage Occupation List relating to the electricity transmission and distribution industry:

•  Project Manager; Site Manager •  Power System Engineer; Control

Engineer •  Protection Engineer; Design Engineer •  Planning/ Development Engineer •  Quality, Health, Safety and Environment

(QHSE) Engineer; Project Engineer •  Proposals Engineer; Commissioning

Engineer •  Overhead Linesworker; Substation

Electrical Engineer •  There are other job titles on the list

relating to adjacent sectors •  eg. geo-science related roles,

mechanical engineer, chemical engineer •  Total demand across these job roles =

c150 per year •  Low volume / high cost to replace

Supply-side issues – Engineering in general

•  UK economy will need 182,000 people per year with engineering skills through to 2022

•  To meet this demand, the number of engineering apprentices and graduates entering the industry will need to double

•  To address the shortfall: •  Double the number of young people studying

GCSE physics as part of triple sciences •  In 2014, 61,641 girls achieved Physics A*-C grade

GCSE •  Yet only 5,916 (9%) achieved an A*-C grade at A level

•  A two-fold increase in the number of Advanced Apprenticeship achievements

•  Provision of careers inspiration for all 11-14 year-olds

Source: EngineeringUK

Supply-side issues •  Sector image

•  Poor for attracting new young talent •  Market certainty

•  Particularly in renewable energy technologies •  Difficult to invest in long-term skills development (e.g. 3-

year Apprentices) •  STEM education

•  Need to increase number of students following STEM subjects

•  Especially females and BME groups •  Need to increase number of STEM graduates that enter a

STEM job (rather than financial services, consultancy, etc.)

•  Multi-utility solutions •  More flexibly skilled workforce

Building by numbers •  Value of infrastructure investment = £466bn over eight years •  Energy sector’s share of this = £275bn •  The infrastructure construction sector is forecasting wage

inflation of 3.8% per year (double that forecast for the economy as a whole by EY)

•  Over the next decade, the entire energy and utility sector will need to recruit around 180,000 workers (c16,000 per year)

•  The cost of maintaining the electricity distribution workforce alone over the next eight years (13,000 recruits) is estimated to be £370million

•  Cost of not renewing the workforce: •  Increasing competition for talent amongst partners •  Increased delivery costs •  Delays in delivery

So… what are we doing about it?

• Address the market failure by: •  Greater and clearer focus on:

•  Attraction and sector image – especially of young people •  Recruitment – using a more targeted and diverse range of entry

routes •  Diversity – increase female and BME representation

•  Collaboration •  Working together, with the supply chain, to identify collective

challenges and solutions •  Procurement Accord

•  Use the procurement process to promote and recognise the importance of skills across the sector

So… what are we doing about it?

•  Energy & Efficiency Industrial Partnership •  Energy & Efficiency Independent Assessment Service • National Skills Academy for Power •  Talent Source Network •  Think Power •  SME Networks • Workforce Planning •  EUSR

DECC Overview Steph Hurst 2 July 2015

The Manifesto: Key Commitments •  A focus on energy security (diverse supplies; domestic shale extraction;

gas; nuclear and good value renewables)

•  Stopping subsidy for on-shore wind

•  Safe development of shale with focus on community benefits and sovereign wealth fund

•  Pushing for more new investment in UK; continue to support North Sea oil and gas production

•  Driving competition to get a good deal for consumers and keep bills low: implementing the recommendations of the CMA review

•  Targets for Smart Meters for homes and businesses and for energy efficiency in homes

83 Westminster Energy

Announcements so far……. •  An Energy Bill announced in the Queens speech

•  Bring forward primary legislation to close the renewables obligation for on-shore wind early (a grace period for those who have already got planning permission, grid connection and land rights);

•  Devolve planning decision making for on-shore wind to local authorities •  Establishing the Oil and Gas Authority as an independent regulator

•  Energy Elements of the Scotland Bill

•  Commitment of existing funding of £50m to the Climate Development Finance Facility for renewable projects in developing countries

•  Heat network projects are being tested across the UK part of DECC’s Heat Network Small Business Research Initiative

•  Parameters for the Capacity Market Auction


Early priorities and commitments •  Securing a global climate deal in Paris is the Secretary of States highest

priority this year. Taking every opportunity to press for an agreement that is ambitious, with regular reviews to further increase ambition and effective rules to allow us to track progress.

•  A focus on consumer bills - keeping bills down while decarbonising at the lowest cost possible

•  Commitment to the Climate Change Act

•  Delivering Manifesto commitments


Documents

Westminster Energy 2nd... · r Continental MV y s s ONGC Lundin ss s s Range sky r s s s ... (Forecast): Target range for 2020 is based on DECC estimates ... incentives • Learning