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Chamber response re Security of Energy Supply

 

SCRUTINY COMMITTEE REVIEW:   “Security of Energy Supply”
Response to the Scrutiny Committee Review by the Chamber of Commerce
1.      INTRODUCTION:
The Guernsey Chamber of Commerce has requested of its members assistance to respond to the Scrutiny Committee’s request to evaluate the policies of the States of Guernsey for securing electricity supply for Guernsey.
The British Chamber of Commerce published a survey in November 2012, covering many of the same issues that the Scrutiny Committee is reviewing, namely, Certainty of Supply, Affordability of Supply and Security of Supply. Clearly, while the survey is specific to the UK, many of the responses of UK business will be resonant with locally based business in Guernsey.
Members felt insufficiently qualified from a purely technical perspective to respond specifically against the Scrutiny Committee’s Terms of Reference, but have a number of strategic issues which they wish to raise:
The Guernsey Chamber of Commerce would like to submit a response from a high level, dealing specifically with electricity supply:
·         The necessity for security of supply.
·         Alternative means for securing appropriate security of supply.
·         Costs of securing that security of supply.
·         Alternative policies to assist in energy conservation which may offset, to some degree, the risks associated with reliance on our existing and future sources of supply.
 
 
2.      PHILOSOPHY:
It is the Guernsey Chamber of Commerce (GCoC) view that no business can succeed unless it has access to a reliable energy supply at a reasonable price. It is a vital ingredient for every business.
Clearly there is a trade off between reliability of energy supply and the price a business will pay for that reliability. There is also huge potential to use electricity more efficiently and well as encourage independent on island generation.
 
3.      COMMENT:
In common with other small islands Guernsey has energy supply issues that are more pronounced than those for larger sovereign states, where energy sources are both more varied, and where there are much higher levels of redundancy to the supply systems – for example via the European Transmission Grid, using energy sources as diverse as nuclear, oil, gas, coal, hydro, photo voltaic, thermal, wind and tidal. Guernsey will have less flexibility than, say, the UK in both sourcing electricity and its electricity generation options.
 
4.      SUMMARY OF FINDINGS OF BRITISH CHAMBERS OF COMMERCE
Security of Supply:
                Response
·         Half of all businesses have been affected by interruption to their energy supply in the last three years, albeit 80% for a period of less than four hours
·         60% of businesses are concerned about the security of energy supply, with a strong bias towards larger businesses being more concerned than smaller businesses.
·         90% of businesses agreed that a diverse energy mix is desirable
·         Wind and nuclear were cited by over 50% of respondents as the most popular choices for provision of a diverse source of energy.
Recommendation
·         Government needs to publish a single strategy paper detailing how to provide long term energy security.
·         Government needs to encourage major infrastructure projects to support energy security, preferably using private (re)sources, but with enabling legislation to facilitate its delivery.
·         Liberalise the energy market further.
 
 
  
Certainty of Supply:
Response
·         Meeting energy supply targets will be crucially dependent on adjustments to behaviour of all sectors of society. This may require not just voluntary action, but regulatory and legislative changes.
·         Most businesses recognise the importance of using energy more efficiently
·         Legislative changes are only effective when businesses “buy-in” to the policy.
·         Larger firms are more likely to have energy usage plans than smaller firms.
·         Lower energy bills (90%) and environmental concerns (65%) were easily the largest motivators for reducing energy usage.
·         Constantly changing government policy on energy policy is likely to lose business support. Clear aims and consistently applied policies are desirable.
·         “Green” initiatives will only be successful if clear cost savings are realised (or higher costs avoided).
 
Recommendation
·         Green” initiatives have to be applied across all sectors of society, demonstrating that it will save them money, or avoid further costs.
·         Improving energy efficiency is the most cost effective method of reducing energy costs and consequently enhancing security of supply.
·         Consult business carefully before effecting any change of policy.
 
Affordability of Supply:
Response:
·         Affordable energy underpins economic growth prospects.
·         Energy prices have become more volatile in recent years.
·         Energy costs have grown rapidly over the past three years, and suppliers must be incentivised to partner with business to help them use energy more efficiently.
·         65% of businesses claim that energy price rises have adversely affected growth prospects.
·         Perception that UK energy costs are higher than continental Europe (Guernsey is higher still).
Recommendation:
·         Energy suppliers need to improve communication with business to ensure that energy saving initiatives are instigated, especially with smaller businesses (& households) who do not have specialist technical skills.
 
 
5.       GUERNSEY’S CURRENT ELECTRICITY REQUIREMENTS
Guernsey’s annual electricity consumption in 2011 was approx. 380GWh, up from approx. 275GWh in 2001. Peak daily demand has been up to 85MW.
While the consumption trend in Guernsey has been broadly flat for the past three years, it should be expected that electricity consumption is likely to rise further, due to:
·         Gently rising population.
·         Electricity gradually displacing other energy sources such as oil and gas and fuel oils.
·         Greater energy consumption from a changing industrial mix, such as power hungry data parks, which already consume approx. 20% of electricity supplied to the island.
Guernsey is currently reliant upon supply from both domestically generated sources and the CIEG link:
·         5 X Slow speed diesels                   (65MW) 
·         1 X medium speed diesel                (17MW)
·         3 X Gas turbines                             (50MW)
·         CIEG Cable link                              (55MW)
Guernsey is on the cusp of being unable to meet its energy requirements if demand rises much further, particularly if the CIEG link is interrupted, as has been the case in 2012. Additionally, by 2017, three of the slow speed diesels will be beyond their useful economic life, reducing on-island generating capacity by 40MW.
The impact of not being able to meet demand at all times could have severe consequences for the islands economy, which is heavily dependent on a reliable source of supply for its domestic and international facing businesses.
Events in 2012, when the CIEG link was severed, demonstrate that, while there were no significant supply interruptions, Guernsey is heavily reliant upon assets where “single point of failure” can have potentially disastrous consequences.
This could have far reaching or even catastrophic effects on Guernsey’s economy, both via the impact of a long term power interruption, or by the economic effects borne by higher costs of “on island” generation, where the marginal cost of production can be 4-5 times the cost of importing electricity by cable from France , at current prices.
CIEG
The CIEG link is currently capacity constrained to 55MW, which is sufficient to transport 100% of Guernsey’s electricity consumption for 9 months of the year. The strategic risks associated with a single cable from Guernsey to Jersey are enhanced by:
·         Single point failure, with no redundancy options.
·         Maximum capacity of 55MW, limiting any growth in supply.
·         The risk that Jersey can “switch off” Guernsey’s contracted supply if it needs the electricity for its own needs.
 
 
 
6.      THE STRATEGIC ISSUES
Chamber believes that the shortcomings of the existing supply and generating arrangements are not sufficiently robust to accommodate the likely rising electricity demand requirements identified above.
Chamber believes that the capability for Guernsey to generate electricity on island for its full current, and expected demand, cannot be achieved at an economically acceptable price using existing assets in the event of a long term failure (say six months). The recent 6 month outage of the CIEG cable has, we understand, virtually doubled the cost of supplying electricity by reliance on “on- island” generation.
Chamber believes that for Guernsey to secure an effective long-term supply of electricity to the island, that will accommodate likely demand requirements over the next 25 years, it will need to consider a second electricity cable link. This cable link should be a direct link to France (or possibly via Alderney, if the FAB link looks likely). The benefits of this strategic option would be to:
·         Offer a greatly enhanced capacity than the existing CIEG link via Jersey (say 100MW)
·         Offer enhanced redundancy to the existing CIEG link.
·         Offer a “ring” link strategy to Jersey that permits electricity to flow in both directions, which offers enhanced strategic options to both islands, and which may eventually permit export to France.
·         Greatly reduce the probability of electricity outages, as the probability of simultaneous failure of both cables is infinitesimally small.
·         Offer the prospect of reducing the infrastructure and expense of oil based/ carbon intensive “on-island” generation.
·         Offer a stable platform from which Guernsey can develop an IT and tech industry hub, where a dependable electricity supply will be a prerequisite.
Chamber believes that a direct cable link to mainland France will accommodate the requirements for a flexible and rising demand profile to meet Guernsey’s needs, as well as offering a far higher degree of reliability and security than is currently available from existing assets.
Chamber believes that it is appropriate to retain the new medium speed diesel, together with the gas turbines as an additional insurance policy against short-term outages, while recognising that outages with new cable infrastructure in place would be much less likely, and where the impact would likely be of shorter duration than we have experienced to date.
Chamber is aware of interest by business to install, and fund commercially viable Photo Voltaic (PV) power generation facilities on island, which can assist in reducing Guernsey’s dependence on external sources for power, and believes that a more open supply architecture is justified.
 
 
7.      COSTS OF A DIRECT CABLE LINK
Chamber has been informed that a new direct cable link to France could cost between £70-100m at current prices.
Financing a cable link could be achieved in a number of ways:
·          Long Term Company (GEL) borrowing with Guernsey Guarantee (AA+/Aa1) in public bond markets, typically fixed rate and term.
·         Long Term Company borrowing in Private markets, typically with single lender ( such as M&G/ Aviva)…………JT have done this recently
·         Short term borrowing with refinancing “roll-over “ risk from banks ( unlikely to be attractive)
·         Public Private Partnership company finances entire construction and acquires ownership risks for an inflation linked return over lifetime of project ( numerous examples in OFTO’s in UK and elsewhere)
·         Guernsey could create a sinking fund to finance such a project
 
Pro-forma cost analysis assuming 25 & 50 year fixed rate borrowing for £100m
Key variables are:
·         Cost of borrowing
·         Amount borrowed
·         Tenor of borrowing
At the current time GEL could likely borrow 25 year & 50 year money, with a States guarantee at around 3.75% and 4% respectively.
The annual service cost of the interest and principal of a 25 and 50 year loan would be £6.27m and £4.71m per year respectively.
To put this in perspective, if one assumed that the 100MW capacity cable was operating at 50% capacity, the implied cost of the “transport” component of electricity would be equivalent to 1.45p per kWh assuming a 25 year repayment horizon, or 1.06p per kWh assuming a 50 year repayment horizon (if one assumes that the buy in rate from EdF is currently 6.25p per kWh). Simplistically, using these assumptions this could result in a rise in electricity supply costs of between 17-23% , but which would subsequently fall over time in real terms as “transport” component of the electricity costs falls as the quantity of imported electricity increases, and as CAPEX on on-island generation is phased out.
The cost of the cable could be offset substantially by not replacing the on-island slow speed diesels as they are phased out over their useful lifetime. The actual cost of commissioning a new cable would therefore likely be much less than the “worst case “ costs assumed in the above example, and could even be negligible.
 
 
8.      IMPACT ON CURRENT POLICY
 
·         Guernsey’s current policy to enforce “lowest cost” production of electricity, would likely have to change if a direct cable link were installed, and additionally the policy would become less responsive to the vagaries of wholesale market prices of electricity generating alternatives, such as fuel oils. 
·         The cable lends itself to a strategy of “acceptable” prices over the long term and also to greatly enhanced reliability of supply and reduction of downside risks of interruption to energy supply.
·         Abandonment of the current policy requirement for on-island generation being capable of meeting 100% of demand, as on-island assets would likely not be capable of meeting pan island electricity demand if both cables failed simultaneously (an extremely unlikely event)
·         GEL would not be required to invest further in oil fired /carbon intensive on-island generating capacity, so reducing CAPEX requirement. Additionally, existing and future oil fired on-island capacity would be used much less frequently, so possibly preserving the useful lifespan of current generating assets.
·         GEL would have to promote as part of a broader policy mandate initiatives to increase greatly the efficiency of energy usage:
  • Appropriate buy back rate for electricity supplied from non GEL sources (both domestic and commercial
  •  Wider use of heat pumps and PVs
  • Advice on conservation of energy
  • Consider initiatives to encourage investment in renewable power sources (but not direct subsidies).
·         An additional cable link would further reduce our requirement for carbon based generation, as imported nuclear produced electricity would effectively provide up to 100% carbon free generation, versus 50-75% over the past two years.
·         Possibility to free up GEL land for other uses as GEL evolves to becoming a supplier and distributor of electricity rather than a generator of electricity.
 
 
9.      CONCLUSIONS
 
·         Chamber is attracted by the prospect of securing a greatly enhanced level of security of supply afforded by a direct cable link to France. It is imperative that business has the confidence in the supply of electricity and consistency in price of electricity.
·         Guernsey’s energy supply policy will likely need to be changed to accommodate a second cable link. The emphasis will change from provision of electricity at “lowest cost” to “highest security at an acceptable price” being the over-riding factor.
·         A second cable link will reduce greatly Guernsey’s perceived vulnerability to electricity supply interruption.
·         Further access to nuclear generated supply will reduce our Carbon Footprint and reliance on fossil derived fuels.
·         GEL will need to develop enhanced strategies to encourage energy saving initiatives towards a “self help” policy.
·         Chamber believes that the costs of securing a reliable source of supply are less than the costs associated with continuing with a 100% on-island generation policy, where the marginal costs of supply are immense, and commercially unattractive.
·         A further cable link will protect Guernsey’s business and domestic energy supply requirements over the next 25 years and beyond, and additionally the cable “ring” infrastructure will provide an unbeatable level of built in redundancy and permit eventual export options to France when large scale renewable generation takes off.
·         Limited on-island oil fired capacity should be retained, with emphasis on generating assets that can respond to short term emergencies, such as medium speed diesels and gas turbines.
·         An energy policy promoting renewable sources of energy which encourages resilience and independence from traditional sources should be encouraged. We refer you to the following website www.eco-island.org outlining a long term vision of self sustainability in fuel, waste, energy, and energy storage. This is being enacted in the Isle of Wight now, and has the support of many multi-national organisations, the UK Government, and may well be the template that we should follow.
·         Suggestions as to how a renewable energy policy may be implemented are the subject of another consultation, on which Chamber will be happy to advise.
 
 
Chamber is available to talk to the Scrutiny Committee on any aspect of this submission. Please contact us at the above address.
Yours sincerely,
 
 
 
Rupert Dorey,
President Guernsey Chamber of Commerce.

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Telephone: +44 (0) 1481 727483
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