Keeping Britain's lights on

The boss of Centrica tells James Ashton how billion-pound decisions are needed to ensure our future energy supply

The slow-burning drama over Britain's future energy supply has had everything: entrances and exits; rows and romance (well, joint ventures at least). Now, according to the chief executive of Centrica, it needs a dose of something else: realism.

At the head of the British Gas-owning firm, Sam Laidlaw runs one of the few domestic players capable of championing the British cause.

The snaking dole queue and rumbling eurozone crisis might have grabbed the headlines this year, but it is also a momentous time for the energy industry where giant investment forces companies to plan years in advance.

In a little over a decade, a quarter of our existing power generation capacity will be closed because plants are coming to the end of their natural life, or else they are pumping out too much pollution. The Government's energy market reforms are designed to encourage investment in an array of low-carbon technologies, and introduce a system to succeed the ROC (renewable obligation certificate) regime that will be phased out in 2017. Firms including Centrica are holding back from making giant spending decisions until they have seen more detail.

"I think the direction of travel has remained good but the urgency is absolutely still there," says Mr Laidlaw, a career oil and gas man who has run Centrica for the last six years. "I think we shouldn't be lulled into a false sense of security – just because we've got an economic downturn the problem hasn't gone away."

It's true: tougher times means homes and businesses are spending less on fuel. Energy bills close to an all-time high have made sure of that. There is also the hope that many of our ageing nuclear reactors can have their lives extended. Gas imports can plug the gap, but that will leave the country at the mercy of foreign supply and fluctuating wholesale prices.

Mr Laidlaw warned a year ago that some green targets may have to be sacrificed in the interests of safeguarding the security of our energy supply the closer to the crunch we get.

"I think at the moment, if you look at the renewables targets we are going to struggle to make them," he said, referring to the aim of deriving 15 per cent of supply from renewable sources such as wind, wave and solar by 2020. The proportion stands at just 3 per cent today. The trouble is, the targets are legally binding. Does that mean Britain will face a fine?

"We're in somewhat unchartered territory in 2020. As a pragmatic result, it will really depend on where everybody else in the European Union is in terms of meeting those targets as to what the sanctions are going to be."

Delays to the publication of reforms, a recession that has cut back companies' willingness to invest and a serious wobble last year after the Fukushima nuclear disaster in Japan have all added up to create a crisis. But the uncertainty over keeping Britain's lights on and homes heated looks as though it was eminently avoidable. Mr Laidlaw agrees that several generations have failed to grasp the nettle because of our abundant supply of coal, oil and gas – despite the odd shock such as that caused by Iran in the 1970s.

"Historically, we've been in a different position and seen ourselves as still a very significant energy producer, but have failed to realise perhaps how quickly this was going to turn to being a very significant importer," he says.

Reluctant to wean itself off its coal and gas dependency, Britain is further behind some of its neighbours in diversifying supply to protect against dwindling resources. Germany had a big nuclear programme; Spain invested heavily in solar. Gas still produces about 40 per cent of our primary energy requirement, compared to about 25 per cent across Europe, and is still the main way of heating most homes.

Centrica has struck a partnership with state-backed EDF of France that is exploring building the new nuclear generators. Their progress is crucial after the Horizon consortium of German energy groups E.ON and RWE scrapped plans to build up to six reactors.

That has left several foreign buyers, including state-backed Chinese firms, circling Horizon. Should that worry us? Mr Laidlaw said competition has been good for bringing down prices below those in the Continent's protected markets, but it has left the country casting around for deep-pocketed saviours.

"We've already said it's fine for the French, it's fine for the Germans and I think that probably everyone would say it's fine for the Americans and the Canadians as well, so why should we exclude certain countries? I think you've got to be very clear around what the real issues are. If there are security issues I think they're manageable."

Mr Laidlaw, who sits on David Cameron's business advisory group, has been broadly welcoming of the Government's energy market reforms that effectively subsidise the price producers can charge for energy from low-carbon sources.

His stance is at odds with that of Ian Marchant, the boss of rival domestic supplier SSE, who hit out recently at the reforms, saying Britain "will live to regret" handing a subsidy to the French that would cause higher energy bills.

"Frankly, coming from where he's coming from, having said he's not going to participate in nuclear and having invested a lot in a wind portfolio, it was fairly obvious that he would want a programme that doesn't incentivise nuclear but does incentivise wind."

Centrica is also in wind, having placed several bets on which new technology will take flower. Its Lincs offshore wind farm goes into production this year. In addition, Mr Laidlaw has sunk billions into the North Sea to boost its own production assets – and profitability. Will the company also stump up for nuclear? He is still thinking about it.

"We've been very clear with all stakeholders including the Government, that whilst we think new nuclear is a good thing for the UK we can only participate in it if it is a good thing for our shareholders as well, and for that to happen a lot of things need to come together."

Costs, planning and design have all to be pinned down. Despite the best of intentions, it looks as though this drama will be long-running.

Generation Now: How the energy sources compare

Gas: accounts for 47 per cent of total electricity generation in Britain. Advantages: It's plentiful, relatively cheap and the cleanest of fossil fuels. Disadvantages: Its price is rising and it is still quite dirty.

Nuclear: accounts for 16.4 per cent of total UK electricity generation. Advantages: It is clean and provides a constant source of power. Disadvantages: Huge upfront costs, the environmental dangers it poses and the high cost of disposing of spent, nuclear fuel.

Wind: accounts for 2.7 per cent of total UK electricity generation. Advantages: It is clean and there is an abundant supply in gusty Britain. Disadvantages: Upfront costs are high, it produces an intermittent power supply and it is economically inefficient.

Coal: accounts for 28.4 per cent of total British electricity generation. Advantages: It is very economical. Disadvantages: It is very dirty and sources of coal, at least in the UK, are fast declining.

Oil: accounts for 1.3 per cent of UK electricity generation. Advantages: It provides a stable source of power at a relatively cheap price. Disadvantages: It is dirty and set to get more expensive in the longer term, in the face of rising demand for oil and dwindling supplies.

Solar: Solar and the other remaining renewable technologies account for 3.3 per cent of UK electricity generation. Advantages: It's clean and the sunlight is free. Disadvantages: Solar generation is intermittent and it is hard to generate energy on a large scale.

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