Utilities expenditure: Watts in store? (Utilities special report)

The public interest in utilities stems from the knowledge that today's investment needs to be funded and the source of those funds is ultimately the customer. It also means some rich pickings for contractors.

The energy sector is currently centre stage. The government is pondering whether to back a nuclear power station building programme alongside its support for wind, wave and other renewable energy sources. There is a need - and one that is growing in urgency - for new power plants to tackle the increasing demand for power, compounded by the impending closure of much of the UK's ageing electricity generation capacity. All of this is thrown into sharp relief by a backdrop of dwindling gas supplies and tight environmental constraints.

Just out of the spotlight at the moment are the water companies, whose price increases announced last year were essentially to fund their heavy investment plans. They are largely to meet environmental objectives and to fix creaking infrastructure. In the wings the power networks too have started to plough investment into their own elderly assets, while upgrading them to accommodate the growing amount of renewable power production.

Capital expenditure
The capital expenditure picture in utilities is essentially in two parts. First, there is the certain expenditure arising from the recent reviews of the controls on capital and operational expenditure imposed on the regulated utilities, namely the water industry in its entirety, and the power and gas industries' networks. Second is the capital outlay from the energy industry on new power stations and probable upgrades to the gas infrastructure.

Investment in new power capacity is inevitable, but how the money will be divided between nuclear, gas, renewable and other technologies remains undecided. How the energy production industry goes forward rests largely on the outcome of a government review of energy policy, which is expected to come to its conclusions within the next year.

Prime Minister Tony Blair has given his strongest signal yet that he backs the building of a new generation of nuclear power stations in the UK. In May Blair told the CBI annual dinner that the issue was "back on the agenda with a vengeance".

He said Britain faced the prospect of being largely reliant on foreign gas imports for its future energy needs. Critics claim Blair had decided to opt for nuclear power even before the government energy review launched, but at the moment nothing has been confirmed.

The water companies and the power networks are currently opening the throttle on five-year capital spending programmes worth some £22bn in total. Contracts for much of that will be in place now since the water industry, which accounts for £17bn of the planned expenditure, and the electricity networks settled their spending plans with their respective regulators at the start of 2004.

More cash
This year, for the first time, both sector regulators - Ofwat for the water industry and Ofgem for the power sector - allowed across-the-board increases in capital expenditure in each industry. Since privatisation the regulators have - in their five-yearly reviews of their controls on the spending and returns of the monopoly network operators - squeezed the companies' capital and operating expenditure. This time around, the regulators have recognised that the demands on the networks have grown and that more cash is needed to meet those demands.

So where are these demands coming from? Water companies have large environmental programmes to fulfil to keep in line with current and forthcoming European Union directives. These account for about £4bn of the capital programme over the next five years. Added to this is another £1bn assigned for safeguarding homes against sewer flooding. The bulk of the expenditure will go on meeting a growing demand and is earmarked nearly equally between capital maintenance - at a steady £1.8bn a year - and upgrading, including expenditure on some new reservoirs and extensions to existing ones.

Tougher standards
The industry is also gearing up to meet the demands of the EU's Water Framework Directive. The detail of what will be required under the directive when it kicks in 2015 is still being honed. But in principle it will require that waterways meet tough purity standards, and the need for upgrading of water treatment plants is anticipated.

The power distribution network owners' most acute concern is that the wires and transformers that make up their networks are coming to the end of their useful lives, adding to network costs. Recognising this, the regulator increased expenditure allowances for the companies by nearly 50% to £5.7bn.

This year National Grid and the two Scottish electricity transmission network owners are negotiating with the energy regulator the terms of its next five-year regulatory review period governing power and gas transmission, which starts next year. Talks are in early stages, but the capital expenditure programme will come in at about £3bn, including National Grid's gas networks.

Concern about security of the UK's gas supply has opened up markets in liquefied natural gas (LNG), which can be transported from many sources worldwide without the need to build cross-border pipelines, and a need for more storage in the UK. LNG is brought in on ships, creating a need for connections from the terminals to the national network. Similarly, building new storage facilities places new demands on the network.

The level of future spending in the power generation sector on new power plants is not yet predictable, but the UK will need to replace some 21GW of capacity by 2015. Some of the new plants will have to be commissioned in the next decade, but the outlook on what the mix of generation technology will be in the long term is still in the air.

The need to ensure the UK has secure supplies of energy has raised the prospect of a nuclear power plant building programme and the need for new power stations is urgent. Before the next 20 years are up all of the UK's nuclear plants will have reached the end of their lives. And many of the country's coal-fired plants will have to be closed in 2016 because they will not meet EU environmental rules that will be in place then.

Nuclear waste disposal
Hand-in-hand with a nuclear power plant building programme would be construction of facilities for disposing of nuclear waste. The government is currently considering how to proceed with finding a final resting place for the nuclear waste created by the UK's outgoing nuclear fleet. New power plants would be expected to create significantly less waste.

Other generation options include more gas-fired plants. Indeed, despite the fact that the North Sea gas fields are fading, there are those who advocate gas plants on the grounds that the technology is known and the plants can be built swiftly to meet the urgent need for new capacity.

Naturally, a gas plant building programme would have an impact on the gas infrastructure and generate further capital expenditure on infrastructure to supply the new plants.

Clean coal plants
Coal is not out of the picture. There are proposals to construct so-called clean coal plants, which use super-efficient boilers and pipe the carbon dioxide they emit into disused offshore gas fields. The carbon dioxide can be used to displace otherwise unrecoverable gas from these fields. Prototypes are in operation.

As well as building the new plants the clean coal development would include the construction of new pipelines to the coast to link with the incoming gas pipes from the gas field.

In the renewable sector wind power dominates. There are 121 operational sites onshore with a capacity of 1.4GW and four offshore with 214MW. Offshore and onshore, there is a total capacity of 2.2GWh either under construction or with planning consents. The growth in renewable generation has created work in connecting the wind farms to the distribution networks. Meanwhile, there is increasing promise in power generated from marine tides and waves with a number of prototype projects in operation.

Household generation
There is growing support for an increase in household-scale generation, much of it using renewable sources, others using more conventional fuels. The technology involved includes rooftop wind turbines, solar panels, and combined heat and power generators whereby a small engine drives an electricity generator and its waste heat is used to heat water. Surplus electricity could be sold to the network.

Advocates of such microgeneration envisage millions of homes using it, substantially reducing the need for centralised large plants and possibly making a new nuclear programme unnecessary. However, major reconstruction of the networks would probably be needed to deal with the surplus power.

What we replace the outgoing power stations with is the focus of the government review. Contributions from interested parties are in, and the government is pondering its next move. However, the construction sector will have an interest whatever the decision.

Power generation is entering what could be a revolutionary stage. If the politics and supporting renewable energy remain stable, and microgeneration takes hold, then there will need to be changes in the networks. Pushing the boundaries of possibility a little harder, significantly higher targets for renewable energy have been mooted, with calls for a target of 20% of total capacity by 2020.

The government target is currently 10% by 2010 with uncommitted ambitions beyond that. Were a radical renewable programme to go ahead, the implications for network design, technology and construction could be huge. At the same time, enthusiasm for nuclear power is gaining weight. The centralised and local structures are not mutually exclusive but an energy delivery system including both would demand new design thinking and new investment.

The long-term plausible possibilities for the future of electricity generation create a far more colourful picture than the coal, gas and nuclear palette we have been living with for the past half century. Should any of those possibilities emerge, they will bring opportunities for the contracting sector as infrastructures need upgrading and new plants need to be built.

Pros and cons
New power capacity generates as many questions as it answers. Here are a few.

Nuclear power
The current nuclear plant design licensed in the UK takes more than 10 years to build. There are newer designs licensed elsewhere in the world that are quicker to build and generate less waste. But getting them past the UK nuclear watchdog would be a lengthy process. Nuclear advocates are arguing for an overhaul of the licensing regime and changes in the planning rules that threaten also to obstruct a new nuclear programme.

Gas
Gas plants are much more efficient than coal and emit less pollution. However, replacing nuclear plants with gas would increase the UK's output of gases contributing to global warming.

Renewables
Wind power, like the weather, is intermittent so, some argue; it needs substantial back-up from conventional plants, which undermines its environmental value. Others counter that nuclear power too needs conventional back-up and studies show that nationally there is enough wind in the UK to make the need for reserve power less than is perceived.

Clean coal
This is untried technology. Supercritical boilers are much more efficient than their conventional counterparts and give out less pollution. But retro-fitting into existing coal plants will not make sufficient inroads into the plant's emissions to enable the UK to meet its targets for reducing the emissions that cause climate change. The benefits of piping carbon dioxide emissions into the ground has yet to be proven commercially.

[Contract Journal, 1 June 2006, p20-22]