Securing future energy supplies

We believe that diversity is the key to secure and reliable energy supplies. By combining renewable wind power and low carbon nuclear power with more efficient gas-fired power stations and the sourcing of new gas supplies, we are balancing the needs for energy security and carbon reduction.

Centrica invested £4bn in 2009 in securing new supplies and storage for gas, developing wind farms, gas-fired power stations and moving into nuclear power for the first time. Investing £2.3bn in a 20% equity interest in British Energy gives us access to power from eight existing nuclear power stations in the UK and the right to participate in the UK’s new nuclear build programme.

We continued to invest in renewables with the launch of the £750m Lincs offshore wind development, which will raise our total renewable energy capacity to 650MW – enough to meet the annual demand of around 450,000 homes. This was partly funded by innovative financing which enabled us to unlock capital tied up in existing wind projects to promote further investment in renewables and help secure future energy supplies. Centrica has also gained exclusive rights to develop offshore wind farms in the Irish Sea Zone with a potential capacity of up to 4.2GW.

Conventional fuels still have a place in the energy fuel mix as the gradual decarbonisation of electricity continues. We focus on combined cycle gas turbines (CCGT) because they offer the cleanest power from fossil fuels. As a result, we have one of the lowest carbon intensities of any major UK supplier at 371g CO₂/kWh in 2009. Our new Langage gas-fired power station, now operational, is one of the most efficient in the UK and generates enough electricity to power 1m homes.

Our upstream businesses give us more control over the cost and source of the energy we sell to consumers through our downstream business, by making us less reliant on volatile wholesale commodity markets. Following the acquisition of Venture and the stake in British Energy, the demand we are able to meet from our own assets in the UK has progressed from 20% in 2006 up to 60% going forward. This aligns us more to our competitors.

Through our downstream business, we are also promoting renewable microgeneration to customers, using British Gas’ innovative technology and skilled engineers.

Diversity is also important in securing gas supplies, helping to manage political uncertainties and the volatility of wholesale markets. We continued to expand our gas exploration and production activities in 2009 with progress on several projects in the waters around the UK and abroad.

Our acquisition of the oil and gas field developer Venture Production resulted in a year-end increase of our European oil and gas reserves of 60%, and widened the range of geologies we have access to in and around British and Dutch waters. The Venture team has been combined with our existing upstream workforce to form our UK upstream gas and oil business centred in Aberdeen, UK. The skills and expertise of the Venture team combined with our existing people will be invaluable as the business seeks to be a leading consolidator and operator of mature gas assets.

Liquefied natural gas (LNG) is increasingly important for meeting UK gas demand. We are the largest holder of LNG import capacity at the Isle of Grain terminal in the Thames estuary. We continue to explore LNG opportunities globally with 15 cargoes imported in 2009 from a range of countries including Qatar, Norway and Australia. In early 2010 we gained our first LNG producing position with a production-sharing agreement in Trinidad. This provides us with significant development opportunities for future, long-term LNG supplies.

We are shifting our operations in Nigeria away from gas exploration to focus on building an LNG business.

Producing gas and purchasing LNG cargoes for the UK is only one step in securing energy supplies. As the UK’s dependence on gas imports increases, gas storage will play an increasingly important role in helping maintain security of supply in the UK. Our Rough storage facility, which accounts for 75% of the UK’s gas storage capacity, played a crucial role in meeting record demand for gas during the exceptionally cold winter of 2009/10. We continue to study the potential of gas storage opportunities with plans for three new storage facilities – Caythorpe, Baird and Bains. Together, these would increase our storage capacity in the UK by around 85 billion cubic feet and increase UK storage capacity by around 50%.

The UK government has agreed a binding target for 15% of all energy to come from renewable sources by 2020. The power sector will play a major role in delivering the bulk of this commitment. Under current plans and assuming the economics add up, we plan to invest over £3bn on 1.6GW of offshore wind, plus a potential 4.2GW. Total investment may be over £9bn, shared with partners. We plan to invest around £15bn in additional sources of gas, power and storage as part of our commitment to securing future energy supplies. We also have an option to take part in the construction of new nuclear power stations on a 20% basis in each of the four reactors currently planned by EDF.

The government has a vital supporting role to play. We need a stable investment climate, planning regime and market support mechanisms to make these long-term investments viable. That includes clear, long-term policies on the price of carbon and use of the renewables obligation.

We believe a support mechanism will continue to be needed to continue to deliver investment in renewables. The renewables obligation is one such mechanism, which is a requirement to either supply electricity to customers that comes from renewable sources or pay a buyout price. Under this scheme, the Lincs offshore wind farm will receive two Renewable Obligation Certificates (ROCs) for each megawatt hour generated and this was an important factor in our decision to invest in the project. (See more on our engagement with governments in stakeholder dialogue).

The UK government also plays an essential role in the development of long term LNG contracts. The UK’s foreign policy needs to continue to be aligned to the UK’s energy security needs.

Unlike the UK, security of supply is not as crucial an issue in the United States or Canada. This is primarily due to the existing amounts of natural gas in North America and the continued dominance of coal in the energy generation market.

Our North American business, Direct Energy, is nonetheless seeking to expand its own gas and electricity resources to supply its customers. Our strategy is to build Direct Energy into a more vertically integrated energy company, mirroring closely the Centrica model and achieving an energy hedge of 35-40% over time. This will enable better management of volatile wholesale markets and more attractive propositions for customers.