SCENE SETTER FOR VISIT OF DEPUTY SECRETARY OF

UNCLAS SECTION 01 OF 02 LONDON 002294

SENSITIVE
SIPDIS

DOE FOR DEP SEC KUPFER

E.O. 12958: N/A
TAGS: KERG
SUBJECT: SCENE SETTER FOR VISIT OF DEPUTY SECRETARY OF
ENERGY JEFFREY KUPFER

LONDON 00002294 001.2 OF 002



1. (SBU) Embassy London welcomes the visit of Deputy
Secretary Jeffrey Kupfer on September 15-17. Issues of the
economy and security of energy supply have come to the fore
in the UK, and the conflict between Russia and Georgia has
served to highlight that an increasing amount of the UK,s
natural gas is imported. Although the UK has relied on its
North Sea oil wells to provide domestic oil and gas, in
2007 approximately 25% of the UK,s natural gas was
imported. Production from the UK,s North Sea fields is
beginning to decline.

The Energy Markets: Dwindling Supplies, Higher Prices
-------------- --------------


2. (SBU) Last week was a bad week for the current
government, with Chancellor of the Exchequer Alistair
Darling publicly saying that the UK,s economy in its worst
shape in sixty years. Following that statement, the OECD
released a report on the world,s seven largest economies,
noting that only the UK was facing a recession, with all
others only a slow-down. The property market and the
financial sector, two main drivers of the UK,s growth, have
both been hit hard by the credit crisis. There are
indications that the UK economy may already be shrinking,
with manufacturing output falling for the past five
consecutive months to July. If the economy has contracted
in the three months ending in September, it will be the
first full quarter of contraction since 1992.


3. (SBU) The rise in commodity prices has hit consumers
particularly hard. The cost of food has risen sharply this
year, as have petrol prices. Consumers are feeling squeezed
by higher prices, including drastic rises in home heating
and electricity costs. In August, most major electricity
and gas companies pushed up rates, led by British Gas, 35%
increase. &Fuel Poverty,8 defined by the government as any
household that spends more than 10% of its income on home
heating, is a topic of public debate.


4. (SBU) In the past few years, the UK has become
increasingly reliant on imported fuel. According to The
Independent, the UK uses gas for heat in 85% of its homes,
and for 40% of its electricity production,. In 2007, it
also imported 80% of the coal it used for electricity. With
a decreasing share of its oil and gas coming from domestic
pipelines, there is impetus to find long-term alternatives.
The UK has supported the Nabucco Pipeline project, and
continues to be a voice for diversification away from
Russia and Russian-controlled pipelines. HMG has also been
in discussion with Nigeria regarding technical assistance
to help increase its output of both oil and natural gas.

Alternative Energies and the Nuclear Option
--------------


5. (U) The UK will have to produce roughly 14% of its total
energy consumption from renewables by 2020 to meet EU
guidelines. While this target is significantly lower than
for some other major European economies, it reflects a
steep increase from today,s 1.5%. Secretary of State for
Business, Enterprise and Regulatory Reform John Hutton and
the Minister for Energy Malcolm Wicks have both pushed for
more rapid expansion of wind farms, both on and off shore.
Although Britain is gifted with excellent wind energy
potential, a lengthy planning process and a weak grid
infrastructure are seen as large impediments. The current
Energy Bill being debated in Parliament is seeking to
change the planning process for large energy projects from
a predominately local affair to a national process. Many
are hoping that this will help speed up the building of
large-scale wind farms and grid improvements. The UK is
increasing its funding for research in all areas of
renewable energy and carbon capture and storage (CCS),and
is about to announce a $2 billion program to promote energy
efficiency in homes and buildings. The UK has a biofuels
mandate to produce a steadily increasing percentage of its
transportation fuels from renewable sources, but recently
public sentiment has turned against biofuels as
&unsustainable.8 Marine energy from waves and tides is a
popular topic when renewable energy is discussed but the
technologies are far from being ready for large-scale,
commercial deployment. Nonetheless, there is strong
sentiment, including from Members of Parliament, against
building new coal-fired power plants. The Government
advocates a diversified mix of energy sources, with
transition over time to low-carbon and renewable sources.

LONDON 00002294 002.2 OF 002




6. (U) While it is not considered renewable energy, there
is a nuclear renaissance in the UK. With all but one of the
existing reactors scheduled to be decommissioned by 2024,
it is imperative that the UK build new plants if nuclear
power is to remain a part of the energy equation.
Presently, it makes up just under 20% of the UK,s
electricity. The government has been strongly in favor of
new nuclear, and has put up for sale its controlling stake
in British Energy (BE),which operates all of the current
nuclear fleet. Although Electricite de France (EDF) bid on
BE, its offer was rejected by shareholders in July because
it was too low. It now remains to be seen if EDF will
return with an improved offer, and if other utilities are
interested. The stated aim of EDF is to build the first new
reactor in the UK by 2018. This week, the Nuclear
Decommissioning Authority, which is in charge of all
decommissioning projects in the UK, announced that it would
sell land adjacent to sites that are decommissioned for the
building of new reactors.

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