The business leader's guide to the low carbon economy

The world currently uses 85m barrels of oil a day, and we have to get it from somewhere.

The easiest and cheapest way is to drill for it on land. Most of the world’s oil still comes from oilfields below land, principally in the Middle East. If you run out of land based oil, you can start to drill offshore. Offshore production is a lot more expensive than on land, but worth it if prices are high enough. That’s why offshore drilling in shallow waters began in earnest after the oil price shocks of the early seventies. Offshore drilling in the relatively shallow waters of places like the North Sea is tough enough, but nothing like the challenge of extracting oil form deep waters like the Gulf of Mexico. BP’s Deepwater Horizon rig was designed to extract oil from more than two miles below the sea bed using a rig floating a mile above it. By any standards this was a difficult, dangerous and expensive undertaking. Since the rig failed on 20^th April, killing 11 of her crew and sending 3m barrels of oil into the sea, the costs have risen dramatically. BP had agreed to put $20bn into a fund to pay for damages and lost earnings; $100m into a fund to compensate oil rig workers affected by the suspension of normal operations; and may face another $17bn or so in fines.

Whether this accident turns out to be the of 9/11 of energy, as President Obama predicts, is not yet clear, but one thing’s for sure – the price of oil is going to be increasing substantially for the foreseeable future.

Will this mean that it continues to be profitable to extract oil not only from deep water but using other expensive methods like oil shales and tar sands? Or that we start to rein back on oil in favour of cheaper sources of energy? Time will tell.

One of the key environmental commitments of the UK’s new coalition government is to implement a smart electricity grid. But what exactly is a smart grid?

A small power station

Our present electricity grid is pretty stupid in at least two significant ways. Firstly it regulates supply, but not demand. Since demand fluctuates wildly day by day and week by week, we need quite a few power stations idle for much of the time, but ready to come on line at very short notice. Secondly, the electricity flows only one way – from big, inefficient power stations to end users.

A smart grid addresses these problems. A smart grid regulates demand as well as supply: here’s how.  Instead of the price of electricity being fixed for long periods of time, the price varies second by second in line with demand. This information would be sent down the cables with the electricity itself. When electricity happens to be very expensive, some devices, like fridges or battery rechargers would turn themselves off for a bit until the price fell or they really needed to be on. Other devices such washing machines would wait for cheap electricity before turning themselves on at all.

Secondly, electricity would flow both ways. When you plug in your electric car to recharge, it would generally be drawing power from the grid. But if there were a sudden demand for power, you might want to sell the power in your car’s batteries back to the grid. You’d be happy because your car would be buying electricity when it was cheap, and selling it when it was expensive. The power generation companies would be happy because you’d be providing them with the infrastructure to deal with peak demand, instead of their having to build extra power stations to cope with such surges.

When will we have a smart grid in the UK? This is where the government is a bit vague. But if we don’t do something soon to reduce demand or increase supply we’re going to run short of electricity in the UK by the end of this decade.

This graph first appeared in a report to the UK House of Lords Economic Affairs committee, published in 2008. It shows that peak demand for electricity in the UK will exceed supply sometime in 2015.

The main reason for this is that a number of coal fired power stations – including Drax, which supplies 7%of the UK’s total electricity – will have to close as they fail to comply with EU emissions regulation due to come into force in 2016.

However, thanks to some recent wheeling and dealing by the power companies and the British government, the EU has now agreed to give the UK a further three years grace before enforcing the regulations. We now won’t run out of power until 2019 – unless significant new sources of nuclear and renewable energy come on stream by then.