Are we heading for an energy crisis?

What happened?

The future of Britain's energy supply has been thrown into doubt by two German power companies. E.On and RWE have announced they will abandon plans to build two new nuclear plants here. The £15bn project would have provided 6,000MW of capacity about 10% of current peak demand. The cancellation has stoked fears that Britain's power supply will be unable to meet future demand.

Why did they pull out?

The firms say last year's nuclear disaster in Fukushima, Japan, is largely to blame. German Chancellor Angela Merkel reacted by banning new nuclear reactors and hastening the closure of Germany's existing stations. The loss of their domestic nuclear market makes developing UK nuclear power more risky and expensive for E.On and RWE. And both firms are also struggling with debt. Together, they owe around £55bn linked to pre-crisis acquisitions and they are now trying to raise capital by selling assets. However, some industry insiders put the main blame on the UK government. Publicly it has committed to nuclear energy. But delays and uncertainty surrounding the coming Electricity Market Reform bill clearly unsettled the Germans. In particular, the government has yet to announce the size of the future public subsidy for nuclear power. Without this, the two firms are unwilling to invest.

So what happens next?

The government is desperately scrambling to help the German firms find a buyer to take over the project, but so far no one has come forward. Another nuclear consortium, NuGen, which is backed by some huge players, such as GDF Suez of France and Spain's Iberdrola, suffered a setback when Scottish & Southern Energy pulled out six months ago. Now the only group that is likely to build a nuclear plant within this decade is the alliance between French state firm EDF Energy and Centrica, owner of British Gas. If the government can't find another firm to develop nuclear power, it will be in a very weak position to negotiate the size of the nuclear subsidy later this year.

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Will the lights go out?

For now the UK has a healthy buffer between supply and demand. In total, the country's power plants have an estimated installed capacity of 90,000MW while peak demand is only 60,000MW. However, many of those plants are old nuclear stations that need to be replaced, or coal-fired plants that will soon fall foul of European regulations on carbon emissions. Some analysts predict that up to 20,000MW will go when power stations are shut down over the next four years. Meanwhile demand, which has been suppressed by the recession, is expected to soar back up to pre-crisis highs by 2015. A strong economic recovery or a particularly harsh winter would leave the UK with no buffer, should demand spike.

Is the only solution nuclear?

The last government signed the UK into legally binding commitments to cut carbonemissions. That means the coalition can only keep the lights on with low carbon energy'. The plan, revealed in last year's Electricity Market Reform white paper, was to make a combination of wind and nuclear the cornerstone of a £200bn overhaul of the country's power network. But while wind power is progressing nicely installed capacity grew 40% last year to reach 6,000MW it can't replace the lost nuclear power. That's because wind power is intermittent if the wind isn't blowing, it doesn't produce; and if it blows too hard it shuts down to avoid damage. So many only generate full power for about eight hours in a day.

What about gas?

Different problems with coal, nuclear, and renewables mean Britain is likely to turn to gas. Stations fired by gas are far cheaper to build than nuclear and the fuel produces less carbon than coal. Yet many utilities don't seem keen to build more without more government help. This year, thanks to dwindling North Sea reserves, the UK became a gas importer for the first time since 1967. And as the Total gas leak proved last week, the gas that is left in the North Sea is getting more difficult and expensive to exploit. Rising UK gas prices either mean lower margins for utilities or higher prices for consumers. Centrica has proposed closing two of its gas plants and there are fears that many of the planned gas plants may never be built.

Will this affect bills?

Annual average energy bills have doubled in the past five years to £1,345. The regulator, Ofgen, was allowing bills to rise so that firms could invest in new generating capacity. Yet with little of it built, bills will continue to go up, especially if the government remains committed to cutting carbon. Broker Liberum Capital estimates our power bills could go up a further 70% by 2020.

Will shale gas save us?

New technology has allowed America to exploit unconventional gas deposits, known as shale gas, in the last decade. The country now has so much natural gas that it's converting import terminals so it can export the stuff. Could the same happen here? A discovery this week has added to Britain's considerable shale gas reserves. Estimates point to 210 trillion cubic feet of shale gas more than is left in the North Sea and, in theory, the world's 11th largest shale gas reserves. An abundance of natural gas would mean cheaper prices from gas-fired power stations. However, with the government still dealing with early-stage environmental objections, it's too early to say whether shale gas could be Britain's energy white knight.