Cheap coal, EU rules threaten British energy crunch

Reuters News
Posted: Sep 28, 2012 8:09 AM
Cheap coal, EU rules threaten British energy crunch

By Susanna Twidale

LONDON (Reuters) - Britain could face an energy supply crunch this decade as cheap coal encourages plant operators to race through generation hours before new EU environmental rules come into force, then shutter generating capacity ahead of schedule next year.

High gas prices and lack of clarity on incentives for investment in renewable energy are meanwhile seen hampering plans to replace about a fifth of the country's electricity generation with cleaner alternatives over the next 10 years.

Nine UK-based coal and oil fired plants with a combined generating capacity of 11.5 GW are due to close by 2015 or when they have completed 20,000 hours of operation for coal-fired power stations or 10,000 hours for oil-powered facilities - part of European Union efforts to cut harmful emissions.

But the owners of four plants, with a combined generation capacity of 6.1 gigawatts (GW) have already said they will close their plants by March 2013 as schemes to slash greenhouse gas emissions in the EU begin to bite.

Data from the Department for Energy and Climate Change (DECC) shows major power producers in Britain had combined generating capacity of 81.8 GW in 2011 meaning these four plants alone could contribute 7.5 percent of the country's power needs.

DECC has said making up this shortfall will cost up to 110 billion pounds over the next decade, but analysts warn there may not be clear incentives for companies to invest in new plants.

"There are definitely some policy difficulties surrounding investing in new renewable plants at the moment as well as financial difficulties," said John Wood, a consultant at law firm Norton Rose.

"The new system (post-2017) is so uncertain that for anyone looking at investing in a plant to come on stream at the end of the decade, it would be very difficult to know whether they should spend the money or not."

Britain's key support mechanism for renewable generation, the Renewables Obligation, will be phased out in 2017 and the government has yet to decide on exactly what type of support mechanism will replace it.

Gas prices, meanwhile, are expected to remain high for the next few years, clouding the investment picture for building new gas plants just as the coal plants are scheduled to close.


In Britain, the so-called "dark spread" - the profit margin made from burning coal and selling the resultant electricity - remains higher than the equivalent "spark spread" for natural gas, giving the generators an incentive to race through their allotted hours and close early.

"As well as current high dark spreads making it profitable for coal plant to use up their hours, a contributing factor (to early closures) may be that from 2013 the companies no longer receive free EU Allowances, and it is also ahead of the carbon price floor coming into effect," said Nick Screen, a manager at consultancy firm Baringa Partners.

EU Allowances are EU carbon permits traded under the bloc's Emissions Trading Scheme (ETS). From 2013 the EU will stop granting free carbon permits to most power utilities, which have been granted them mostly free-of-charge since the scheme started in 2005.

Britain will also adopt a carbon price floor from April 2013, adding an extra 4.94 pounds ($6.22) for each tonne of carbon emitted by thermal power generators on top of the price of the EU Allowances, which currently trade near 8 euros ($10.29) per tonne for March 2013 delivery.

Centrica, which owns and operates seven gas fired power stations in England and Wales, with a combined output of 3.9 GW, said in its annual results in July that high gas prices, along with the removal of free carbon allowances next year "will render much of the UK gas-fired generation fleet unprofitable".

David Stokes, director at energy consultancy Timera Energy said current spreads render most new gas building uneconomical.

"But there is a large amount of existing UK (gas) capacity running at low load factor than can ramp up into peaks. Hence our concern on capacity crunch if large amounts of this existing (gas) capacity is closed over the next five years," he said.

Centrica closed its Kings Lynn power station earlier this year due to poor market conditions and has said it will continue to review the future of its Peterborough and Roosecote plants.

In contrast, RWE officially opened a new 2.2 GW gas-fired power plant in Pembroke earlier in September which cost the firm 1.2 billion euros, according to the company's half-year results published in August.

However, it also said in the results the higher generation capacity will not boost earnings in the company's generation business due to current market conditions.

"The present framework conditions are anything but favourable", RWE's CEO Peter Terium said at the time.

(Editing by Catherine Evans)