Capacity solutions exist but we need quick progress

The prospect of the UK facing blackouts was back in the papers earlier this month when Sir John Armitt claimed that blackouts “would be the best possible thing that could happen”. However, as an industry, this is the last thing we want. So with capacity margins becoming uncomfortably tight, how did we get here and how can we prevent the worst from happening, asks SSE's Keith MacLean

How did we get here? Much of the recent and forthcoming plant closure is down to the EU Large Combustion Plant Directive, where coal-fired stations in particular have had either to fit technology to reduce emissions, or opt to just run for a limited number of hours and then close. The recent availability of cheap coal, combined with the UK’s introduction of a new tax on carbon emissions, incentivised coal generators to use up their limited “running hours” sooner rather than later, leading to plant coming off the system earlier than expected.

With coal being phased out, gas-fired plant has an increasingly important role to play in providing ‘firm’ generating capacity, and will continue to do so when some of the UK’s nuclear plants begin to close later this decade. But low or even negative margins (ie the difference between the cost of generating electricity and the amount for which it can be sold) have made it increasingly difficult to make the business case for keeping older plant open in the face of the high fixed costs needed to maintain it. Even new, efficient gas plant is struggling to make a return on investment and not just in the UK.

So even with capacity expected to tighten further, the economics for existing thermal plant are increasingly unfavourable and the future is too uncertain for investments to be made in new plant. Even if final investment decisions for new plant were made today, clearly there would be a lag before any new plant could be built and running, so maintaining the availability of existing capacity and encouraging plant to come out of mothballs should be a top priority.

Will there be blackouts?

As National Grid asserted just prior to Christmas, even if demand did outstrip supply at certain points, it is unlikely that this would result in ‘blackouts’. Grid’s Nigel Williams told the Guardian: “It’s most likely we’d reduce the frequency a bit, so lights would dim a little and hairdryers would be a little less hot. Most people would not notice.”

While ‘blackouts’ make for a good headline, the reality is likely to be less dramatic but undesirable nonetheless. In the event of shortages, intensive energy users such as heavy industry could also be asked to shut down temporarily. Clearly when the economy is trying to recover, this is not an ideal scenario. Equally, when demand is high and margins tighten, there is an increased likelihood of significant peaks in wholesale prices.

What to do?

The Government’s response centres on two solutions: in the longer term, the Capacity Mechanism will see generators effectively being paid a reduced energy price but receiving a fixed payment in return for keeping their plant available to help meet demand when needed. The first capacity ‘auctions’ will be held in 2014, but the first payments to generators not made until 2018. So while the capacity mechanism is a good way forward for new build, it is obvious that it will not address the immediate issue of capacity problems well before 2018.
 
The proposed shorter-term solution is the introduction of a Supplemental Balancing Reserve (SBR), which would give National Grid powers to pay generators to extend the life of existing power stations or bring back mothballed plant. We think this could be a workable solution, but as yet final details are yet to be confirmed, so this needs to happen urgently if any mothballed plant is to be brought back on in time for next winter.

Dr Keith MacLean is Policy & Research Director at SSE plc. He will be speaking in the Utility Week Debate, Keeping the Lights On, at the Sustainability Live exhibition at Birmingham’s NEC on April 1. For more information and to book your place, see sustainabilitylive.com