Market view: Brexit – an opportunity not to be missed

Brexit has reopened the debate of the UK’s future energy mix and whether the right sort of investment signals and policy incentives are there to encourage a resilient yet flexible energy system.

We would question whether a larger scale rollout of new nuclear beyond Hinkley is the right answer. Yes, the scale of nuclear provides pure capacity but at a significant cost and to the detriment of securing other more flexible generation.

The cost of CCGTs is much lower than new nuclear plants (the latest build costs of Hinkley have ballooned to £37 billion). Many commentators have quoted CCGT capex costs at £0.5m/MW compared to £6.9m/MW for nuclear. Under this premise, almost 14 CCGT plants with the flexibility to support renewables could be built for the cost of just one new nuclear plant.

Brexit presents government with an opportunity to holistically review energy policy. We find ourselves in a position where we can take back control of key policy issues that were being driven by broader EU objectives and cherry-pick areas of policy that best serve the UK.

Does our energy policy ensure security of supply whilst delivering the best value to consumers? The answer to these questions largely rest on two key policies: the capacity market (CM) and increased electricity interconnection.

Capacity market

The CM is a crucial enabler to securing security of supply; however, the question remains as to whether enough new, and the right type of, capacity will be brought forward.

Whilst the peaking plants which cleared the capacity auctions provide cheap capacity, they do not solve the balancing issues. They will only run at the times of highest demand and National Grid will rely on the existing fleet to deliver at all others. The consumer ultimately pays to cope with the high penetration of renewables and lower levels of conventional thermal plant pushed to the margin by subsidised technologies.

It’s crucial BEIS issues a clear energy policy and minimises further, unneeded, interventions. From our perspective, our two international shareholders, and investors, are eager to understand how this sector will be supported and priorities set before Brexit negotiations kick off in earnest.

Interconnection: a level playing field

The current volume of planned interconnection risks pushing thermal generation to the fringes, but also jeopardises the investment case for new gas projects. InterGen has two shovel-ready CCGT projects, with a combined capacity of 2.4GW and they will create around 3,000 jobs during construction. Domestic generation creates many jobs but as the uncertainty from Brexit lingers, government should be safeguarding and indeed creating UK jobs.

Interconnector projects enjoy numerous mechanisms that offer funding and/or reduce development risk compared to existing and new gas. These are the EU projects of common interest fund, Ofgem cap and floor regime, no network charges, no carbon allowances, and CM payments.

The latter is where the most confusion and inconsistency lies. Interconnectors are exempt from all network charges thanks to their ‘transmission asset’ status. In spite of this, they are awarded quasi-generator status allowing them to participate in the CM. Last year, both government and Ofgem were quick to acknowledge the issue of overcompensation where a number of embedded generators were receiving CM awards as well as other subsidies.

The rules should be applied consistently and we want to see a solution that deals with interconnectors that have or are receiving other funding as well as benefiting from CM revenue.

These discrepancies are important because they will impact the future energy mix in Great Britain. By ensuring interconnectors are treated the same as all other domestic GB generation, they can be assessed truly and fairly on their investment, contribution to jobs, security of supply and ultimately the economic interests of consumers.

Looking Forward

In last year’s energy policy reset speech, then energy secretary Amber Rudd said it’s “imperative” we get new CCGTs in the next decade, and close all unabated coal by 2025. However, we have seen no firm policy on this. Investors despise uncertainty and delays to key policies prolong the life of the very plants government wants to close.

This summer highlighted the balancing issues faced by the system operator and the case for further gas fired generation was strengthened. In May, we witnessed for the first time in 100 years four days of zero output from coal and a summer of increasingly volatile balancing services use of system rates.

On 13 September, National Grid faced significant balancing issues driven largely by weather conditions, exacerbated by multiple outages of large thermal plants. In conjunction, the French interconnector fell-down at a point where imported capacity was being relied upon to support an already tight supply margin and provide frequency.

The same week balancing issues continued, leading to offers accepted by coal stations of up to £1,250/MWh. This highlights the value of flexible, fast responding gas-fired generation. Until we can store electricity on a large scale, the system will always need a stable form of thermal generation to combat the intermittency of renewables and the unpredictability of interconnectors.

For investors to come forward, policy must be well signalled and committed to. From a security of supply and consumer value perspective it’s imperative the CM brings forward new flexible gas capacity that addresses National Grid’s balancing issues rather than exacerbates them.

Before the terms of Brexit are negotiated, politicians have a chance to listen to industry and learn from our understanding and expertise in the market. Only then might we have a post-Brexit energy market that is fit for purpose.