Utility Week expert view

“The trilemma has all but reduced to a good old-fashioned dilemma as wholesale power prices have been pegged high with little room for movement.”

One day we will look back with incredulity on these days of impending energy crisis and the years running up to them when crisis was a growing dot on the horizon. Hopefully we will be looking back from a position of secure and clean power and properly insulated homes where the wholesale price of energy is real and the costs are justly partitioned among consumers through smart technology.
But right now we are a long way away from that cosy place. We are embarking on operations under a byzantine set of power market reforms that purport to bring on low-carbon generation and incentivise fossil-fired plant to back it up.
Yet in counterpoint to the administration’s reforms to support renewables, we see generous tax arrangements for shale gas. And we have government ministers excited by “new technology” that could provide 200 years of gas (that would be the 80-year-old trick of underground coal gasification that has never produced worthwhile results). This mix of complexity and ambiguity of government intention is giving prospective investors little confidence.
One thing that has been simplified through Electricity Market Reform (EMR) is the “trilemma” – the triangle of cost, carbon and confidence in supply. It has all but reduced to a good old-fashioned dilemma as wholesale power prices have been pegged high with little room for movement.
Strike prices for low-carbon generation options are 60-100 per cent greater than current wholesale market prices. Carbon price support will hike the current low cost of coal-fuelled power. Gas prices are high and look to remain so as there is little reason for global demand to let up.
We are now down to a decision on where the bias should lie between carbon-cutting and security. And the government’s enthusiasm for gas is probably a giveaway. In truth there is probably little choice.
In the short term, new combined cycle gas turbines (CCGTs) – not wind – are the natural option to replace retired gas and nuclear plant. Biomass would be a major player but the government has capped dedicated biomass capacity to 400MW. However, coal’s days are not done yet.
The emissions credentials of gas outstrip coal’s, but wholesale prices currently are overturning that. The Department of Energy and Climate Change and National Grid separately anticipate 8-10GW of coal plant still operating in the UK in 2025. And depending who you ask, 15GW and even 18GW could be in play in the 2020s.
Hardly any of the 19GW of proposed and permitted CCGTs are being built. Existing plant is being mothballed. Gas is being kept out by cheap coal and high gas prices. We wait to see if the capacity mechanism under EMR can incentivise new developments of gas-fired plant operating at the low load factor of a back-up plant for offshore and onshore wind. Depending on how much wind capacity is built, up to 56GW of gas plant could be needed by 2030, when demand is expected to top 400TWh.
The inescapable need for fossil-fuelled plant in the absence of carbon capture and storage and the availability of a substantial chunk of coal-fired plant puts carbon budgets under pressure. With the current depressed price of coal showing little prospect of change, the chances of hitting a 50gCO2/kWh carbon intensity target as recommended by the Committee on Climate Change look slim – which may explain government delay in setting a target.
Coal’s position should fade once the carbon support tax undermines its price advantage over gas. Once gas returns to the game, the UK will still have to look to a carbon intensity in the region of, and probably greater than, 200gCO2/kWh. Shale gas has a place whether it is home-spun or, assuming current negotiations are successful, imported as LNG from the US. But shale’s role will be limited by UK planning and politics. Hundreds of shale gas well sites each the size of four football pitches with 50 trucks a day rolling in and out of them – many in or near affluent constituencies – are not going to happen.
Gas is essential for security certainly up to the 2030s, but wind is equally so – as well as being pivotal to low-carbon generation. So the government needs to cease banging the drum for gas to give renewable investors confidence. However, it also needs to grasp the nettle and spell out that 2020 carbon targets and 2030 ambitions will be subordinated to ensuring security of supply while coal and gas hold the fort.
Politically driven and misguided electricity market reform in the early 1990s, which included a belief that market price signals would attract investment in new capacity, started the UK on the path to the brink of an energy crisis. Somehow we stayed on that path. If we are to squeak through the coming winters of negligible capacity margin, power plant developers need clarity on where the government’s priorities lie.