Will new gas-fired plant bring security of supply?

In a speech delivered on 18 November 2015 and a subsequent written statement, Amber Rudd has set out the government's vision for the future of energy supply in the UK. The energy secretary has put security of supply front and centre, in what has been billed as an energy policy reset. With the National Grid forecasting that spare capacity could be as low as 1.2 per cent this winter, many will welcome this announcement. However it remains to be seen just how smoothly Ms Rudd's proposals can be implemented.

The speech covered a number of major points. In addition to plans for a further three CfD auction rounds for certain less established renewable technologies and increased nuclear generation, Ms Rudd announced that DECC will consult on the phasing out of unabated coal-fired generation by 2025. In so doing, the Energy Secretary has accelerated a process which many had seen as inevitable.

In a world increasingly attuned to the dangers of climate change, coal has long been falling out of favour. Across the EU, the percentage of electricity produced by coal has been in steady decline and, with the European Parliament’s approval of new stricter air quality rules in October, the trend is likely to continue. In the UK more than 16,000MW of coal-fired capacity has been shut down since 2012. As much of the UK’s ageing coal-fired fleet approaches its sixth decade, Ms Rudd’s plan to decommission the surviving plants does not come as a great surprise.

The closing of coal fired-generation, which currently accounts for 28% of the UK’s electricity generation, will leave the UK with a significant supply gap. Some of this gap will be filled by renewable generation. In particular, Ms Rudd gave a nod to offshore wind, which is ‘a technology which has the scale to make a big difference.’ Scottish Power’s plan to seek permission for a 1.2GW offshore farm in Suffolk following the speech is evidence of this scale.

However Ms Rudd’s insistence that ‘intermittent generators [should] be responsible for the pressures they add to the system when the wind does not blow or the sun does not shine’ and her previous attacks on renewable subsidies, give a clear indication that renewable technologies can expect less government support in the new energy landscape.

Instead, the government will priorities new gas generation. The Energy Secretary stressed that ‘in the next ten years, it is imperative that we get new gas-fired power stations built.’ Gas has a number of advantages over coal. Not least it is significantly cleaner, producing half as much carbon dioxide and drastically fewer noxious pollutants. Ms Rudd acknowledged that new gas generation will require government support, which she proposes providing through further capacity market auctions. However it is not certain that the existing capacity market framework will be able to deliver a smooth transition to gas.

Under the capacity market framework, electricity generators receive subsidies in exchange for a commitment to make generating capacity available at peak times. Gas is a particularly well suited fuel for peaking. However, thus far, the scheme has failed to engender new gas generation, with existing gas and diesel generators receiving the bulk of the support under the previous auction round. Indeed, the one new gas generator which did win a contract in the December 2014 auction round, the Carlton Power plant in Manchester, has subsequently encountered financial difficulty and its future looks questionable. 

In an attempt to prevent situations similar to Carlton, where generators win capacity market contracts but subsequently fail to perform, Decc published a consultation on planned reforms to the capacity market. The reforms include:

• a prequalification finance test for larger new build projects, in which directors must declare their lowest clearing price and state that they will have finance secured at that price;
• post agreement tests at five and 11 months in which projects must show that they have obtained finance; 
• disqualification provisions whereby projects which default are prohibited from reapplying to participate in the capacity market for two years and directors are personally disqualified from working in a managerial role on any project bidding in a capacity market auction for three years; and
• progressive increases in the level of credit cover which large new build projects must lodge if they fail to meet the five and 11 month financing tests to ‘incentivise them, if they are going to fail, to fail early’.

These stricter provisions are unlikely to lead many to jump in with new generation and industry will be looking out for additional incentives before submitting plans for new generation. Indeed the government’s recent U-turn on renewables has led to greater regulatory uncertainty, which any subsidy will need to overcome if it is to encourage development.

A further obstacle to the smooth transition to gas comes from the problem of fuelling gas plants. Currently half of the UK’s gas is imported and could increase to 75 per cent by 2030. Ms Rudd has suggested that shale gas from fracking may solve the problem. However the industry is in its infancy in the UK and it is not at all clear that there are significant reserves of shale gas in the UK. In the meantime, with Norwegian supplies set to halve by 2030, new gas plants will become increasingly reliant on Russia and the Middle East for their fuel. Given the growing instability of those regions, this does not chime too well with Ms Rudd’s emphasis on energy security. 

Although it is not clear whether the recent announcement will deliver the energy security we all hope for, it does at least provide a clear indication of the direction of future government energy policy and put an end to the regulatory uncertainty of recent months.

Clare Hatcher and Owen Williams, Clyde & Co