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UK coal-fired electricity generators weigh up LCPD extension risk - analyst

20 Sep 2012 16:39:52 | csd

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Coal-fired power generators in the UK may be eating up limited running hours prescribed under European law on the assumption that they will be permitted to extend life-spans should supply margins be stretched, according to an energy analyst.

But such a move would leave the UK government at the mercy of infraction proceedings at EU level for the first time - a step that, according to a top energy lawyer, would be a highly contentious move.

Coal-fired plants in the UK have been burning through limited running hours under the large combustion plant directive (LCPD), which compels highly polluting plants to either comply by installing emission abatement equipment or opt out of the directive.

Opted-out plants can operate for a maximum of 20,000 hours between 2008 - which was when the legislation came into effect - or the end of 2015, whichever comes first.

Historically high profit margins for coal-fired plants, known as dark spreads, have seen them run down their allotted hours swiftly. On Tuesday RWE npower confirmed it will close 2.6GW of coal- and oil-fired electricity capacity at the end of March next year, bringing the combined capacity of plants slated to shut by that date to 5.8GW (see EDEM 18 September 2012).

But, according to Inenco energy market analyst John Pering, there is more to it than generous dark spreads. "There may be some expectation out there that they [coal-fired plants] may be allowed to run for longer, or for additional hours," he said.

Infraction

"UK power supply is going to be very tight from April 2013 if they do take that capacity away," Pering said, "and with renewable power still unreliable you're going to need that Baseload generation."

However, the UK will not be able to allow its polluting plants to run in breach of the LCPD without exposing itself to infraction proceedings, Pinsent Masons senior associate Caroline Ramsay explained.

"The Commission would pursue enforcement of the directive and, if the UK failed to enforce it, the [European] Commission could then open infraction proceedings, which could see the UK being brought before the ECJ [Court of Justice of the EU] and ultimately getting fined."

Historically, the UK is highly risk-averse when its reputation in the eyes of the Commission is at stake, Ramsay said. However, "the new coalition government does appear to be a little more euro-sceptic and we'd need to take into account what the UK is willing to do."

Under this interpretation of events, the UK government would be forced to weigh up the political cost of ever-tightening power supply margins, leading to higher bills and ultimately threatening supply security, with the cost of facing infraction proceedings at EU level - a situation it has never previously been in.

Reopen?

At first glance, the UK's interpretation of "plant closure" under the LCPD appears to leave the option open for power stations covered by the directive to reopen after a lengthy period of closure.

The UK's National Emission Reduction Plan (NERP), which has been submitted to the Commission, defines plant closure as follows:

"Although it is intended that the plant will at a later stage resume operations, the period of closure will be appreciably longer than would be regarded as normal in an industry in which temporary closure of plants is inevitable."

But according to Ramsay it is unlikely that such a clause could be used to reopen plants that were closed under the LCPD, because those stations would be subject to more stringent emission levels prescribed by the NERP.

The anticipated loss of capacity has had a profound impact on the UK wholesale electricity market. Utilities have pointed to the expected rise in power prices when justifying the commissioning of new combined-cycle gas turbines, despite gas-fired profit margins being devastatingly low (see EDEM and ESGM 6 September 2012).

Yet even spark spreads on the forward curve post-Summer '13 remain historically weak. On Tuesday, the front-summer product was last calculated at £6.18/MWh, down 49% from £12.16/MWh at the start of 2011, indicating that the market expects power supply margins to remain comfortable, despite looming LCPD closures. JS

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