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UK electricity sector faces ‘pinch point’ in 2015 – Ofgem

05 Oct 2012 17:27:55 | edem esgm

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Electricity generation in the UK could be insufficient to meet demand by late 2015 if the power system is exporting to mainland Europe at full capacity during peak consumption times, the country's energy regulator Ofgem said on Thursday.

And it is already too late to construct additional combined-cycle gas generation (CCGT) plants to ease the burden on the system, both Ofgem and power system operator National Grid conceded.

The analysis was part of Ofgem's first annual electricity capacity assessment, unveiled in London on Friday. The projection covers derated capacity margins, which is the expected excess of available generation capacity to demand, expressed as a percentage.

The available generation projection takes into account any expected intermittency of the production fleet and the fact that plants at times may not generate because of faults or maintenance - presenting as accurate a picture of available generation as possible.

Even under Ofgem's base-case scenario, the derated capacity margin is expected to fall from 14% today to just 4% by 2015/16, edging up to 5% a year later.

The 0% scenario assumes exports to mainland Europe of 3GW - 2GW to France and 1GW to the Netherlands. These exports are unlikely over a long period of time, as forward prices in the UK are above those on the continent, but a cold snap could boost spot prices across France and the Netherlands, triggering short-term exports from the UK.

'Pinch point'

The 0% figure will come as news to many in the market, as Ofgem had to account for very recent announcements in formulating its conclusion, including RWE npower's announcement concerning the closure of 2.6GW of coal- and oil-fired capacity next March (see EDEM 18 September 2012):

"The announcement will lead to the plants being closed about a year or so earlier then we had assumed in our base case," National Grid network operations director Chris Train said.

Irish operator ESBI also announced plans to bring its 860MW Carrington CCGT on line in 2016 just a fortnight ago (see EDEM 28 September 2012). "This means Carrington is likely to miss the 2015/16 pinch point," Train said.

Price impact

There was uncertainty on Friday as to whether the UK power market had adequately priced in the rapid tightening of margins.

Summer '15 Baseload edged above Winter '14 Baseload for the first time back on 14 September, although the premium has swapped between the two products four times since then. At Thursday's close, Winter '14 had reclaimed a narrow £0.30/MWh premium over the summer.

"There's something priced in alright," one power trader said. "We're seeing some recognition, although whether it's enough is debatable."

The figures highlight a sharp disconnect in the shape of the forward curve between UK power and natural gas prices. NBP Winter '14 has maintained a minimum premium of 3.20p/th over Summer '15 since the latter's introduction. At Thursday's close the spread was 7.85p/th.

Spark recovery?

The disconnect between the two markets looks certain to boost spark spreads, which have been dwindling at historical lows for months. On Thursday, the Summer '15 spark was last calculated by ICIS at £12.56/MWh - a substantial £5.15/MWh premium over the Winter '14 product.

This could go some way to incentivising the return of mothballed CCGT plants to the market, which would offer some relief to the power system, given that, as the Carrington project time-line demonstrates, minimum build times for new CCGT plant already extend beyond 2015.

Liberum Capital analyst Dominic Nash told ICIS that spark spreads in the region of £15.00/MWh are required on the forward curve to incentivise building new CCGT plant, making new-build gas-plant unlikely for the foreseeable future, even beyond the 2015 "pinch point".

The projection marks the first time that any organisation charged with governance of the UK's energy sector has conceded that supply may be insufficient to meet demand following the large-scale closure of plants up to 2016 under EU environmental regulation (see EDEM and ESGM 26 April 2012).

The government's reaction was measured. Energy secretary Ed Davey said the Ofgem report "provides a comprehensive analysis of the security outlook and government will consider carefully the implications".

The UK Department of Energy and Climate Change will respond formally before the end of the year, Davey said. JS

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