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UK electricity generation capacity could feel the strain earlier than thought

18 Jan 2013 18:59:37 | edem

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Electricity capacity margins in the UK could fall faster than predicted towards the late-2015 "pinch point" because of highly aggressive coal plant generation strategies and the impact of the carbon floor, according to market sources.

British energy regulator Ofgem warned in its electricity capacity assessment last October that 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 (see EDEM 5 October 2012). "The specific reduction in components of margin are understated, particularly for coal," one prompt trader told ICIS. A number of UK coal-fired power plants are operating on limited running hours under the EU large combustion plant directive (LCPD).

But generous profit margins for coal capacity, or clean dark spreads, have provided plant operators with the economic impetus to burn coal at an accelerated rate. "I don't think they [Ofgem] factored in how aggressively the running hours have been eroded," the prompt trader said.

The looming carbon floor price, which will apply to the power generation sector from 1 April, has provided further incentive for coal plants to eat up hours, with generation economics becoming less favourable from the end of the first quarter of this year.

This policy, market sources said, will itself contribute to the accelerated decline of capacity margins. "The severity of the carbon price support mechanism has not been taken into account," one trader said. "More specifically, the severity of escalation."

The carbon floor has been set at £16.00 (€19.13)/tonne of CO2 equivalent (tCO2e) from April 2013, rising to £30.00/tCO2e by 2020 in 2009 prices. This compares with a closing EU allowance (EUA) spot price on Thursday of just €5.45/tCO2e on Thursday - a record low.

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Should spot prices remain at this level - and at the time of writing on Friday the product was heading for a new low - UK power generators would be paying a gaping top-up premium of €13.68/tCO2e. "Forward coal plant economics aren't as flash as most appraise them to be," one trader said.

System operator National Grid's latest transmission entry capacity register, published on Thursday, lists a drop in plant equivalent to 4.3GW from 1 April, while over the course of the year, the total increase in capacity is just 1.2GW - a deficit of 3.1GW.

This is broadly in line with Ofgem's assessment. But thereafter, the regulator's report assumes around 200MW of coal plant will come off line in 2014/15.

But the feeling is that what coal plant remains after April of this year will burn through its hours more voraciously than Ofgem has assumed in its assessment.

The regulator will update the capacity assessment on an annual basis each October.

Ofgem pointed out the long list of uncertainties that it attempts to take into account in the report.

"Although it is clear that risks to security of supply will increase, it is very difficult to accurately forecast the level of security of supply provided by the market," it said.

"This is because of uncertainties regarding commercial decisions about generating plants, electricity interconnection flows to and from the continent, and the level of demand."

Last October's margin warning preceded a spike in activity on longer-dated spark spread contracts, as the back end of the electricity curve traded on the back of its own fundamental outlook as opposed to taking its lead solely from the NBP - a rare occurrence (see EDEM 11 October 2012). JS

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