UK coal plant capacity qualifiers likely to stay open

UK coal-fired plants entering this month’s new capacity auction to provide guaranteed available generation for one year from Winter 2018 are unlikely to mothball in the intervening period, despite the prospect of plant economics becoming more unfavourable in the next few years.

The UK government has launched the capacity mechanism to secure the availability of 50.8GW of flexible plant from the start of October 2018. This is designed to provide adequate back-up supply to increasing quantities of intermittent renewable generation streaming onto the system.

Up to 13GW of coal plant has successfully pre-qualified for December’s auction, all of which will only be eligible for maximum one year contracts.

But expected declines in profit margins for coal generation over the next few years have made the outlook tougher for plants as they await the first year of capacity payments.

Mothballing

But a source from a utility with coal-fired assets told ICIS that positive dark spreads and the cost of placing components into preservation would be prohibitive to mothballing plant for a short interim period to the introduction of the capacity market.

“The [clean dark] spread is currently positive, and plant withdrawal when spreads are positive would be hard to explain,” the source said.

“Mothballing saves very little cost unless you can ‘de-man;’ and putting the boiler and turbine into and out of preservation will have a cost,” the source added.

Peter Atherton, utilities analyst at Liberum, agreed that forward profit margins are still favourable enough to keep coal plant online, adding that replacing skilled staff and reacquiring a grid connection when returning from mothball could pose a plant difficulties.

Dark spreads

The Winter ’16 clean dark spread – the notional profit margin for 35% efficient coal plant including the cost of carbon emissions – was calculated by ICIS at £9.26 (€11.75)/MWh at Monday’s close, representing a 25% decline in its value since the spread was first assessed at the start of October.

The plummeting cost of power over the winter months instigated by weakness on the far curve of the NBP natural gas market has been a principal factor behind the spread’s loss of value.

And the spread does not compare favourably to current profit margins for coal plant, with ICIS calculations showing the month ahead clean dark spread priced at £13.43/MWh and February ‘15 at £14.32/MWh on Monday.

The principal reason for the difference is the increasing rate of the UK’s carbon price floor – a top-up tax to the EU’s emissions trading system – that will mean the cost of emitting carbon for power generators will rise two-fold to £18.08/tCO2 from the start of next April.

The pre-qualification stage conducted during the summer attracted successful interest from plants totalling 62GW of derated electricity capacity, although this will be whittled down in the auctions themselves that are set to take place next week.

RWE’s 1.6GW Aberthaw plant was rejected in the pre-qualification stage, although it is unclear whether it has appealed the decision.

Industry commentators have previously cast doubt on the ability of existing thermal generation to adopt a competitive bidding strategy in this December’s auction, arguing that refurbishment costs and the need to recover lost revenue in the period up to 2018 would dictate a high level of bidding ( see EDEM 25 September 2014 ). Henry Evans