Coal subsidies pose threat to new UK gas-fired power plant construction

UK government policy could undermine a further shift away from coal-fired to gas-fired power generation, despite combined-cycle gas turbines (CCGTs) playing a more prominent role in the UK’s power mix over the last 12 months, policy experts have said.

Falling gas prices at the country’s NBP market and an increase in the UK’s unilateral carbon tax – the carbon price support (CPS) – in April 2015 have squeezed profit margins for coal plant operators compared to gas counterparts over the last year.

As a result, coal-fired plants have been pushed increasingly out of the generation mix, forcing 4GW of capacity to close at the end of March and resulting in what was a unique occurrence earlier this month of no output from coal-fired sources for a window of a few hours.

But the charge of gas-fired generation, particularly through the construction of new plants, could be stopped in its tracks by current policy as the government adopts measures favourable to coal plants.

“The government has started handing this money out like confetti to these coal plants,” said Tony Lodge, research fellow in energy at the Centre for Policy Studies.

“It has effectively undermined the capacity market auction to incentivise gas. If the government wants shiny new 60% efficiency gas plants, it needs to ensure a higher capacity market price and stop using a sticking plaster for old coal.”

Government concern over supply margins in the near term has resulted in the UK’s capacity remuneration mechanism being brought forward one year to the start of winter 2017 to entice the remainder of the UK’s coal fleet to stay open.

The UK’s system operator National Grid has also awarded supplementary contracts to coal plants in recent months to help it manage the system at times of scarcity. This included a contract for ancillary services from Drax’s remaining coal-fired units until April 2017 (see EDEM 1 April 2016).

This has occurred despite a commitment from the energy secretary Amber Rudd last November to put an end to all coal-fired generation by the end of 2025.

‘Mixed signals’

“That political signal might well have steered some of the utilities to plan to close up shop before then,” director at energy consultancy E3G Jonathan Gaventa said.

“But for the immediate period, we are still seeing some mixed signals where some of the remaining coal plants are in receipt of capacity payments or secured contracts for other system services,” he added.

Two auctions for capacity market contracts have taken place to date, both of which have failed to deliver investment to more than one new gas-fired plant, the 2GW Trafford Power CCGT.

It means that just two new gas-fired plants, the other being ESB’s 880MW Carrington plant commissioning this year, are set to come online ahead of 2020.

Capacity procured from the both auctions has favoured existing coal plants, embedded small-scale generating units principally run on diesel, and interconnectors.

The capital-intensive nature of new gas build and alternative revenue sources for other power infrastructure has enabled existing capacity to undercut new gas plant in bidding for contracts.

Both the energy regulator Ofgem and the government are looking at reforms to the capacity market rules that would limit the impact of diesel generation on the auction.

Although the early adoption of the capacity market will act to keep coal online and available to the system, Gaventa said this is not a guarantee that running hours will increase.

“I don’t think that will necessarily mean any pick up in coal generation unless there’s a big shift in the underlying economics; there’s a big shift in coal and gas prices; or unless there’s some change to the carbon floor price,” he said. henry.evans@icis.com