UK’s delay of capacity payments threatens electricity supplies – SSE

Katie Mcque

21-Mar-2013

The UK government has come under fire for threatening energy supplies by delaying the introduction of capacity payments for thermal-generation electricity plants.

UK utility SSE said it was taking several units from its power plant fleet, totalling around 1GW, off line by the end of 2014. It deems them no longer profitable to run in the wake of low margins from gas-fired plants, policies boosting the carbon price and the delay to the capacity mechanism.

This is in addition to the closure two 490MW units at its Ferrybridge coal-fired plant next year under the Large Combustion Plant Directive (LCPD).

“[The] government needs to bring forward to 2014 capacity payments for existing plant if it wants to reduce the risk of a serious capacity crunch in the next three years,” said SSE in a statement. “[A] review has been conducted against a backdrop of challenging energy market conditions with continued extremely low spark spreads and many new emission regulations which have weighed heavily on the viability of thermal generation plant.”

It added the constrictions imposed on the plants that have opted out of the LCPD, and the introduction of the carbon floor price at an “unexpectedly high level” has caused these plants to be unprofitable.

Capacity payments are not due to be introduced until 2018. There are also uncertainties over qualification criteria for the capacity payments and it is not known whether plants already in operation will receive them.

UK energy minister John Hayes defended the government’s stance. “The amount of spare power available today is currently comfortable. As old infrastructure closes over the coming years, we expect this margin to reduce but we will make sure it stays manageable,” he said.

“We are not complacent about this, which is why we have an insurance policy – the capacity market. We’re considering how and when this can best be used to bring about any necessary increase in supply or reduction in demand.”

The news comes amid concerns that the UK faces a capacity squeeze because of an ailing power plant fleet. The construction of replacement low-carbon generation plants have stalled over investor uncertainty, blamed on unclear governmental policies (see EDEM 27 February 2013).

“I’m not at all shocked, it is an entirely sensible option for SSE. Their thermal capacity which is ceasing operations is uneconomical and it is not likely to return to profitability in the short or medium term,” Stephen Hunt, a utilities analyst at UBS, told ICIS.

The 735MW gas-fired Keadby plant now faces closure, as does a 120MW unit at Uskmouth, and two units totalling 60MW at the Slough biomass plant. The output at the gas-fired Peterhead plant is also set to be reduced.

“The news that Keadby would be deep-mothballed is a little bit of a shock. It has only just received upgrades. But it would not be profitable to run in any case,” Hunt said.

Energy and Climate Change Committee member Peter Lilley also criticised the government’s approach. He told ICIS: “This illustrates the absurdity of the system we created when Parliament signed up to the Climate Change Act in a spasm of self-righteousness and an absence of hard-headed scrutiny. We have created a ludicrous system which makes high cost, unreliable energy drive out lower cost, reliable generating capacity.”

The Department of Energy and Climate Change (DECC) recently revealed that it was considering extending the lives of coal-plants subject to the Industrial Emissions Directive (IED) to mitigate a capacity squeeze (see EDEM 20 March 2013).

Plants generating some 20GW of capacity are subject to the IED. It stipulates that, by 2016, the plants must either opt in, and invest in reducing emissions, or opt out and close.

Extending the life of these plants, however, may not remedy capacity issues, says Hunt. “The IED deadline is still a few years away and companies still have time to decide whether to opt in,” he added. “However the capacity crunch will come before their deadline, so it will not be avoided by keeping these plants alive.” Katie McQue

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