ICIS Horizon modelling – Labour Party plans would have strongly bearish impact on UK and connected markets

Author: ICIS Editorial

2019/11/07

This story has originally been published for ICIS Power Perspective subscribers on 28 October 2019 at 17:41 CET.

On 24 October the opposition Labour Party released a paper outlining its plans for the energy sector if they were to obtain power. The paper comes at a time when UK Prime Minister Boris Johnson is pushing for an election in December. Our modelling shows that the Party’s plans for a massive expansion in renewable capacity would have a substantially bearish impact on wholesale power prices both in the UK and in connected markets.

Labour paper – main points on electricity

  • Renewables
    • Increase offshore wind capacity to 52GW (from 8GW currently) and onshore wind capacity to 30GW (from 13GW currently). The two together should provide 55% of domestic generation by 2030
    • Increase solar PV capacity to 35GW in 2030 (from 13GW currently) so that it provides 9% of domestic generation by 2030
    • Trial and expand tidal energy to around 3GW and increase hydro capacity by 500MW by 2030
    • Do not expand solid biomass beyond current levels

  • Thermal
    • Phase-out coal-fired generation “as soon as possible” and end electricity from oil anywhere in the UK by 2022
    • Maintain gas-fired capacity at current levels, but reduce generation from 130TWh currently (paper’s figure) to 36TWh by 2030
    • Ensure that any fossil fuel use in electricity production is coupled with 100% carbon capture and storage (CCS), meaning no GHG is emitted
  • Nuclear
    • Maintain nuclear at current level (9GW) by 2030, with plants that are due to close replaced by the equivalent capacity. “This could be possible in the time frame by developing two replicas of the Hinkley Point C in the mid to late 2020s”

 Modelling

  • We ran our model, attempting to match the data on capacity targets provided in the report
  • Given the time required to bring additional capacity online, we assumed a rise (compared to our base case) in solar and onshore wind from 2022 and in offshore wind from 2024, with linear growth to the stated 2030 targets
  • We assumed that the 2025 coal phase-out date remains unchanged, while gas capacity was assumed to remain almost flat through to 2030. However, we did not model gas capacity with CCS attached
  • For nuclear, we assumed a dip between 2023 and 2024 due to plant closures, with capacity then increasing to current levels from 2025 as new capacity comes online at a rate that replaces further closures
  • In line with the report, we assume demand reaches 392TWh in 2030 (+50TWh compared to our base case)
  • We kept the carbon price and interconnector assumptions the same as for the base case (see analysis below)

 Analysis

Power price

  • The impact of adding an additional 51GW of solar and wind capacity by 2030 (compared to our base case), as well as higher levels of nuclear capacity, would have a significantly bearish impact on power prices in the second half of the 2020s, with Great Britain turning from among the highest cost power markets in Europe currently to one of the lowest priced markets by 2030
  • By 2030, our modelling suggest that annual average prices would fall to €44.64 (£38.58)/MWh) in nominal terms, which represents a delta of €27.64/MWh compared to our base case assumptions

Renewable capture prices

  • In addition to a fall in the wholesale power price, the prices captured on the market by onshore wind, offshore wind and solar producers would see a significant decline in the Labour scenario with the massive expansion of renewable output cannibalising the price obtained on the market by each producer
  • As we analysed in a recent white paper, the slow pace of onshore wind and solar expansion under current base case expectations would lead to the levelized cost of energy (LCOE) for each technology falling below the capture price. As a result, projects operating without subsidy should become increasingly profitable throughout the 2020s
  • However, under the Labour scenario the capture prices for onshore wind, offshore wind and solar would fall well below the LCOE for each technology in the second half of the 2020s, meaning that increasing levels of annual subsidies would be required for all three technologies to reach the required targets

Thermal generation

  • Our modelling reflects the results seen in the Labour report, with gas-fired output falling to a low of 35TWh in 2030 (compared to 53TWh under our base case assumptions)
  • However, our modelling did not assume that CCS technology was attached to the gas-fired capacity, which is the stated goal of the report
  • It is unclear whether adding CCS to all gas-fired capacity is technically feasible or the extent to which it would impact the merit order and generation
  • In theory, the government could seek an extremely high carbon price to incentivise plant operators to invest in CCS technology rather than emitting CO2. However, in the absence of an equivalent scheme in connected countries, this would almost certainly lead to domestic generation being replaced by an increase in gas-fired generation imported from neighbouring countries
  • The Labour paper does not mention carbon pricing in the report so the party’s intentions remain unclear. For the purposes of this modelling we used our base case assumptions

Imports

  • The modelling in the Labour report did not include interconnectors, but states that it is “extremely likely that they will be an important part of the UK energy solution”. Therefore, for the Labour scenario we kept the interconnector assumptions from our base case
  • As a result of increased renewable output, the Labour scenario would lead to a substantial reduction in net imports in the second half of the 2020s, with average net imports of 38TWh between 2025 and 2030 (compared to 78TWh in the base case)

Impact on neighbouring countries

  • The changes to the UK power price and net imports from neighbouring countries has a knock on effect on the power prices of connected countries
  • The most significant bearish impact is on Norway, with the average wholesale price decreasing by as much as €20.60/MWh by 2030 (compared to the base case) as Norwegian exports would be rerouted to other markets. The result is similar to the scenario we recently ran on the impact of the potential cancellation of the NorthConnect interconnector between Norway and the UK
  • As can be seen in the graph below, the Labour scenario would also have a significantly bearish impact on the power prices in France, Denmark, Belgium, the Netherlands and Germany in the late 2020s, though the price delta for the all-Ireland market is negligible

Outlook

  • Strongly bearish for UK power prices in the second half of the 2020s, with the average annual power price falling to €44.64/MWh in 2030 (compared to €72.28/MWh in the base case)
  • Strongly bearish for renewable capture prices in the UK, meaning that despite anticipated future technology cost reductions, subsidies paid to generators would likely need to increase each year between 2025 and 2030
  • Bearish for wholesale prices in all markets connected to the UK as domestic renewable generation in the UK would increasingly reduce net imports from 2024

Matthew Jones is Senior Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Matthew.Jones@icis.com

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