LCPD impact on UK electricity market disputed; study slams energy policy stance

The closure of coal- and oil-fired power plants in the UK under EU environmental law will not create the “huge hole” in electricity generating capacity that some fear, Barclays head of energy market research Trevor Sikorski told ICIS on Tuesday.

Three coal-fired plants with capacity levels totalling 4.15GW are scheduled to close in April next year under the EU Large Combustion Plant Directive (LCPD), with an additional 980MW due to close by the end of 2015 under the directive. A further 3.7GW of oil-fired plant will also be forced to close.

The mass-closure contributed to a recent warning from British energy regulator Ofgem that capacity 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).

But Sikorski said that, with new plants such as EDF Energy’s 1.3GW West Burton coming on line early next year, “when push comes to shove and capacity has to switch off, particularly after the first few ones go, you’re into some pretty inefficient plant, so you’re taking plants with hardly any utilisation and replacing them with plant that will always be available and have high efficiency.”

That, he said, would go some way to reducing any capacity margin deficit, despite historically low profit margins, known as spark spreads, for natural-gas-fired plants. “There’s a huge difference in spreads for those two different kinds of plant,” he said.

Scathing

Sikorski’s comments come at a particularly sensitive time for the power generation sector, with some government advisory bodies openly at war with the government itself about the future generation mix.

In a scathing critique of energy policy, the parliamentary environmental audit committee said in a report published on Tuesday that the government had “used a veil of apparent transparency” to mask its intentions on a future energy mix, creating policy uncertainty and eroding investor confidence.

The committee, which is tasked with monitoring policy against environmental targets, said comments made by chancellor George Osborne had pitted the environment against the economy, labelling the stance “wrong and counterproductive”.

The report said uncertainty about energy policy “has affected industry confidence in the viability of new nuclear energy … as well as onshore and offshore wind power. It has also allowed the government to belatedly raise the prospect of a second ‘dash for gas’.”

Both nuclear and wind power will fall under the Department of Energy and Climate Change’s (DECC’s) long-term feed-in tariff with contracts for difference model, more details of which will be included in the forthcoming second reading of the energy bill (see EDEM 22 May 2012). DECC said the instruments will “provide stable and predictable incentives for companies to invest in low-carbon generation”.

The emvironmental audit committee was critical of Osborne’s affinity for gas instead of renewables, as outlined in his Budget 2012 statement. “The chancellor underlined costs associated with supporting renewable energy but described gas as ‘cheap’ and ‘the largest single source of our electricity in the coming years’,” its report said.

A Treasury spokesman did not respond to requests for comment on Tuesday.

Emissions target

The report added that recent comments made by energy minister John Hayes on the limits of onshore wind power projects “have also added to an impression of inconsistency in environmental policy making”.

The audit committee’s report noted that earlier enquiries have found that the main driver of increased energy bills has been the price of gas rather than renewable subsidies.

Hayes has said that the UK “must not be over-reliant on any one technology but [must] build a balanced low carbon mix”.

The committee recommended a “clearer route” providing greater visibility of the government’s intentions than the previously published Energy Pathways, which explored a range of policy alternatives.

Its report also urged the government to set an emissions reduction target for the electricity industry, adding to the cacophony of critical opinions on the issue from lobbies as diverse as the nuclear power and renewable energy industries.

The adoption of a carbon reduction target for the power sector would be a matter for DECC and not the Osborne-headed Treasury.

But the Treasury is seen as playing an increasingly interventionist part in UK energy policy because of the intrinsic link between the role of low-carbon electricity generation and gas-fired power plants in driving wider economic growth.

The environmental audit committee sought evidence from the Aldersgate Group, Friends of the Earth, Green Alliance, E3G, the Association for the Conservation of Energy and the Environmental Industries Commission, which fed into its report. KB/JS