National Grid flags scale of UK electricity generation capacity delay

22 November 2013 16:51 Source:ICIS

Growing political unease has forced UK power generators to put a “substantial” amount of new capacity on hold at a time when the electricity market is nearing its capacity crunch pinch point.

Until now, evidence of a mass climb-down on the part of generators with grid connection licenses has been largely anecdotal. But on Thursday, National Grid chief executive Steve Holliday revealed the scale of the move, citing perceptions of increasing political risk among generators.

“We have seen a slowdown in the start-up of new generation construction. Currently, just under 2.5GW of new generation will require connecting to the transmission system over the next two years,” he said.

At the same time last year, National Grid was expecting 2GW to come on line each year from 2013-2015, or 4GW over the next two years.

Therefore 1.5GW of contracted grid connections have been pushed back from 2014-2015 to unspecified dates, meaning projects that would have alleviated the approaching 2015-16 capacity crunch – which National Grid and regulator Ofgem first warned of last year ( see EDEM 5 October 2012 ) – will not hit the system in time.

Any tight supply picture is also set to extend for longer than previously thought because, as Holliday explained: “The low level of connections is likely to continue for the next few years as many projects are potentially delayed.

“We have always known from experience that not all of the contracts for generators to connect lead to a connection, but compared to this time last year we have seen a substantial change to this profile of contracted generation,” he added, as National Grid unveiled its half-year results.

Winter risk

The encroaching pinch point has for some time fed risk premium into wholesale electricity curve contracts, with Summer ’15 closing 3.9% above Summer ’14 on Thursday, while Summer ‘16 was valued just 1.8% above Summer ’15.

On the winters, when the grid will be stringently tested, the season-on-season premium was 4% on Winter ’15, and 3.8% on Winter ’16.

The evidence from National Grid is proof that generators have become exasperated with the uncertainty surrounding the political climate they will be operating in.

“Interestingly, our total contracted generation list out to 2023 has grown, showing that customers are still looking to invest, but are waiting, and are looking to do so when they have certainty,” Holliday said. “We are now looking at a scenario where our connection investments are low for the next few years.”

The crisis of confidence among potential generators means National Grid will be left in part to bank on electricity demand tracing a gradual downward path, in line with expectations, over the next few years.

But even this could be a gamble, with the wider economy launching a recovery at precisely the time that some in the industry would prefer growth to remain stunted.

According to the Bank of England’s (BoE’s) latest monthly inflation report, published last week: “The economy is growing robustly, as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”

National Grid executive director Nick Winser said the grid operator does “need to keep an eye on the GDP growth figures”.

However, the BoE report continued: “Significant headwinds – both at home and abroad – remain, and there is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalise.”

‘From fever pitch to farce’

The challenging political outlook across the industry has made headlines. Earlier this week, reports surfaced suggesting deep differences of opinion between the British prime minister’s office and his own government’s Department of Energy and Climate Change.

This prompted the Renewable Energy Association to say on Thursday: “This has gone too far. The public debate around energy policy has gone from fever pitch to farce. Our members are already reporting problems securing investment, and this further undermines confidence. With a capacity crunch looming and firm action on climate change ever more urgent, these investments cannot wait.”

According to Holliday, getting the energy bill through parliament, which will trigger the reform of the electricity market alongside the contracts for difference subsidy regime for generators ( see EDEM 18 March 2013 ), is key to unblocking the bottleneck for power generation projects.

“Get this energy bill through parliament. That piece of legislation is crucial to give investors the clarity for the future,” Holliday said. “And let’s not forget just how stable the UK has been for such a long period of time.” Jamie Stewart

By Jamie Stewart