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UK - weak power

The retirement of coal-fired power stations is tightening the UK's electricity supply-and the government doesn't seem to have a plan to cope

The UK is facing a looming power-sector capacity crunch. Demand isn't the problem: it's pretty stable. Supply is another matter: generation capacity is disappearing with no clear replacement being planned.

National Grid, the country's power-transmission operator, reckons UK consumption will remain around 61 gigawatts a year until 2030. It may even fall, depending on whether low-cost power alternatives are preferred to environmentally friendly ones.

But government and EU-wide policies to curb carbon emissions have resulted in a push to retire polluting coal-fired capacity, as well as inefficient and ageing gas-fired facilities. By 2025, coal will be out; and lots of nuclear capacity will be gone too.

Wood Mackenzie, a consultancy, estimates the UK's total installed coal-fired capacity (including plants that the National Grid are now holding in reserve, such as Eggborough) was 19.4GW at the end of 2014. By the end of 2016, this will be down to 12.3GW. Over the same period gas-fired capacity will have dropped from 36.3GW to 31.6GW.

One gas-fired power station has come online this year-the 0.88GW Carrington plant in Manchester-but it's a mere spark compared to the blaze of capacity that is being extinguished.

"There's potential for there to be a very large gap over the next seven to 10 years if power stations coming offline are not replaced," says Jenifer Baxter, head of energy and environment at the Institution of Mechanical Engineers. If users have to switch off power to direct it to the grid, this will affect industry, she says. "It's clear we need to invest in the system but it's not really clear where."

Offshore-wind capacity additions will make up some of the shortfall but a lack of storage facilities for renewable power means this intermittent source of energy won't be able to plug the gap on its own.

Uncertainty ahead

The UK government finally approved the Hinkley Point C nuclear-power station, which will be located in southwest England, earlier this year. The facility will supply around 7% of the UK's power, but not until it is completed sometime after the beginning of 2025.

The Brexit vote has also muddied the waters, leaving investors unclear about future policy. The only certainty is that a period of political, regulatory and commercial uncertainty has begun.

"All of these things add up to a picture which isn't very clear," Baxter says. New prime minister Theresa May's government hasn't had time to speak to industry and find out where the problems are, she adds. "National Grid are working on ways to manage it but it's still really unclear how they'll do that."

The loss of UK power generating capacity has resulted in tighter margins-the amount of spare generating capacity available-prompting prices to rise as traders import energy from the continent.

In mid-September forward baseload power prices in the UK for winter 2016-17 soared to a record £160 ($198.95) per megawatt hour (MWh), or three and a half times their average through 2016, according to price reporting agency ICIS.

Peter Osbaldstone, director of Wood Mackenzie's Europe, Middle East and Africa power research team, says concerns about both the availability of UK-based supply and imports from France, where some of the country's nuclear reactor capacity is offline, are behind the recent price rises.

"Tightening of capacity has been looming for a while," he says. "A few years ago we had around 20% spare capacity, now it's virtually nil. The situation we're in now is the new norm. We won't see the same level of spare capacity that we have done in the past."

Buying more electricity from continental Europe through interconnectors is one option. But suppliers such as France and the Netherlands will prioritise domestic demand before exporting, Osbaldstone says. "France is one of our major suppliers but it doesn't have a lot of flexible capacity so they shouldn't be counted upon," Osbaldstone says.

Wood Mackenzie expects new-build gas power stations to be a major part of the market's response to tighter margins, and forecasts 12GW of new capacity will be added over the next decade, taking the total to around 40GW.

But that depends partly on the development of the UK's capacity market, a mechanism that enables the government to buy via auction the power capacity it thinks it will need later. But, says Osbaldstone, the price the government pays will "need to be substantially higher than those emerging from the first two rounds of auctions to get people on board". Clarity in government policy would help too.

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