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UK targets switch to gas

The UK Conservative government is to consult on phasing out coal completely by 2025, but it must find ways to trigger investment in gas-fired plant

UK Secretary of State for energy, Amber Rudd, told an audience in London on 18 November that after “20 years of action on climate change, 30% of the country’s electricity still comes from unabated coal.” That is all going to change – but only subject to gas-fired power generating capacity rising enough to guarantee security of supply; and at the moment the signs are not good.

Rudd told the Institution of Civil Engineers that a consultation is booked for the spring to decide on when to close all unabated coal-fired power stations.

“Our consultation will set out proposals to close coal by 2025 – and restrict its use from 2023,” she said.

Most in the market had assumed that coal would be phased out anyway, under existing regulations such as the European Union’s large combustion plant directive. But she said the government would only proceed if it was “confident that the shift to new gas can be achieved within these timescales.”

On the positive side, the government has lowered its long-term forecast gas price for the coming years, linking it to the cost of US LNG. This neatly reverses the tactic of her predecessor, Ed Davey, who pointed to rising fossil fuel prices to justify subsidies for renewables and the price guarantees for EDF Energy and Chinese partners to build nuclear plant in the UK.

Blaming past governments, she said: “We now have an electricity system where no form of power generation, not even gas-fired power stations, can be built without government intervention. And [there is] a legacy of ageing, often unreliable plant.”

The UK is facing winter with its thinnest-ever spare generation capacity. As it is, transmission system operator National Grid has to bid for demand and supply-side responses, and it has already this winter requested 500 MW to top up its safety cushion needed to meet peak supply. Of that total generators bid in to supply 457 MW and major users were poised to turn down a total 43 MW of demand. In the event not all of that was needed.

Market signals too weak for gas

With prospective gas-fired plants facing lower power prices and reduced market access thanks to higher renewable supply, returns appear insufficient to attract investors, leaving the government searching for ways to persuade companies to build them.

The only plant on the table is Carlton’s 1,520 MW plant at Trafford. But subsidised renewable energy will keep gas off the grid, while developers of new gas capacity want to be able to sell their output more. “Nobody is expecting it to be built,” Lisa Waters at consultancy Waters Wye told PE.

Capacity payments carry big penalties in the event of non-delivery, and they are not enough to justify build costs: developers want their plant to run all the time, not to capture a capacity market event, she said.

Combined-cycle gas turbine developers will either want some form of price guarantee, or be able to run their plants more of the time.

Insistence on the part of some environmental groups to move exclusively to renewables would mean regular winter blackouts during periods of calm.

The government said switching to gas would go a long way to hitting carbon reduction targets, but it will also need more renewables.

“New low-carbon policies will be introduced soon, and certainly before the Paris summit… We are well on track to generate 20% of electricity from renewables by 2020,” a government spokesperson told the BBC.

The news came only a few days after large consumers were paid up to £2,400/MWh to switch off at peak time.

This high value the market is placing on peak requirements illustrates the need for flexible backup capacity, given the current tight reserve margin. If there’s another cold or calm snap this winter as is expected, those high returns could also go to dirty diesel generators rather than cleaner gas plants, which have been brought in temporarily to ensure there is sufficient reserve capacity.

Helping the consumer

A recent study by Good Energy claims to show that if renewable support was viewed in net terms, the cost to consumers would be seen to be far lower, undermining the government’s rationale for reducing direct subsidies as much as it has.

The report said that while renewable subsidies pushed up consumer bills in the short term, they also act to reduce them by driving down wholesale electricity prices.

In 2014 wind and solar generators reduced the wholesale cost of electricity by around £1.55bn in 2014, it claimed, compared with a net cost of supporting wind and solar generation of £1.12bn.

In 2015 it said that value is expected to rise to an estimated £2bn.

“The report has highlighted the importance of viewing renewable support in ‘net’ terms. Subsidy schemes supporting renewable generation are paid for by consumers and raise bills.

However, renewables also decrease bills by reducing the wholesale cost of electricity. When this is considered, the cost of supporting these schemes in 2014 was reduced by 58%.”

What the report fails to acknowledge is that the price fall caused by the widespread adoption of renewables is making the flexible gas fired plants uneconomic. Gas plants are not required when renewable supply is high, cutting their use.

It’s a self-reinforcing cycle: as more renewables are installed, gas and other plants are used less, pushing up the cost per MWh of using them. But the flexible capacity must be built to ensure supply when intermittent renewables are low.

The government has attempted to remedy the situation with the capacity market, but so far this has not resulted in any confirmed new gas plants.

The wrong market for subsidies

The problem doesn’t just affect future gas fired plants, but renewables too. As more wind or solar is added, supply surges will result in even lower prices when they are running, so renewables may never be able to rely on the market alone.

Without a guaranteed rate, the more renewables that are running, the lower the price will be, as the cost of actually running the plant will be close to zero.

Any further intermittent renewable expansion will also continue to be at the expense of essential flexible generation, resulting in a greater subsidy requirement.

There should be little surprise that the current government has decided to remove the subsidies.

Caught in a situation where further intervention would create the need for another set of possibly even more substantial subsidies for backup power, as well as more subsidies for renewables, they had little choice, other than to abandon the market altogether.

Demand may be the answer

If supply becomes more inflexible – as is the case with renewables – then another possible solution is to control demand more effectively.

This is an ideal option for a government that favours the market, as the value in demand management is very much market driven, as illustrated by the dramatic spike in the price of wholesale electricity prices to £2,500/MWh.

The more the price of power on the market varies with intermittent renewable flows – or indeed as the reserve margin gets increasingly tight – the greater the value in the argument for managing demand.

The technique has potential far beyond the existing system of paying companies to interrupt consumption.

One such approach from Reactive Technologies combines mobile communications technology with cloud-based software in order to vary power consumption of potentially millions of commercial and industrial customers’ consuming devices within a set range.

“We can help our customers to avoid peak-time energy demand costs; detect the best time of day to trade energy and identify revenue-generating services that can help balance the grid. The customer retains full control of the service, without disruption to normal operations,” said Marc Borrett, CEO of Reactive Technologies.

“The way we now generate and consume electricity has led to real physical changes in the UK’s energy system. These pressures are driving the need for greater levels of control and flexibility.”

So while the Good Energy study may be right in finding that renewables do push market prices down, further subsidies or guarantees of some kind are needed to ensure there is enough flexible power to keep the lights on more of the time.

Unless, that is, storage or new demand management technology like that of Reactive Technologies really does take off.

The government may have to put a massive premium on flexibility, or ensure gas generators have more sustained access to the market, in order to keep the lights on as the coal and nuclear plants close.

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