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Power Plant Closures Threaten UK Electricity Grid

Christopher Adams, Financial Times

A wave of power plant closures threatens to push Britain’s creaking electricity system close to breaking point within months, energy experts have warned, with new gas-fired stations not being built quickly enough to plug supply gaps.

The latest moves to shut old coal-fired plants deemed uneconomic — the most recent, Eggborough, announced just two weeks ago — could trigger electricity price spikes and put UK businesses with interruptible contracts at greater risk of supply curbs.

The rapid pace at which plants are being closed, ahead of a deadline for compliance with new EU rules on air quality, is such that the National Grid has had to buy in emergency back-up this year for the second winter in a row.

Worse, just over a year from now, should temperatures plunge on a mid-December evening, it could even find itself without adequate power generation. Jefferies, the investment bank, calculates that for 2016-17 just 53 gigawatts of capacity will be available to meet forecast peak demand of 56 gigawatts.

“This would be the first time in living memory that the UK could not cover peak demand with dispatchable generation,” says Peter Atherton, the bank’s utilities analyst.

A recent National Grid study shows just how slim the safety cushion of spare UK generating capacity over expected demand has become. This winter’s margin would be just 1.2 per cent, it found, so flimsy that four idled power stations are being paid to come online if needed.

“Capacity margins this winter will be at their lowest level for more than a decade, so security of supply is a big issue in the short term,” says Simon Virley of KPMG, and a former senior official in the Department of Energy and Climate Change.

“Supply is struggling to meet demand. But, remember, supply will equal demand. We can get to that point by allowing prices to rise — spikes — or by blackouts,” says Dieter Helm, professor of energy policy at Oxford university. “We are now sailing very close to the wind.”

For now, as long as plants do not fail, blackouts look unlikely. Gas supplies are plentiful, and prices cheaper than a year ago. Like last winter, mild weather may not put the electricity network under the kind of strain that forces idle power stations into action and compels the grid to curb business supplies.

Chart: Fuel used for UK electricity generation

However, with no let-up in plant shutdowns, the grid could soon face a more serious test.

By March next year, says Mr Atherton, more than 16,000 megawatts of coal-fired capacity will have been shut since 2012. Including closures of gas-fired stations and ageing nuclear plants, the UK will have lost 21,400MW of so-called “dispatchable” generation since 2010.

Over the same period, it has built just 6,000MW of capacity, a shortfall blamed on policy mistakes, including, say companies, an earlier absence of economic signals for investment in new capacity, particularly gas-fired plants.

So far, these closures have had no impact on forward power prices. Weak demand, the expansion of renewable energy such as wind and the grid’s emergency buying measures may explain this. Professor Helm says: “The grid will do its best to make the system balanced. They will probably do it, just.”

Even so, with the capacity squeeze at its most acute in 2016-17, do not rule out sharp market swings. Mr Atherton says: “A price shock following a security of supply event is clearly possible at some point.”

Chart: Spare electricity capacity in the National Grid during winter

Move past 2017, and the UK should, in theory, feel the benefit of recently introduced measures — capacity auctions — designed to provide energy companies with an incentive to fill the supply gap by building gas-fired stations.

Whether that will happen is unclear. New gas plants did not emerge as big winners in the first such auction held last December, while existing gas, coal-fired and nuclear stations did. Professor Helm argues that further reforms to the auction system are needed.

Looking further ahead, to the mid-2020s, the UK should be able to draw on additional power supplies, with more subsea electricity lines connecting it to continental European markets. The capacity on such interconnectors is projected to more than double from 4GW to 10GW by 2021.

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