The closure of two nuclear power plants in the UK after safety concerns has put the spotlight on the UK’s energy security – particularly in the winter months.
Other European countries are also facing concerns over energy security in the short-term. The closure of nuclear power plants has already caused a potential problem of energy security in Belgium, where energy experts have raised the spectre of possible blackouts this winter, following on from the shutdown of three of their reactors due to safety concerns [link].
Capacity Crunch in 2015/16
Figure 1: UK energy capacity margins – Source: National Grid [link]
National Grid has highlighted that the UK’s energy supply will continue to deteriorate until 2015/16. The average excess energy supply over peak demand could drop to as low as 2% in the winter of 2015/16, and without any action from the Government, the likelihood of controlled disconnections (blackouts) would vary from 12.5 – 25% [link]. The well respected research firm Aurora Energy has also reported that “[There appears] to be an acknowledgement from National Grid that the supply situation could be a lot tighter than it first thought. When you get this close to the margins you could have a very big problem.”
Why the Capacity Crunch?
The EU’s Large Combustion Plant Directive (LCPD)
This directive forces power stations in Europe to either meet sulphur and nitrous oxide emissions standards, or agree to close by 2015 [link]. As a result of this legislation, from 2013 – 2015 there will be five coal-fired power station closures in the UK [link].
The UK’s Carbon Price Floor (CPF)
The UK’s unilateral CPF raises the cost of carbon from UK power generators over and above the EU price. Bloomberg New Energy Finance predicts that the CPF and the LCPD will lead to power generation from coal falling from 39% of output in 2014 to 16% in 2018 [link]. The CPF has also made gas-power generation less profitable, creating unfavourable conditions for investment in new gas fired power stations.
Nuclear Plant Closures
Table 1: UK remaining Nuclear Power Stations – Source: Department of Energy and Climate Change [link]
All but one of the UK’s current nuclear power plants will close by 2023, with 4.3GW of capacity going by 2019 and a further 4.2GW by 2023 [link]. The remaining unit (Sizewell B) would only be capable of providing 14% of the 2013 level of nuclear fleet generation [link].
Figure 2: UK profit margin from gas – fired power generation – Source: Financial Times [link]
The profit margins for gas-fired power generation have fallen dramatically over the past few years for a variety of reasons:
- US Coal Exports: The US shale gas revolution has led to a huge increase in US coal exports, which have increased from 50.1bn tons to 129bn tons over the past six years. This has meant it has become far more profitable for European utilities to generate electricity from cheap US coal than from gas.
- Increasing Renewable Energy: Gas fired generation is only profitable during times of peak demand. As more renewable generation is added to the grid, the amount of time gas fired generators can be profitable has diminished.
- Fukushima Disaster: Japanese demand for gas after the Fukushima disaster led to gas prices shooting up in Europe and Asia in 2011/12. The ‘clean-spark spread’ – the difference between the price received by a generator for electricity produced and the cost of natural gas needed to produce that electricity – subsequently went into a loss in the UK. This led to many companies taking their gas stations offline.
Government Mitigation: Short-Term
Freezing the Carbon Price Floor: This decision, in essence, gives UK coal power stations (those complying with the LCPD) an extra year’s profitability, which will make it cheaper to burn coal instead of gas until 2018 [link].
Demand Side Balancing Reserve: Under a voluntary agreement, some businesses will be offered payments to reduce their energy demand at peak times until 2018 [link].
Supplemental Balancing Reserve: This will be used as a means to keep unprofitable power stations open for short periods during the winter peak demand [link]. Any plant capable of providing this service can apply, but plants breaching the LCPD would not be eligible.
Government Response: Long-Term
Increasing Renewable Energy: The Government aims to have 30% of the UK’s electricity supplied by renewables by 2020 [link], requiring much of the UK’s base-load generation to remain on standby to account for the increasing intermittency.
Introducing a Capacity Market to Increase Investment in Gas: As a result of the closure of coal, gas and nuclear plants, the Government has made it clear that significant investment in gas will be required – up to 26 GW by 2030 [link]. Due to increasing intermittent electricity generation, many gas generators will be required to remain on standby going forward, making them uneconomic to run. The Government will therefore introduce a capacity market, which will subsidise gas generators to either increase or free up capacity on the grid from 2018 onwards [link]. There are, however, concerns that the capacity market will not encourage the construction of new gas power stations. Bloomberg New Energy Finance, for example, argues that already-built coal fired power stations’ construction costs are sunk, meaning that they will be able to under-bid developers of gas fired stations that are yet to be built [link].
New Nuclear Generation: It is hoped that by 2024 the new nuclear plants Hinkley Point C and Sizewell C will come online, just before 4.6GW of existing nuclear plants go offline. The two new nuclear power plants would provide 6.4GW of capacity.
Recommendations
Delay Implementation of EU’s Large Combustion Plant Directive: Given that the National Grid has warned about a capacity crunch in the winter of 2015/16, the UK should not be obliged to implement the LCPD until there is no threat to capacity margins. It is vital that additional coal capacity is available in the event that capacity margins become tight.
Speed up Shale Gas development: The Government admits that significant investment in gas will be required up until 2030. Shale gas offers a great opportunity to replace the decline in domestic production of conventional gas throughout the 2020s, and the Government should accept all of the recommendations set out by the Lords’ Economic Affairs Committee [link], including the establishment of a Cabinet Committee to oversee shale gas development.
Scrap the Carbon Price Floor (CPF): The CPF continues to be a threat to UK manufacturers and is discouraging investment in new gas power stations, while doing little to further the Government’s environmental objectives.
Scrap Demand-Side Balancing Reserve: The Government should ensure that adequate capacity is in place until the operation of the capacity market, so there will be no need to incentivise businesses to shutdown their operations. The demand-side balancing reserve would needlessly hamper industrial productivity.
Scrap Fourth Carbon Budget Targets: The Government should not commit to unilateral climate or renewable energy targets. The fourth carbon budget target should therefore be scrapped until there is a final agreement on EU-wide targets.