Government heading for electricity capacity price crisis in 2019

As Conservatives gear up for the next election they could be hit by a electricity crisis as the costs of subsidies for new gas power stations escalate in 2019. This is because of a triple failure of policy; its failure to realise that its nuclear power objectives are undeliverable, the failings of its 'capacity mechanism' which beckon an escalation in costs in 2019, and a failure to promote decentralised energy solutions that would avoid these problems. To cap it all, as the Conservatives implement their ending of incentives for most renewables, they end the development of low carbon solutions that will decrease electricity prices in the medium and long term.

Let's go through this carefully. First, we have discussed in this blog at length how the notion that nuclear power could be delivered at a price cheaper than even offshore wind is now is a myth. The nuclear programme will certainly not be delivered at anything like the time or scale envisioned. To boot we now rely on a huge loss making French nationalised industry (EDF soon to be merged with AREVA) to decide to make another very likely huge loss on another EPR at Hinkley C even then involving British consumers paying the incentives until at least around 2060.

Second, to make up for the shortfall in capacity the UK may experience through this failure of nuclear policy we have a market based 'capacity mechanism' through which plant are ordered, and are paid standby fees, for their ability to provide capacity when demanded by the National Grid. This system is supposed to make up for the fact that increasingly wholesale power prices are being depressed by the increasing quantities of renewable energy, thus making it unviable for power station investors to recoup their investments from sales on the wholesale power markets.
 The prices of the standby fees payable under the capacity mechanism are determined at annual auctions for contracts to supply the capacity in 4 years time (the first of which was held earlier in this year for 2018/9). The Government sets a total firm capacity figure that should be supplied through the capacity mechanism and the Government will pay the price (through electricity consumer bills), at the highest margin bid to meet the total capacity required by the Government in the future. The problem is that as old coal fired power stations retire by 2023 there is very probably going to be a tremendous 'spike' in the size of capacity payments awarded in the auctions in and around 2019.

In fact the capacity mechanism is just as much a 'subsidy' or 'incentive' as anything earmarked for renewables or nuclear, and in 2019 the size of this is set to soar. The problem for the Government, and the electricity consumer is that it is not just the new plant that receives the subsidy, it is all generation capacity except, in practice, renewable energy. Even old nuclear power plant, which are going to be kept online anyway as much as possible for technical and economic reasons, receive this subsidy. The problem will erupt around 2019 when a lot of new capacity will be needed. Various companies with plans for combined cycle gas turbines (CCGTs) are now lining up in eager anticipation to put in bids through which they will receive large payments to induce them build the new capacity. Not only will there be large capacity payments, but ALL existing generators (except renewable ones) will receive the payments. This will make the power actually supplied by the  new CCGTs, in practice, very expensive.

Against this background it is no exaggeration to  say that onshore wind is now the cheapest widely available option for new generation. From 2019 onwards it seems unlikely that once you count in the costs of paying all generators enough through the capacity mechanism to get new CCGTs built that the cost of the CCGTs will be much, if anything, less than £70 per MWh. CCGTs have been costed by Policy Exchange at around £60 per MWh, but for them to be delivered in practice a lot of money will have to be paid to the other suppliers of (old capacity). This jerks up the effective price to much higher than £60 per MWh.

But none of this will help new wind power or solar power projects. They need something known in the trade as long term power purchase agreements (PPAs) that will pay them, say, £70 per MWh over 15-20 years. But none of the electricity companies will pay them this. Moreover the Government has decided to ban even the many windfarms that now having planning consent from gaining PPAs by competing for 'contracts for difference' (CfD). These CfDs, of course are available for Hinkley C and other nuclear power proposals.

Of course there are alternatives to the Government's policy. The potential shortage of flexible capacity could be solved through a combination of, first, increasing (rather than as the government is doing, decreasing) regulations favouring energy efficiency in buildings, and secondly by encouraging through planning law and incentives the deployment of combined heat and power plant (CHP). This is an organic process that will not involve the spikes in capacity mechanism that will result from what Kevin Anderson of Scottish Power has called (last week) a 'new dash for gas'. This system works well in Denmark. Indeed the CHP plant which would be best associated with district heating systems could be converted to using, or used in conjunction with, industrial sized heat pumps, the latter which could make good use of excess quantities of renewable energy. Government estimates put the potential for CHP at massive quantities

Interestingly, the party policy that currently seems to be closest to this notion is that of the 'new left' Labour Party, whose policy, is I understand, now influenced by former MP Alan Simpson who campaigned to get the feed-in tariff system legislated in 2008. However, even if a Corbyn Government were to get elected in 2020, it will be too late to avert the coming electricity gas capacity price spikes.


For some relevant references and commentary, see:

http://www.ft.com/cms/s/0/aa73555e-6c35-11e5-8171-ba1968cf791a.html#axzz3oACYB1mw

http://www.policyexchange.org.uk/media-centre/blogs/category/item/what-exactly-is-subsidy-free-onshore-wind

http://www.timera-energy.com/pricing-dynamics-in-the-new-uk-capacity-market/

http://www.parliament.uk/business/committees/committees-a-z/lords-select/science-and-technology-committee/news/resilience-electrcity-system-report/

https://www.gov.uk/government/news/the-first-ever-capacity-market-auction-official-results-have-been-released-today

http://www.telegraph.co.uk/news/earth/energy/11925444/UK-energy-crisis-Trafford-gas-plant-in-doubt.html
http://taylorkeogh.com/news/press-release/decc-capacity-market-auction-trafford-power-gas-fired-power-project/