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Capacity margin looks too thin

Paper Thin Capacity Margins lead to Grid’s plea to power-down.

It has been a fairly dramatic week for the energy sector what with National Grid having to beg a group of heavy power users - including businesses, factories and hospitals - to switch to back-up power to reduce demand as the country came dangerously close to running out of electricity last week. There have been also been reports recently that four idled power stations have already been asked to power back up as we move inexorably towards a winter in which our capacity margin could be as low as 1.2 per cent – the thinnest they’ve been for more than 10 years.

The Grid admitted they were 500MW (enough to power 400,000 homes) short of maintaining a ‘safe cushion’ going into this winter. Going forward it looks even worse. According to the investment bank Jefferies, in just over a year from now, we could even find ourselves without adequate power generation. The bank calculates that for tax year 2016-17, just 53 gigawatts (GW) of capacity will be available to meet forecast peak demand of 56GW.

So far so alarming. Peter Atherton, Utilities Analyst at Jefferies (as reported in last week’s FT) explained why we are falling into this power ‘capacity crunch’ so quickly. It is a combination of factors:

Coal-fired power stations are being closed at a rapid pace to meet EU air quality targets ahead of 2023 compliance deadline. These closures, together with the closure of ageing nuclear and gas-fired stations, has eliminated some 21,400 MW of dispatchable generation over the last five years, while only 6,000 MW of new capacity has been brought onto the Grid in the same timeframe. A big deficit there then!

The other problem is that the remaining gas and coal-fired stations have been running at full throttle for a number of years and are badly in need of servicing and repairs. However that servicing has not been happening to recommended levels because the entire gas fleet has been loss-making as prices have fallen leading to operators slashing maintenance spend. So many of these plants are now at higher risk of having to shut down for unplanned maintenance, putting us further at risk of running out of power.

To top this, there is now real and fairly widespread concern that the new capacity auctions are not working effectively to incentivise generators to build much-needed new capacity right now. For most, key to this is the worry that no new gas-fired power construction projects look like being committed to in the near-term. We will not have to wait long to test this view - the second T4 auction, setting a target of 45.4GW, will take place next month.

New gas-fired plants would be a quicker and cheaper way of keeping the lights on through the next 10 years or so until enough renewables capacity has been built and (hopefully) Hinkley Point C (HPC) comes online from 2025.

The Government’s decision to back HPC seems like an odd one in the context of our near- term, near-certain capacity shortfall. Peter Atherton again, this time reported in Utility Week, says that HPC will be “the most expensive power plant in the world”.

And it will be built using European Pressurized Reactor (EPR) technology which is notoriously complex to build. So much so that we can almost guarantee it won’t go live until well after 2025. Some projections put HPC’s start date as far out as 2033, which happens to be the Government-stipulated start date that is written into its contract with EDF by all reports.

“For the cost of £16 billion for the 3,200MW to be built at Hinkley, the UK could build 27,000MW of new gas-fired power stations solving the energy crunch for a generation,” Mr Atherton said.

But gas-fired power is apparently not the way to secure our energy future, nor is renewables if early unplugging of Renewables Obligation (RO) subsidies for onshore wind projects, set for the chop a whole year early on 1st April 2016, is anything to go by.

So that leaves us with fracking as well as new, super-expensive alternatives including the latest £5 billion wheeze of pumping power down a gigantic cable from Iceland. If the Icelink gets the green-light next May, it could bring 1.2GW of geothermal-based power capacity to the UK by 2023. At this early stage the price remains uncertain, but Bloomberg New Energy Finance’s central estimate of £86/MWh brings it in slightly cheaper than new nuclear.

It is tempting to say the Government seems to be clutching at straws - make that HVDC cables - in its quest to deliver energy security while hitting decarbonisation targets.

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