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The UK faces capacity crunch as coal-fired power plants close

World Coal,

The UK is facing a critical tightening of electricity supply as older thermal power plants are retired and investment in new capacity is delayed on regulatory uncertainty, warned Ian Marchant, CEO of SSE, a utility. His warning came as SSE announced the closure of 2000 MW of thermal power capacity, over half of which is coal fired. “There is a very real risk of the lights going out,” he said.

SSE is one of a number of companies to announce the closure of coal-fired power capacity in the UK. It will retire almost 1000 MW at the Ferrybridge coal-fired power plant and 345 MW at its Uskmouth plant by March 2014. Last month, RWE also announced it has closed its 2000 MW Didcot A coal-fired power plant as the plant ran out of operating hours under the EU regulations.

Much of the UK’s older coal-fired capacity is facing imminent retirement under the EU’s Large Combustion Plant Directive, which requires highly polluting power plants to close by the end of 2015 or after 20,000 operating hours from January 2008. With low coal prices making coal-fired power plants more profitable that gas, many time-limited coal-fired power plants have raced through their allocated hours already and will close this year: BofA Merrill Lynch estimates 7 GW of coal-fired capacity will come offline this year in the UK.

Meanwhile, with the introduction of a unilateral carbon tax in the UK this month, thermal power generation faces an additional uncertainty – uncertainty that is putting utilities off making the investment decisions that would mitigate the capacity crunch. SSE announced it was postponing final investment decisions on new gas-fired plants to 2015, unless the government provides relief from the carbon tax in the form of capacity payments earlier than it currently plans.

Despite the negative consequences of its introduction, the carbon tax actually received scant mention in the UK Budget. As Tony Lodge, research fellow at the Centre for Policy Studies, told World Coal: “It is telling that the introduction of the carbon price floor escalator only received a one sentence reference in the Budget Red Book. Britain has an appalling record in maintaining escalator taxes and another one on alcohol was abandoned in the Budget, due to fierce backbench political pressure. The carbon price floor will begin to attract far more attention when the connection is made between it and rising electricity prices this year. How long before it is similarly thrown out? But the damage will already have been done.”

This leaves the UK energy sector in a critical position. Ofgem, the market regulator, predicted a 1:12 chance that the “capacity crunch” in the UK would result in lights going out – but this was before SSE’s announcement of capacity reductions. As Marchent concludes: “It appears the government is significantly underestimating the scale of the capacity crunch facing the UK [but it] can reduce this risk very easily by taking swift action to provide much greater clarity on its electricity market reforms.” Going on past performance, this might be too much to hope for.

Written by Jonathan Rowland.

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