Britain’s war on coal: the fallout

Tony Lodge

Britain’s new Conservative government has a big problem that has just got a lot worse. For the last five years of coalition government, UK energy policy has endured one of its most erratic and confused periods. New policies were adopted (since dropped) promoting renewables as the answer to erratic and high fossil fuel prices. It is increasingly acknowledged that this legislation is already out of date as gas, coal and oil prices remain depressed.

A toxic legacy of this period has been one of the most damaging energy taxation policies to have emerged in any leading western economy – and the British Conservatives still appear to be wedded to its retention. The Carbon Price Floor (CPF) was introduced in 2013 and was designed to tax CO₂ from coal-fired power plants in order to raise billions for the UK Treasury and also incentivise investments in new cleaner energy.

This tax operated on top of the existing EU ETS carbon price, which has faced low prices (currently around €8/t of CO₂) as a result of the prolonged depression in the Eurozone. Britain’s unilateral CPF now stands at £18.08/t of CO₂. With the ETS price added, this means coal-fired power plants are paying around £24/t of CO₂ emitted. That is equivalent to a tax of around £57 on a tonne of coal worth £34. The side effects and costs of this policy are now clear to see; they threaten a full-blown British energy crisis within the next two years. But why?

Ministers were confident that the tax, which is set to rise on its trajectory to £30/t of CO₂ in 2020 and then again to £70/t of CO₂ by 2030, would force coal plants to gradually close over the next six to ten years and encourage the new build of cleaner combined cycle gas turbine plants, alongside renewables and new nuclear developments. But this hasn’t happened. Instead, there has been a domino process of underground and opencast mine closures and, perhaps more importantly for the UK, a series of large and premature subcritical coal plant closures have been announced this year for early 2016, amounting to over 5300 MW of coal capacity.

Scotland’s only coal-fired power plant, at Longannet (2400 MW) will close in March 2016, followed by England’s Ferrybridge (1000 MW) and neighbouring Eggborough (1960 MW) plants. The generators have cited the CPF as being one of the main drivers behind their decisions. Though the plants were towards the end of their lives, many had been modernised with flue gas desulpherisation (FGD) technology and updated turbines. It had been hoped that some may have opted to further update their systems with NOX reduction technologies; they could then operate into the 2020s.

It is important to examine what this spate of closures means for the UK and the lessons it holds for other countries that may have sought to follow the UK lead. The latest closure announcement at Eggborough means that 16 173 MW of coal-fired generation capacity will have shut in the UK between 2012 and 2016. Adding in gas-fired and nuclear plants that have also closed, the UK will have lost 21 400 MW of dispatchable/baseload generation since 2010. In the same period, the UK has only built some 6000 MW of replacement generation, meaning a net loss of 15 400 MW – or over 20% of the total.

This now undoubtedly presents the UK with an energy supply problem in the near future. Looking at winter 2016/17, the UK will have only 53 000 MW of dispatchable generation available to meet forecast peak demand of 56 000 MW. This would be the first time in living memory that the UK could not cover peak demand with dispatchable generation, which has traditionally had a fleet of coal plants at its heart. So far, the rapid closure of the coal fleet has had no impact on forward power prices. The growing influence of renewables, National Grid’s emergency capacity market measures and weak demand may explain this.

But with the closure of the coal fleet accelerating and reserve margins (based on dispatchable generation) negative, a price shock, following a security of supply incident, is clearly now possible. It is increasingly likely that the British government will need to abandon the policies set out in the Energy Act 2013 and introduce emergency measures to encourage companies to keep coal plants operational in the national interest – even at the cost of political and industry criticism.

Alongside the early closure of power plants, the CPF has also landed the final deathblow to Britain’s underground coal mines and threatened the existence of the remaining opencast mines. Because the tax has been ramped up y/y since 2013, power plants have worked tirelessly to stockpile as much coal as possible at lower CPF rates – because the tax is applied on the amount of coal purchased. This has consequently created a massive distortion in the coal supply market and made it increasingly difficult for underground mines, such as Hatfield, Thoresby and Kellingley, to sell their coal at competitive prices against imports. All will have closed by Christmas.

The CPF has had a toxic effect on British energy security and the coal sector; its impact could even affect the political fortunes of the British government. It must be removed. Watch this space.

Edited by Jonathan Rowland. This article first appeared in the November 2015 issue of World Coal.

About the author: Tony Lodge is a Research Fellow at the London-based Centre for Policy Studies. His new policy paper, The Great Green Hangover – How the new Government can reduce bills and avoid an energy crisis, will be published later this year.

Read the article online at: https://www.worldcoal.com/special-reports/06112015/britains-war-on-coal-the-fallout-3122/