Coal: Subsidising the past
By Dr Jonathan Marshall, ECIU Energy Analyst
Convincing investors to back new electricity generation capacity in the UK is notoriously difficult, and currently almost entirely reliant on the government supporting the current project du jour. Be this EDF’s Hinkley Point, the three monster offshore wind farms that signed deals in September, or the latest favourite of small scale nuclear reactors that tempt ministers on Victoria Street, all have been chosen at the expense of other technologies before being pushed forwards wholeheartedly by government.
However, on top of offering cash to new low-carbon capacity, the government has got itself into the business of subsidising existing power stations. Early next year will see the latest round of the capacity market, a scheme that supports ‘firm’ electricity generating capacity with payments in return for a guarantee that they will be available during the winter months.
Results released at the beginning of December showed that eight nuclear power stations and six coal fired power stations are set to bid for capacity contracts in the new year. Not only were many of these units originally built by the state, but now UK homes and businesses are facing bills just to stop them from closing.
Turning a nuclear power station off is hardly a straightforward task, and there would also be no economic rationale behind them not running over the winter when wholesale market revenue is at its highest, so it is hard to justify the £450 million-plus worth of contracts signed to date. On current forecasts, this is likely to top up wholesale market revenue by more than 10%.
Coal plants are in a different situation. Despite also being fully amortised, higher fuel costs mean that their continued existence is not economically viable without government handouts. In fact, the government is so scared that they will close, it is prepared to take total capacity payments to more than £600 million in the next auction, ECIU analysis shows.
Out of kilter
Now, this might be fine if the government wasn’t facing legal action on air pollution, hadn’t very publicly declared its desire to lead the world away from coal-fired electricity before 2025, and didn’t release its latest plan to decarbonise the economy to great fanfare just a couple of weeks ago.
In the face of these actions, throwing hundreds of millions of pounds at coal power plants seems somewhat out of kilter. By keeping these antiques running – the UK’s newest coal power station was built more than 40 years ago – there is less space for new more efficient and less polluting capacity on the UK network.
When first thought up, the capacity market was designed to deal with a capacity crisis that was apparently looming in the next decade. By auctioning off 15-year contracts to help new power stations get up and running, it was supposed to usher in a new era of gas-fired power stations, operating on a revenue stream for simply existing, as well as that accrued from generating and selling electricity. The Contracts for Difference scheme – a system that was meant to bring on new low carbon capacity by auctioning fixed-price deals, as seen with offshore wind – has faced criticism, but at least it achieved its main goal. The same cannot be said of the capacity market.
February’s auction will be the fourth year in which these lucrative contracts have been on offer, yet (despite signing off a few billion quids worth of ) the capacity market is still to incentivise these new large power stations that the government once desired.
That is, if the government still wants them. The recently-announced Clean Growth Strategy only sees enough room for gas to make up 15% of national electricity supply in 2030, hardly a promising future for energy investors.
Looking to the future
But it isn’t just new gas generators that would benefit were coal and nuclear bumped from the subsidy list. Nigh-on 5 GW of battery capacity is in the running for the next auction. This is the same kit that Greg Clark and his ministers have openly shown admiration for, and is the sort of next-generation equipment that can keep British lights on at the lowest overall cost for British bill payers.
By ensuring that a pre-determined surplus of supply is available throughout the winter, the capacity market reduces market signals that could spur on new and innovative tech. Advanced storage techniques, demand-side response and other cutting-edge technologies are facing a huge barrier that prevents them responding to wholesale prices that reflect a true market.
The plummeting cost of battery technology has helped one large solar project come online recently entirely without government support, with incorporated storage able to ensure power is there when needed when the sun isn’t shining on a cold January Monday evening.
Wind and solar are now able to produce electricity without handouts, providing they can secure a fixed-price deal in line with wholesale costs. This could not be said just a couple of years ago, such is the pace of change in renewables. As such, the premise of handing out millions to coal dinosaurs simply for not closing is hard to align with the actions of a forward looking government.
Surely, if the government is going to offer support to energy, it should be that of the future rather than of the past.