Last week the Daily Telegraph reported that Sainsbury’s, the second largest supermarket in the UK, has built a series of gas-fired generators due to its concerns over security of supply. The article quotes Paul Crewe, head of sustainability at the company, who said that worrying about energy security keeps him awake at night as his company is responsible for about 1% of UK demand, and mentioning reliance on interconnectors and gas from the Baltic and Russia. The plants already supply 10 stores across the county, with a further six due to be added this year. Sainsbury’s generates biogas from food waste which it injects into the gas grid, and consumes an equivalent amount in its power stations.
The UK has not experienced a power cut due to a generation shortfall since the 1970s, however concerns about energy security has been growing as the electricity reserve margin has fallen in recent years. In January, the Institution of Mechanical Engineers issued a widely publicised report claiming that with the closure of coal and the majority of nuclear power stations by 2025 there would be a potential supply gap of 40-55%, depending on wind levels. The report concluded that 30 new gas-fired power stations should be built to avoid this shortfall.
The report was criticised as being overly simplistic, with most commentators agreeing that any potential shortfall would be significantly lower, not least due to wide expectations that the nuclear fleet will see further life extensions. However, 7 GW of coal has announced imminent closure (albeit with some being delayed due to securing SBR contracts), so concerns over a shortfall are not without foundation.
To combat this, DECC has two primary strategies: new nuclear, and the recently announced changes to the Capacity Market. The official line on new nuclear is that the flagship Hinkley Point C project will commence operations in 2025 and will deliver 7% of the UK’s energy needs. Unfortunately, there are good reasons to question whether this is realistic: despite the very high level of UK government support via the Contracts for Difference subsidy scheme, French electricity company EDF who is to build the plant has yet to take its final investment decision and is also seeking support from the French government.
There are also concerns surrounding the technology. The plant is to be one of the new generation of EPRs (European Pressurised Reactors) to be built, the first of which are currently under construction at Flamanville in France, Olkiluoto in Finland and Taishan in China. The Flamanville project was initially expected to open in 2013 at a cost of €3.3bn. The latest projected start date is Q4 2018, and costs have trebled to €10.5bn. Construction at Olkiluoto began in 2005, with an expected commissioning date of 2010, however the plant is not expected to open until 2018 and has incurred cost over-runs of over €5bn.
There are significant problems with the pressure vessels that have been delivered to Flamanville, with excess carbon in the steel causing structural weaknesses and the possibility that they will need to be removed from the reactors and replaced, leading some commentators to suggest that 2020 might be a more realistic commissioning date. This matters because as part of the support package for Hinkley Point the UK government has offered finance guarantees which would lapse if Flammanille isn’t up and running by the end of 2020.
The other part of DECC’s security of supply strategy is the Capacity Market. Under this scheme, generators bid for 1, 3 or 15 year contracts depending on whether they are existing, refurbished or new plants. The first two auctions cleared at extremely low prices, with only one large new plant winning a contract (the Trafford CCGT, which is expected to default on its CM obligations having so far failed to secure financing). In fact, even some existing plants that won 1-year contracts have announced their intention to close as the non-delivery penalties are lower than the losses they would incur in staying open over the next few years.
DECC recently announced changes to the Capacity Market with the aim of incentivising new gas generation, to meet the needs of the next decade. There are no specific measures to force new gas to be built, but by raising the demand levels (DECC’s guidance indicates the 2021-22 target will be at least 3 GW higher than would otherwise be the case) the auction is likely to clear at a higher price. Timera Energy forecasts that a price of at least £40-45/kWh for a 15-year new-build contract would be needed in order to support the investment case for new gas plant. There is also an expectation that the Government will legislate to curb the proliferation of diesel peaking plant through new emissions regulations, increasing the scope for gas to be successful in the auctions.
Through these changes, DECC is laying the groundwork for avoiding a capacity crisis in the next decade, however it is already too late for such measures to work in the near-term, as even CCGTs which are relatively quick to develop, require 1½ – 2 years’ construction and commissioning time. To address this near-term challenge, DECC has announced a new capacity auction for 2017-18 and in the meantime, National Grid must rely on contracting back-up supply through the Supplementary Balancing Reserve and STOR (Short-Term Operating Reserve) markets. This involves paying power stations that would otherwise close to remain open as a last resort.
National Grid is also able to compensate large energy users for reducing consumption at times of system tightness through the Demand Side Balancing Reserve. According to Ofgem, National Grid has secured 3.6 GW of reserve for the coming winter, and the capacity market auction will provide further incentives for generators to remain available.
National Grid will publish its review of last winter later this month, and launch its consultation for winter 16. It will be interesting to see the weather-adjusted reserve margin and see how tight things might be if the recent run of mild winters is broken next year.
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