Today the Government has announced a new consultation to promote energy security (yet to be published) as part of its ongoing Review of Electricity Market Arrangements (“REMA”). Two main elements are being highlighted – a desire for more gas-fired generation to provide a backup for renewables in the absence of bulk seasonal electricity storage, and a move towards locational power pricing, in an effort to try to persuade generation and demand to co-locate.
While the first is a good idea, the second is not.
Why we need more large-scale gas-fired generation capacity…
I have written many times about the growing risks to energy security as this decade progresses. Increasing demand from electrification will coincide with the closure of the last remaining coal plant (Ratcliffe, 2 GW) and the last four Advanced Gas Cooled Nuclear Reactors (4.7 GW). In addition, the futures of Drax (4 GW) and Lynemouth (0.4 GW) biomass plants is uncertain after 2027 when their subsidies expire. 10 GW of firm, non-intermittent generating capacity could leave the grid before the end of the decade.
And it’s simply not being replaced at the necessary rate to ensure energy security – the Capacity Market which was designed to enable new large-scale combined-cycle gas power stations to enter the market has almost completely failed to deliver. Since the first long-dated capacity auction in 2018 only 3.5 GW new large-scale gas-fired plant has been awarded contracts, however in addition to the 10 GW of potentially retiring capacity between now and 2030, since 2018 13.5 GW of conventional capacity has already closed, including 3 GW nuclear (Dungeness, Hinkley Point B, Hunterston B) and 10.5 GW coal (Aberthaw, Cottam, Drax, Eggborough, Fiddler’s Ferry, and West Burton A). Of the new large-scale gas plant that has secured capacity contracts, one third is open rather combined cycle technology, which has higher carbon emissions.
In other words, since the first long-term capacity auctions, 10.5 GW of conventional capacity has closed, another 10 GW may close by 2030, making a total of 20.5 GW, with only 3.5 GW large-scale gas generation being delivered by the Capacity Market over this timeframe (and a further 840 MW of CCGT at Carrington which took FID before the first capacity auction, so while it has been built in this timeframe, it was not secured by the capacity contract it was later awarded).
It is pretty clear that the amount of firm, dispatchable generation that has closed and is likely to close up to 2030 is far greater than the amount of new firm, dispatchable capacity that has been secured to replace it, and this creates a potentially un-manageable risk to security of supply.
“There are no two ways about it. Without gas backing up renewables, we face the genuine prospect of blackouts. Other countries in recent years have been so threatened by supply constraints that they have been forced back to coal. There are no easy solutions in energy, only trade-offs. If countries are forced to choose between clean energy and keeping citizens safe and warm, believe me they’ll choose to keep the lights on. We will not let ourselves be put in that position. And so, as we continue to move towards clean energy, we must be realistic,”– UK Government press release
That the Government wanted more gas-fired generation has never been a secret – back in 2016, there had been talk of an additional 26 GW by 2030 (per the 2012 Gas Generation Strategy). It’s just not been a focus in recent years. But today the Government is reminding us that gas generation is still a necessary bridging technology, that without it, blackouts are a real risk towards the end of the decade, and that it is one of the very few sources of generation that can be delivered quickly with a build time of just two years.
Last year, an unabated CCGT, the 1.5 GW Eggborough Power Station, won a 15-year contract meaning it would run past the 2035 date on which the GB power system is intended to be met zero. There was much angst about this. But the reality is that CCGT + CCS is currently unproven. Also, long-term capacity auction prices have been rising – this year’s auction was the highest priced yet. Any new gas generation being built from now on is likely to attract a cost premium due to the uncertainty over emissions rules and running hours once the 2035 deadline is reached.
…and why we do not need locational pricing
On the other hand, a move to locational or zonal pricing is not a good idea. The proposal appears to be to allow renewable generators to charge consumers more for locating closer to them, and that this will potentially save them money over time (“the reforms could save households £45 off their yearly energy bill” according to the press release). I think the chances of savings actually emerging are small, but in the near term, consumers would not only pay more, but they could be forced to live alongside ugly infrastructure they have time and again rejected in public consultations. People do not appear to want to live close to windfarms in particular, so the idea that they will be forced to not only have these machines close to their homes, they will have to pay extra for the privilege is unlikely to go down well with the public.
Not only is this likely to be unpopular among consumers, it’s unclear whether developers will be keen either. Developers have typically sought to build where their generation will be optimised ie in windy or sunny places. The south east of England is not particularly windy, it is densely populated, and there are many more people liable to object to developments being close to their homes. That means the development process is likely to be more of a headache, and since costs are already rising (and are likely to continue to rise) due to supply chain inflation, adding yet more cost is going to make life difficult.
So far consumers have bought into the narrative that renewables are cheap, but there must be limits to how far they can be misled over this – at some point they will notice that bills have risen significantly since we began the push for renewables, and that this is true in most countries that have developed intermittent renewables, and in particular wind power, at scale. People may wonder why, if the wind is free, not only are windfarms subsidised, but that subsidies are increasing. They may wonder why, if renewables are so cheap, they will be asked to pay more in their bills to have them built close to their homes. At some point they will realise that the intermittent renewables emperor has no clothes.
The arguments against locational pricing are well rehearsed and I have set them out in the past (they don’t avoid grid constraints because demand and generation don’t tend to co-locate, and they reduce liquidity by fragmenting the market). There is no good alternative to building new grid infrastructure – more transmission capacity will reduce curtailment and enable all generation to be delivered to demand centres. Trying to move the generation or demand is unlikely to be inefficient in a world where electricity costs are not necessarily the main drivers of business location. For example, datacentres require good telecom connectivity and the ability to hire staff – these are both more important than electricity costs when choices over location are made. Companies will respond to price signals, but people working in energy regulation tend to forget that energy price signals may not be the strongest price signals faced by businesses.
We will see what the outcome of this new consultation will be, but it should come as no surprise that the Government is renewing its push for more gas generation to support energy security. However, people would be forgiven for cynicism – consultations take time, which the current Government simply does not have since by law a General Election must be held before the end of January next year. That means it will be difficult to complete this consultation, digest the results, decide on a course of action and implement the necessary statutory or regulatory changes before Parliament is dissolved. We will have to keep our fingers crossed that action on energy security is not unduly delayed and that risks to security of supply are mitigated in a timely fashion.
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