UK capacity market will benefit old coal, not new gas
Analysis suggests that the effect of the government’s new incentive programme to ensure the lights stay on will initially be to reprieve ageing coal-fired power stations
London -- The UK government’s new capacity market, which will support electricity generating plants that can be switched on to deal with shortages and so help to prevent black-outs, will prolong the lives of some of the country’s coal fleet. These coal-fired power stations have an average age of 42 years and produce higher carbon emissions per MWh produced than other generation technologies.
This finding, in a research report published by Bloomberg New Energy Finance for its clients this week, means that the policy will do little in its early years to encourage investment in new gas-fired plants, or demand response arrangements to reduce electricity demand at peak times.
Seb Henbest, head of Europe, Middle East and Africa at Bloomberg New Energy Finance, said: “This message from our analysis will disappoint those who have been hoping that the capacity market would immediately pave the way for new gas-fired capacity in the UK, and also those who have been calling for the rapid retirement of coal-fired power plants.”
Last month, the Conservative-Liberal Democrat coalition published the final design for the capacity market, which is being brought in to ensure that the UK has enough available power capacity to prevent black-outs during periods of high demand, such as winter cold snaps. The capacity market received state aid approval from the European Commission on Wednesday 23 July.
This new market will involve auctions, with the winning bids receiving payments for keeping capacity available in case of need. The first auction will be held on 9 December 2014 and will cover electricity supply in 2018-19. There will be a second auction round in December 2017.
The report, based on detailed analysis of the current UK generating fleet, the cost for new power stations and demand response services, and the outlook for power prices, found that eligible legacy capacity going into the December 2014 auction will be 56.2GW, more than enough to meet the government’s target level for capacity in 2018-19 of 53.3GW.
Monne Depraetere, power analyst at Bloomberg New Energy Finance, commented: “Coal-fired generation still accounts for 40% of the UK’s electricity. Those plants already exist, their construction costs are sunk, and so they will be able to under-bid developers of gas-fired power stations that have yet to be built. Whereas the carbon price floor will drastically reduce coal plant run hours, the capacity market now anchors their role as back-up generation.”
Bloomberg New Energy Finance calculations suggest that an existing coal plant would need a capacity payment of at most GBP 45 per kW per year ‒ and in some cases significantly less ‒ to break even. A new gas-fired project would need at least GBP 49 per kW per year, in addition to revenue from power sales.
The UK’s capacity market has been welcomed by utilities with coal assets under threat from the country’s carbon price floor, and those concerned with balancing increasingly large amounts of variable renewable power from wind and solar. However, it has also faced some criticism from those who oppose the idea of government intervention in the energy system and believe capacity payments entrench incumbents.
Bloomberg New Energy Finance found in its report that the reprieve for coal would likely only be temporary, with 80% of current capacity likely to be forced offline completely by 2024 as a result of tightening EU particulate emissions regulations. This would provide space for new-build gas-fired power stations, but due to the market design, developers are likely to opt for less efficient open-cycle facilities, rather than the more efficient combined-cycle variety.
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