Utility Week

16 | 5TH - 11TH OCTOBER 2018 | UTILITY WEEK Finance & Investment O ver the years, UK electricity genera- tion has been dependent upon vari- ous technologies. For much of the 20th century, King Coal dominated energy generation – and was oen at the centre of bitter disputes: the long-lasting strikes of 1926, 1972, 1973/4 and 1984/5 remain part of the UK's industrial history. For a short period in the 1960s, oil became a feasible alternative until the quadrupling of oil prices in the mid-1970s meant that oil- fired output became uncompetitive. The same era saw the development of nuclear power, once famously described by Lewis Strauss, a leading member of the Eisenhower administration, as "too cheap to meter". At privatisation in the early 1990s, the attractions of new efficient combined cycle gas turbine (CCGT) plants gave rise to heavy investment for the subsequent decade. Recently, though, CCGT investment has vir- tually stopped. Given that coal-fired plant is to be phased out by 2025, this scenario raises real concerns about the future availability of baseload capacity. The table, which shows conventional thermal and CCGT output every quinquen- nium since 1970, provides a stark illustration of how UK generation is changing. Last year's figures have also been included: they show how renewables output is beginning to achieve mass. Furthermore, for the first time, generation from thermal sources fell below 60 per cent of total output. Radical change Clearly, the UK generation market is under- going radical reform. And although Germany is investing in new coal plant – with the installation of the requisite carbon abatement equipment – the UK's planned closure of all existing coal plants by 2025 looks nigh irreversible. Furthermore, the prospects for new CCGT plants look grim until they have a better chance of operating consistently as baseload stations; otherwise, the financial returns simply do not stack up. In recent years, much emphasis – and formidable effort – has been placed on the third-generation 3.2GW Hinkley Point C plant, due to cost c£20 billion. The contract for difference (CfD) is of unprecedented gen- erosity – an inflation-linked 35-year contract with a 2012 base price of £92.50p per mega- watt-hour. Last year, winning offshore wind bids were struck at below £60/MWh. Indeed, aside from renewables and Hin- kley Point C, investment in generation is dangerously low, mainly because potential investors question the projected returns. Aer all, for many of the big six, genera- tion activities have been a tale of woe. Centrica has sold off a swathe of gen- eration plants, mainly CCGTs; heavy genera- tion division losses had been reported. It is now focusing on its retail and commercial customer base, both in the UK and in the US, although the stock market is far from convinced. Iberdrola – owner of Scottish Power – has also suffered. Its 2017 figures showed that the liberalised element of its UK generation mar- ket was still underperforming. Iberdrola cited lower margins and higher government obligations, although the clo- sure of the Longannet plant distorted the overall numbers. By contrast, Iberdrola's renewables business was improving, with higher output and increased capacity. RWE's UK generation returns in recent years have been as dire as its share price per- formance. Its focus now lies in reinvigorating its powerful position in the German genera- tion market. Drax, by contrast, has very much blown with the wind – or, more accurately, with biomass. As the owner of the eponymous plant – once the largest power station in the world – it has been progressively convert- ing its coal-firing operation into one which burns a vast amount of imported wood. While Drax continues to benefit from for- midable biomass subsidies, it is other renew- ables that are playing a key role in driving the fundamental changes in the UK market, where the era of huge plants – Hinkley Point C excepted – is seemingly ending. It is widely accepted that there are seven renewable technologies: wind, hydro, marine, biomass, geothermal, solar; and fuel cells. Well over a decade ago, Iberdrola's pre- diction was that wind generation would take off far more quickly than other renewable technologies and that, in the long term, solar would also prosper, especially in the south of England. This viewpoint has been firmly vindicated. To be sure, onshore wind has stalled on the back of less accommodating planning rulings and the phasing-out of subsidies. But offshore wind looks to be a real winner. The government has been pushing for costs to fall from £140/MWh to £100/MWh by 2018. Last year's successful bids by Engie to build offshore windfarms – off the Moray Firth with Portugal's EDP Renovaveis – and by Orsted (formerly Dong Energy) off Horn- sea – for £57.50/MWh – represented a dra- matic step forward. It also highlighted the generosity of the Hinkley Point C CfD. Indeed, this pricing scenario raises the question as to whether any other new nuclear projects, such as Bradwell, Moorside The rise of renewables The UK generation market is in the midst of major transformation, as a rapid rise in renewable power output meets a fall in conventional generation. Nigel Hawkins investigates. Analysis 1970 215 188 0 23 5 0 87 1975 238 207 0 26 4 0 87 1980 252 215 0 32 5 0 85 1985 266 208 0 54 6 0 78 1990 284 219 0 59 6 0 77 1995 299 164 49 81 6 0 71 2000 327 125 116 78 7 0 74 2005 346 136 128 75 7 0 76 2010 333 158 105 56 6 8 79 2015 282 89 86 64 7 35 62 2017 276 40 122 64 7 44 59 Source: Digest of UK Energy Statistics (DUKES)/Nigel Hawkins Associates Year Output Conventional thermal CCGT Nuclear Hydro Wind and solar Conventional thermal and CCGT (%) UK GENERATION OUTPUT (TWH)

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