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Uberflip 15 11 13

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Interview Revenue € million much greater thy counterparty buying the power or a capac"We are very supportive of competition and that meansstructure. That definition of your horizontal ity mechanism that covers the fixed costs – or reinforced separation of is our counter to any price freeze." both," he says. That competition means gas Somerset is calling for action from the generation from supply" power plants will continue Intergen'stheir to take government on both fronts. The Department chances in an "increasingly volatile" UK of Energy and Climate Change in June commarket. There are a lot of variables. Intergen is "scrabmitted to creating a capacity market, through which gas bling about in the gas space" left by low-carbon gengenerators will be paid for being available, whether they erators. Somerset thinks next year "will continue to be generate or not. The first auctions are due in the first half challenging for us" but clean spark spreads – the differof 2014. The idea is to make sure there is enough back-up ence between the power price and gas and carbon prices plant for when the wind doesn't blow. The consultation – will start to pick up towards the end of 2015. period runs until Christmas and independent generators He accepts that the technology has a diminished like Intergen are keen to get their message across. place in the merit order ("I know we are signed up, we As it stands, the ten-year contracts proposed for new have certain [climate change] obligations"), but he warns gas power projects are "just too short" for institutional that if gas is crowded out, the sector could become investors, Somerset says. "Although you could finance, "incredibly unbalanced". He notes the high cost of some it would add a big refinancing risk. If you stretch that low-carbon technologies. EDF's new Hinkley Point C loan out to 15 or 20 years, that would reduce the annual nuclear power plant is to get a guaranteed "strike price" risk considerably." He points out that the government is of £92.50/MWh, nearly twice the current wholesale price. proposing 15-year contracts for renewable generation. "I "Wow, that is not a bad deal for EDF," says Somerset. don't think we are being unreasonable," he says. "Offshore wind is north of that. Even onshore is a hunHe is also concerned about the penalty regime, dred [pounds a megawatt-hour] and these are big sums which imposes fines on generators if, for one reason or of money." another, their capacity is not available when the system The real competition is coal, however, for the diminmost needs it. "At the moment, we have a proposal on ishing part of the market not taken up by low-carbon the table from government that if you fail to meet your providers. Coal generators must shortly decide, in 'stress event' when called, you could lose the entirety of response to Europe's Industrial Emissions Directive, your capacity payment for the year." Somerset and other whether to convert to biomass, upgrade to continue runwould-be capacity market participants are keen to proning on coal, or close by 2023. These decisions "will have pose less punitive alternatives. "We have already made a big impact", says Somerset. "These investment decithese points – it is a question of reiterating and coming sions are major. What happens to coal is fundamental to up with a proposal ourselves. We are hard at it and it is our business." absolutely critical for these projects." On the gas supply side, Intergen will continue to deal As for the wholesale power market, Somerset is starton the exchanges rather than seek direct contracts, he ing to look for a long-term buyer but says the structure says. "We have not looked into sourcing a supply of gas of the big six makes it difficult. "We can't rely on the specifically for the UK business. But it is very interesting existing PPA market, because the vertical structure is to see the development of fracking in the UK. As long as essentially flawed. Under the vertical structure the large it is responsible, I am very supportive of it… It seems to companies will self-build and they will look for pricing me, if you can source a large deposit of shale gas in the signals, but because liquidity is so poor, they are hard to UK, which brings jobs and is reasonably remote from see. When they do see signals, they will start to act, but communities, it is worth doing. Gas is going to be with that might already be too late… What we are trying to do us for decades." here is break through that. All we are interested in is the When Utility Week interviewed Somerset in 2010, he most competitive generation deal we can get." talked about diversifying into renewables. Intergen is He is looking ahead to a future Labour government for not investing yet, but he insists it is still on the cards. his preferred solution: break up the big six. That does not "We have looked very seriously at a couple of wind necessarily mean legal separation but a strongly policed opportunities," he says. "Strategically, that is the way I self-supply restriction, he says. "What we are very supwould like to take the UK business, there is no question portive of is a reinforced separation of generation from about that." It has been delayed by a couple of changes supply, which is one of the points that [shadow energy of shareholder, he says. "You need consistency to make secretary] Caroline Flint is talking about. We are supportsuch a step away from your core business. We have that ive of a pooling arrangement, where generators have to consistency now and that is exactly what we are doing." sell their contracted volumes through the market." The other plank of Labour's energy manifesto, a 20-month price freeze for consumers, sent shockwaves Intergen Europe (UK and Netherlands) revenue through the industry and sparked widespread warnings 1200 that it would scare off investors. Somerset's response is understated: "We don't think it is a good idea." He acknowledges that the idea has played well with 1000 the public. "It provokes a wider debate about what the energy market is for… In the old days, the state-owned industry was not a perfect beast. It had a lot of costs 800 attached to it. It was not commercial but, yes, it kept the lights on." Nowadays exposure to market forces, coupled with increasing government intervention and subsidy 600 has made energy prices "a mish-mash which is quite 2008 2009 2010 2011 2012 hard to control". He adds: "We would say as an indeYear pendent generator, the best way to keep prices down is 10 | 15th - 21st November 2013 | UTILITY WEEK

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