Utility Week

UTILITY WEEK | 28Th March - 3rd aprIL 2014 | 7 Comment "It might appear ironic that the freeze on carbon price support could further disadvantage gas by keeping coal in the game." Utility Week expert view Trevor Loveday W ho is going to invest in UK energy now? Chancellor George Osborne has, in the recent Budget, demonstrated that he has no will to steady the energy policy ship so that investors can get on board, confident they are not going to get a soaking. He has shown what has perhaps always been his (and arguably the opposition) party's intention to use energy as a vote-grabbing, support-appeasing measure. A freeze on carbon price support is the latest in a series of apparent acquiescences to special pleading – others including EDF, the shale gas lobby and now heavy industry. Maybe having been out-negotiated into handing over a nice little number of a deal by EDF, Osborne has concluded the nuclear industry has no more need to be shored up by a carbon tax. The final budget before the general election next May was always going to a very political one. And while the chancellor and the rest of the coalition are fully aware of the potential value in terms of jobs, revenue and long-term security of supply that renewable generation promises, they are also keenly aware of the electoral implications of an impending power capacity crunch. So the carbon tax freeze is the latest in a string of moves that are part of the same ambition to ensure gas has a pivotal role in power production for the politically foreseeable future. It would be difficult to question a view that says political points as well as the environ- mental goals to be scored through renewable growth can be achieved without sticking strictly to Brussels' targets. These climate change policy adjustments are clearly intended to arrive at a point where the government can assure the public that gas power stations will keep the lights on, emissions will be cut as coal plant closes and renewable generation will grow. While reduc- tions in emissions may not match the expectations of the greenest, coupled with assured power sup- plies they might keep the electorate happy. Politics aside, gas is arguably the only viable option for maintaining adequate baseload while backing up renewables for at least the next ten years. The cheap American coal forced onto global markets by the shale gas bonanza in the US, coupled with the surge in global gas demand in the Far East, has put that outlook in question. But the reality remains that renewable growth and nuclear closures on the scale sched- uled in the UK will need supporting gas capacity. What are the policy options? The capacity market could boost the profitability of gas plant by offsetting volatility in wholesale markets. But the capacity mecha- nism is riddled with uncertainty and unlikely to galva- nise investors to put their money into gas power stations while weak returns on gas-fired power persist. Bringing the capacity market forward, however, could improve the chances that some of the 19GW of consented capacity currently in a stalled pipeline might be realised. Furthermore, delivery of the capacity market in (say) 2015 could make a positive contribution to extending the life of existing gas power stations. There are scenarios where coal plant could be kept in play by the planned capacity mechanism as peaking capacity into the 2020s without falling foul of the Indus- trial Emissions Directive. Extensions to the life of coal plant approaching closure under the Large Combustion Plant Directive are improbable but not impossible. Meanwhile, negotiations with the US to persuade it to share some of its shale gas good fortune through access to LNG from shale could hold the key to secure cheaper gas supplies, but the holding of breath is not advised. And while this government foresees a possibility that the UK's own shale resources might come to the rescue, its impact on prices is not likely to be felt ahead of 2020. What is clear is that near-term carbon and renewable targets will be reined in. Targets for the fourth five-year carbon budget in 2023 will get pushed back and the 50gCO2/kWh carbon intensity limit recommended by the Climate Change Committee will not be adopted, because it is outside the level attainable by even the most efficient gas power stations. A basis for such target adjustments might be as a vehicle for keeping gas-fired generation in play as the lowest carbon, flexible means that is immedi- ately available to shore up dwindling UK baseload capac- ity. The government has said it anticipated some 9GW of new gas power stations to be generating by 2020, with another 25GW or so coming on in the following decade. It might appear ironic that the freeze on carbon price support could further disadvantage gas by keeping coal in the game. But the need for extended use of unabated coal is looking inevitable until a nuclear fleet is re- established and perhaps a few more interconnectors are built. Extending the life of existing gas power stations takes the heat out of the need for new investors. Energy has become a ballot box battlefield where decisions on environmental and security of supply issues are measured in political terms. Under those terms, a green heaven can wait; the general election will not.

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