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18 | 23RD - 29TH OCTOBER 2015 | UTILITY WEEK Finance & Investment Analysis N ational Grid's winter outlook report covers familiar territory for the energy market. Yes, supply margins will be tighter than they have been. And yes, National Grid is equipped with the tools to balance the system should cold wintry weather tighten its grip on already meagre margins. However, this year's report comes with two important caveats regarding its "last resort" measures: National Grid's balancing reserve is less likely to be merely "precau- tionary" this winter; and in the coming years this trend will continue. So whereas once the balancing reserve was for a "worst case scenario", this year the worst case is expected to be the actuality. And the years to follow are expected to be worse still. "While there should still be sufficient capacity available to cover demand, there is now very little 'fat' in the system to absorb unexpected events," warns Jefferies analyst Peter Atherton. "More concerning is the situation the UK may face in 2016/17. [National Grid's] emer- gency measures have been sufficient so far, and may be sufficient for the coming winter, [but] the dislocation in the UK power mar- ket is slowly eating away at security of sup- ply. Further coal closures, or an unexpected event, could prove a tipping point," Atherton says. Ofgem has long predicted that the UK power sector would feel a squeeze over win- ter 2015/16 as older plant shuts down and new investment comes forward. But the pace of closure has accelerated with the UK now set to lose Scottish Power's 2.3GW Longan- net plant and 1.9GW Eggborough plant, and SSE's 1GW Ferrybridge and 0.5GW Fiddler's Ferry assets in less than six months. These heavy losses will more than offset the expected rollout of new investment in renewable energy and gas-fired power. Strategic reserve here to stay The regulator now admits that a strategic balancing reserve will need to remain in place until the government's capacity market is able to secure supply. The reverse auction is expected to deliver capacity from winter 2018 and beyond through its reverse auction. But now even these plans look doubtful. Just a week before National Grid's win- ter outlook it emerged that Carlton Power's planned Trafford gas-fired power plant has still not been able to secure the investment needed to drive the £800 million project for- ward, despite stubbornly holding firm in the reverse capacity market last year as the price dropped well below analysts' expectations. The auction finally concluded at £19.40/kW aer three days of sinking pricing levels, which vindicated the government's insistence that the auction would deliver the lowest cost to consumers, but at a price so low that it leaves generators in trouble. Unless the situation changes soon, the Trafford plant will not be available to sup- ply power by its contracted 2018 start date. Although a specific case, it raises important questions over why mechanisms designed to thaw investment in UK energy have yet to warm up. Critics warned last year that the auction would needlessly reward existing power plant – which would have been available to the market even without a contract – and fail to bring forward investment in much-needed new capacity. Analysis from Cornwall Energy suggests that the auction level is almost half what a new-build gas project would need. A report from the analysts shows that a minimum clearing price £35/kW is necessary to sup- port large-scale new CCGT, "and that is being Cold comfort for generation This year the balancing reserve may well be called upon to see us through winter, and margins will grow ever tighter as capacity is taken offline. Jillian Ambrose reports. CLEARING CAPACITY WITH CURRENTLY QUALIFIED AND INITIALLY QUALIFIED VERSUS TARGET CURRENTLY QUALIFIED NEW-BUILD CAPACITY (MW) n CCGT n Interconnector n OCGT n Pumped storage n DSR n New embedded Source: Cornwall Energy 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 6,000 5,000 4,000 3,000 2,000 1,000 0 n Nuclear n Hydro n Pumped storage n New embedded n Existing embedded n Existing interconnector n New interconnector n CHP n EFW n DSR n OCGT n Coal n Existing CCGT n New CCGT n Target De-rated capacity (MW) De-rated capacity (MW) New build 1965 627 48 1102 540 5187 Oct Sep Target