Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/749133
14 | 11TH - 17TH NOVEMBER 2016 | UTILITY WEEK Policy & Regulation Market view B rexit has reopened the debate about the UK's future energy mix and whether the right sort of invest- ment signals and policy incentives are there to encourage a resilient yet flexible energy system. We would question whether a larger scale rollout of new nuclear beyond Hinkley is the right answer. Yes, the scale of nuclear pro- vides pure capacity but at a significant cost – and to the detriment of securing other, more flexible, generation. The cost of CCGTs is much lower than that of new nuclear plants (the latest build costs of Hinkley have ballooned to £37 bil- lion). Many commentators have quoted CCGT capex costs at £0.5m/MW compared with £6.9m/MW for nuclear. Under this premise, almost 14 CCGT plants with the flexibility to support renewables could be built for the cost of just one new nuclear plant. Brexit presents the government with an opportunity to holistically review energy policy. We find ourselves in a position where we can take back control of key policy issues that were being driven by broader EU objec- tives and cherry-pick areas of policy that best serve the UK. Does our energy policy ensure security of supply and still deliver the best value to consumers? The answer to this question rests largely on two key policies: the capac- ity market (CM) and increased electricity interconnection. Capacity market The CM is a crucial enabler to securing secu- rity of supply. However, the question remains as to whether enough new capacity, of the right type, will be brought forward. Although the peaking plants that cleared the capacity auctions provide cheap capac- ity, they do not solve the balancing issues. They will only run at periods of highest demand and National Grid will rely on the existing fleet to deliver at all others. The con- sumer ultimately pays to cope with the high penetration of renewables and lower levels of conventional thermal plant pushed to the margin by subsidised technologies. It's crucial that BEIS issues a clear energy policy and minimises further, unneeded, interventions. From our perspective, our two international shareholders, and investors, are eager to understand how this sector will be supported and priorities set before Brexit negotiations kick off in earnest. Interconnection: playing fair The current volume of planned interconnec- tion threatens to push thermal generation to the fringes, but also jeopardises the invest- ment case for new gas projects. InterGen has two shovel-ready CCGT projects with a combined capacity of 2.4GW. They will cre- ate about 3,000 jobs during construction. Domestic generation creates many jobs but as the uncertainty from Brexit lingers, gov- ernment should be safeguarding and indeed creating UK jobs. Interconnector projects enjoy numer- ous mechanisms that offer funding and/ or reduce development risk compared with existing and new gas projects. These are the EU projects of common interest fund, Ofgem's cap and floor regime, and CM pay- ments. They pay no network charges and no carbon allowances. Interconnectors are exempt from all network charges thanks to their "transmis- sion asset" status. In spite of this, they are awarded quasi-generator status that allows them to participate in the CM. Last year both government and Ofgem were quick to acknowledge the issue of overcompen- sation where a number of embedded gen- erators were receiving CM awards as well as other subsidies. The rules should be applied consistently, and we want to see a solution that deals with interconnectors that have received or are receiving other funding as well as benefiting from CM revenue. These discrepancies are important because they will affect the future energy mix in Great Britain. By ensuring inter- connectors are treated in the same way as other domestic GB generation, they can be assessed truly and fairly on their invest- ment, contribution to jobs, security of sup- ply and ultimately the economic interests of consumers. Looking forward In last year's energy policy reset speech, Amber Rudd, the energy secretary at the time, said it was "imperative" to build new CCGTs in the next decade, and close all una- bated coal by 2025. However, we have seen no firm policy. Investors despise uncertainty, and delays to key policies prolong the life of the very plants government wants to close. This summer highlighted the balanc- ing issues faced by the system operator and the case for further gas-fired generation was strengthened. In May, we witnessed for the first time in 100 years four days of zero output from coal and a summer of increasingly vola- tile balancing services use of system rates. On 13 September, National Grid faced sig- nificant balancing issues driven largely by the weather, and exacerbated by multiple outages of large thermal plants. In conjunc- tion, the French interconnector fell down at a time when imported capacity was being relied upon to support an already tight sup- ply margin and maintain frequency. The same week, balancing issues contin- ued, leading to offers accepted by coal sta- tions of up to £1,250/MWh. This highlights the value of flexible, fast-responding gas- fired generation. Until we can store electric- ity on a large scale, the system will always need a stable form of thermal generation to combat the intermittency of renewables and the unpredictability of interconnectors. For investors to come forward, policy must be well signalled and committed to. From a security of supply and consumer value perspective, it's imperative that the CM brings forward new flexible gas capacity that addresses National Grid's balancing issues rather than exacerbates them. Before the terms of Brexit are negotiated, politicians can listen to industry and learn from our understanding and expertise in the market. Only then might we have a post- Brexit energy market that is fit for purpose. Mike Novelli, vice president and general manager, UK/Netherlands, InterGen Brexit: opportunity knocks The UK's departure from the European Union offers the government a chance to thoroughly review energy policy without having to take broader EU objectives into account, according to Mike Novelli.