Cheap coal, EU rules threaten British energy crunch

* Plants to close in early 2013 make up 7.5 percent of UK
capacity
* Investment picture bleak for new gas plants

By Susanna Twidale
LONDON, Sept 28 (Reuters) - Britain could face an energy
supply crunch this decade as cheap coal encourages plant
operators to race through generation hours before new EU
environmental rules come into force, then shutter generating
capacity ahead of schedule next year.
High gas prices and lack of clarity on incentives for
investment in renewable energy are meanwhile seen hampering
plans to replace about a fifth of the country's electricity
generation with cleaner alternatives over the next 10 years.
Nine UK-based coal and oil fired plants with a combined
generating capacity of 11.5 GW are due to close by 2015 or when
they have completed 20,000 hours of operation for coal-fired
power stations or 10,000 hours for oil-powered facilities - part
of European Union efforts to cut harmful emissions.
But the owners of four plants, with a combined generation
capacity of 6.1 gigawatts (GW) have already said they will close
their plants by March 2013 as schemes to slash greenhouse gas
emissions in the EU begin to bite.
Data from the Department for Energy and Climate Change
(DECC) shows major power producers in Britain had combined
generating capacity of 81.8 GW in 2011 meaning these four plants
alone could contribute 7.5 percent of the country's power needs.
DECC has said making up this shortfall will cost up to 110
billion pounds over the next decade, but analysts warn there may
not be clear incentives for companies to invest in new plants.
"There are definitely some policy difficulties surrounding
investing in new renewable plants at the moment as well as
financial difficulties," said John Wood, a consultant at law
firm Norton Rose.
"The new system (post-2017) is so uncertain that for anyone
looking at investing in a plant to come on stream at the end of
the decade, it would be very difficult to know whether they
should spend the money or not."
Britain's key support mechanism for renewable generation,
the Renewables Obligation, will be phased out in 2017 and the
government has yet to decide on exactly what type of support
mechanism will replace it.
Gas prices, meanwhile, are expected to remain high for the
next few years, clouding the investment picture for building new
gas plants just as the coal plants are scheduled to close.

PROFITABLE COAL
In Britain, the so-called "dark spread" - the profit margin
made from burning coal and selling the resultant electricity -
remains higher than the equivalent "spark spread" for natural
gas, giving the generators an incentive to race through their
allotted hours and close early.

"As well as current high dark spreads making it profitable
for coal plant to use up their hours, a contributing factor (to
early closures) may be that from 2013 the companies no longer
receive free EU Allowances, and it is also ahead of the carbon
price floor coming into effect," said Nick Screen, a manager at
consultancy firm Baringa Partners.
EU Allowances are EU carbon permits traded under the bloc's
Emissions Trading Scheme (ETS). From 2013 the EU will stop
granting free carbon permits to most power utilities, which have
been granted them mostly free-of-charge since the scheme started
in 2005.
Britain will also adopt a carbon price floor from April
2013, adding an extra 4.94 pounds ($6.22) for each tonne of
carbon emitted by thermal power generators on top of the price
of the EU Allowances, which currently trade near 8 euros
($10.29) per tonne for March 2013 delivery.
Centrica, which owns and operates seven gas fired
power stations in England and Wales, with a combined output of
3.9 GW, said in its annual results in July that high gas prices,
along with the removal of free carbon allowances next year "will
render much of the UK gas-fired generation fleet unprofitable".
David Stokes, director at energy consultancy Timera Energy
said current spreads render most new gas building uneconomical.
"But there is a large amount of existing UK (gas) capacity
running at low load factor than can ramp up into peaks. Hence
our concern on capacity crunch if large amounts of this existing
(gas) capacity is closed over the next five years," he said.
Centrica closed its Kings Lynn power station earlier this
year due to poor market conditions and has said it will continue
to review the future of its Peterborough and Roosecote plants.
In contrast, RWE officially opened a new 2.2 GW
gas-fired power plant in Pembroke earlier in September which
cost the firm 1.2 billion euros, according to the company's
half-year results published in August.
However, it also said in the results the higher generation
capacity will not boost earnings in the company's generation
business due to current market conditions.
"The present framework conditions are anything but
favourable", RWE's CEO Peter Terium said at the time.