UPDATE 1-UK to boost new gas plant capacity estimates by 30 percent

Tue Dec 4, 2012 12:51pm EST

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By Karolin Schaps

LONDON, Dec 4 (Reuters) - Britain will on Wednesday increase its estimate for new gas-fired power plant capacity to 26 gigawatts by 2030, up 30 percent on estimates given only two months ago as it lays out the case for new investment in the sector.

"We need up to 26 gigawatts of new gas capacity but much of this will be used to replace existing capacity," said an energy ministry spokesman ahead of an announcement expected by finance minister George Osborne on Wednesday.

New gas-fired power plants are needed to back up intermittent renewable energy and replace ageing and polluting power stations.

Around 21 GW of new plants needed will be used to replace stations that will shut down between now and 2030, Energy Minister John Hayes said in a parliamentary committee meeting on Tuesday.

The government had previously counted on 20 GW of new plants coming on line by 2030, but on Wednesday increased this amount to 26 GW.

"(Osborne) is looking at the generation in the future and what might be possible scenarios around that," said the spokesman for the energy ministry, which prepared the report on the future of gas-fired power plants.

The report aims to give power plant investors enough incentives to build new gas-fired stations, needed to fill a looming mid-decade supply gap created by the closure mainly of coal plants.

Britain's energy regulator warned in October the country's excess power capacity margin could fall to 4 percent by 2015/16 from 14 percent now due to plant closures.

"The government's confirmation that gas will continue to play a fundamentally important role in the UK's energy mix should give investors much-needed certainty to invest," said Mike Tholen, economics director at industry lobby Oil & Gas UK.

The government last week proposed new legislation including a mechanism to reward owners of gas-fired power plants for holding stand-by capacity to complement the use of intermittent renewable energy plants.

Britain needs to attract around 110 billion pounds ($177 billion) in electricity market investments by 2020 to replace ageing infrastructure.

Around 30 projects have been given planning permissions but developers have held back on a final investment decision mainly due to policy uncertainty.

"Any move to expand the role of gas in the UK's power generation sector would need to be accompanied by a reversal of (the) decline in production if greater import reliance is to be avoided," said Peter Kiernan, energy analyst at The Economist Intelligence Unit.

A possible counterweight to the decline in Britain's gas production is the exploration of shale gas, which has revolutionised the U.S. energy market.

Britain last year put a temporary ban on shale gas fracking work at a site near Blackpool where a number of earth tremors were measured.

The government is expected to make a decision soon on whether to lift the ban, but the Chancellor's announcement on Wednesday will not touch on the resumption of fracking work, the energy ministry spokesman said.

"From the gas generation strategy don't expected any announcement on shale gas per se," he said, adding that the government's shale gas report would be published soon.

Osborne announced in October a consultation on offering tax breaks to shale gas exploration, such as removing a supplementary charge on corporation tax that applied to North Sea oil and gas drilling.

Industry sources said they did not expect further details about shale gas tax breaks on Wednesday. ($1 = 0.6213 British pounds) (Reporting by Karolin Schaps; additional reporting by Oleg Vukmanovic and Sarah Young; editing by Keiron Henderson)

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