COLUMN-UK aid to gas and renewable plants may cut power prices: Wynn

LONDON, July 8 Mon Jul 8, 2013 12:11pm EDT

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LONDON, July 8 (Reuters) - Britain's wholesale power prices may well fall, contrary to general expectations, as planned extra government support for gas and renewable electricity generation counters the impact of future rises in gas prices.

Lower wholesale prices could hurt gas, coal and some large-scale, low carbon generation, such as biomass now operating under a subsidy scheme that will be phased out for new projects over the next four years.

That risk was underlined last week by a decision from RWE npower, the British arm of Germany utility RWE, to halt plans to convert a coal plant to burning biomass.

The uncertainty is a consequence of a period of chaos in European electricity markets as countries try to meet ambitious, legally binding renewable energy targets.

Wind and solar power plants are expensive to build but have near-zero marginal costs, meaning they can push fossil fuel power off the grid and drive wholesale power prices lower.

Germany has installed the most non-hydro renewable power capacity in Europe and has experienced the biggest impacts, including a sharp fall in wholesale power prices - with disastrous consequences for the economics of gas-fired power.

In Britain wholesale power prices have so far remained relatively stable. (See Chart 1)

That dynamic may be about to change, because of a massive pipeline of new wind power and plans to subsidise gas fired generation.

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Chart 1:

Chart 2:

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GOING DOWN?

Britain has some of the most ambitious targets under a wider EU goal to ramp up renewables by 2020, including proposals for a total of 28 gigawatts (GW) of onshore and offshore wind power capacity, under the country's "National Renewable Energy Action Plan".

That will push British wholesale power down on windy days, as in Germany - depending on demand.

The British target is a three-fold increase on current levels of wind power, and compares with current peak power demand in the country of about 56 GW.

Britain may drive down wholesale power prices with other interventions, although their impact is less certain because the plans are so far unannounced or incomplete.

For example, it plans to support new nuclear power, although it is unclear how much new capacity will be built and by when.

Like renewables, nuclear power has a high upfront cost but very low running costs which will push wholesale prices lower.

The Department of Energy and Climate Change (DECC) has also confirmed plans from next year to pay gas-fired power plants to make capacity available to generate power when it is needed.

The aim of this capacity market is to cut the cost of investing in gas-fired power, as the country closes a swathe of ageing fossil fuel plants.

By lowering the all-in cost of gas-fired power, the move would cut wholesale power prices, as DECC has acknowledged.

"The costs of capacity agreements will be met by suppliers. But the impact on bills will be partially offset by reduced wholesale prices," DECC said in its statement on capacity payments two weeks ago.

Again there is uncertainty, with no clarity yet about the amount of gas-fired capacity it will pay for.

GAS PRICE?

Acting in the other direction on wholesale prices is the prospect for higher gas prices.

Gas presently accounts for just over a quarter of British power generation (26 percent in the first three months of this year) but that proportion will rise in the short-term given net closures of ageing coal and oil capacity.

Gas will probably rise more in the future: DECC forecasts that up to 26 GW of new gas will be required by 2030. At present there is a total 31 GW installed.

Season-ahead UK gas prices have risen markedly since 2009. (Chart 2)

They may continue to do so, given the backdrop of Europe's dwindling domestic supplies and rising exposure to a global liquefied natural gas (LNG) market where prices are high because of demand in Asia and Latin America.

COAL TO BIOMASS

It appears that the mere risk of falling wholesale power prices was too much for RWE npower to continue with its project to convert a coal plant to burn biomass including wood pellets.

RWE npower said last week that it had halted those plans while it "assessed and reviewed" the project's feasibility.

One factor was the power price outlook.

"The (forecasts) in terms of where we see electricity prices are not enough to warrant this investment now," a spokeswoman said on Monday.

Britain is in the process of exchanging one low-carbon subsidy regime for another.

Significantly, the future scheme will have no exposure to lower wholesale power prices, while the biomass plant RWE npower had proposed for Tilbury, east of London, is contracted under the present scheme.

Under the current system, large-scale renewable power generators earn a combination of the wholesale power price and a green credit called a renewable obligation certificate (ROC).

Under the future, contract for difference (CFD) scheme, they would earn a flat rate called a strike price.

The rules for switching from one to the other have not yet been announced - if that is possible at all.

Meanwhile time may have run out for Tilbury, which would have to apply for various costly licences to burn biomass with no assurance that it would turn a satisfactory profit.

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