LONDON (Reuters) - A rapid rise in British wind power capacity will gradually cut returns for operators of gas and coal plants over the next three years as their power stations serve more and more as gap fillers for intermittent renewables.
UK wind capacity is forecast to rise by 50 percent to 8,500 megawatts by late 2012, around 13 percent of total installed capacity, according to green energy industry group RenewableUK.
But this rapid growth may be stymied in coming years by an aging power grid, which is limited in the volumes of new capacity it can accommodate. The network operator will have to invest in a major overhaul for the UK to follow in the footsteps of green energy leaders such as Germany and Spain.
Britain's 3,400 onshore and offshore wind turbines have been working hard over the past weeks. Power production from wind farms reached a new record high on September 6 when remnants of hurricane Irene hit the British Isles.
Wind power is set to shape short-term power and gas prices as it adds to electricity supply and means the amount of gas needed to generate electricity in power plants will vary.
"Over time intermittent generation will change the structure of gas plant returns as they face reduced running hours and less certainty as to when they are likely to generate," said Olly Spinks, director at consultancy Timera Energy.
Flexible gas plants will play a more important role in the future energy mix, but the government needs to ensure these power stations can recover their costs to prevent them from closing due to low profits, which would threaten to create a security of supply risk, he added.
Government electricity market reform proposals, which are currently passing through parliamentary approval, include a mechanism to reward operators for holding spare capacity, which can switch on quickly to bridge times of low renewable energy output.
But as this policy will not come into force until around 2014, thermal plant operators meanwhile face eroding profit margins especially at times of high wind.
The outlook for profits of burning gas for power generation, or spark spreads, has been low in Britain, partly because of growing wind power production, traders said.
High wind power production this month weighed on UK short-term power prices as output from wind farms reached new records as remnants of hurricanes brought strong winds to the British Isles.
"Wind speeds have been pretty strong of late, which will increase wind power generation and hence push prices down in theory," said Kamran Pervaze, energy market analyst at consultancy Wheldrake Energy.
"However in practice, it's still considered very low when we compare it to countries such as Denmark and Germany."
In Germany, where nearly five times as much wind capacity is installed, all renewable energy produced has to be sold on the EEX exchange, resulting in negative power prices at times of strong wind speeds and low demand.
Such scenarios are unlikely in Britain at present, but traders face higher impact from wind power capacity on prompt power trading as periods of high wind speeds can leave the market oversupplied.
"If we have lots of generated and embedded wind it can have a big impact on supply and demand," said one UK-based energy trader who regularly uses wind power forecasts to trade UK power.
Britain's Renewable Obligations programme demands that power suppliers will have to source a growing percentage of total supply from renewable energy, increasing the pressure of especially wind power on energy prices.
The obligation in England and Wales is set at around 12 percent until March 31, 2012.
One of the barriers to Britain's booming wind power market is its aging transmission grid. This month network operator National Grid paid wind farm operators in Scotland to switch off their turbines as overproduction threatened to block the grid at night when demand typically falls.
"For a country with some of the best offshore wind resources in the world it's pretty embarrassing by international standards," said Pervaze about Britain's grid infrastructure.
National Grid plans to invest 2.2 billion pounds in three major projects over the next decade, which includes nearly doubling power export capacity between Scotland and southern England to better distribute growing volumes of renewable electricity.
Reporting by Karolin Schaps; editing by Jason Neely