Power market needs radical reform

LONDON (Reuters) - Britain’s power market must be radically redesigned to spur hundreds of billions of pounds of investment in low-carbon technologies needed to fight climate change and keep the lights on, the heads of two UK utilities said on Wednesday.

Energy regulator Ofgem estimated in October that at least 200 billion pounds of investment is needed over the next 15 years to meet electricity demand and climate change targets and some analysts say the final bill could be much bigger.

Most of the investment will be needed to replace Britain’s ancient coal- and oil-fired power plants, expected to close by 2015, with plants able to backup an expected boom in wind power capacity in the UK North Sea over the next few decades.

It still makes economic sense for utilities to run their fully-depreciated old fossil fuel plants when wholesale prices rise at times of tight electricity supply.

But they will not spend billions on building plants that under current rules will only make money when output from heavily-subsidised offshore wind farms drops drastically.

“We keep the lights on by running some quite old power stations for a small number of days a year...You can’t do that if you invest two or three billion pounds in a new station,” Paul Golby, the chief executive of E.ON UK, told a carbon capture and storage (CCS) forum in London on Wednesday.


E.ON, like its competitors in the UK energy market, has a growing portfolio of wind farms which benefit from a government incentive scheme, called the Renewables Obligation, paying renewable energy technologies like wind for their output regardless of the wholesale electricity price.

Under Britain’s current power market, called NETA, other plants get no support, earning only what they can sell their output for.

As the current market structure stands prices could fall into negative territory at times of very high wind output if Britain gets even close to its target of installing 33,000 gigawatts of turbines by 2030.

“This has major implications for the future funding of projects ... How do we make a return on these massive investments when those plants may be running intermittently?” Golby told the conference.

If world leaders meeting in Copenhagen next month fail to agree a deal that significantly increases the cost of emitting carbon the UK needs a technology-neutral back up plan to support the use of cleaner technologies.

“It’s vital that the UK energy market can remunerate both new nuclear and coal with CCS alongside other forms of low carbon energy,” he said.

Although low carbon, nuclear power plants are too slow in raising or lowering output to respond effectively to rapid changes in output from thousands of wind turbines that the government needs to be turning over the next decade if it is to come close to meeting its carbon emissions targets.

Nuclear plants also take too long to build to replace all the plants expected to be retired by 2020.

So utilities have tended to build cheap gas fired power plants to back up wind, which many industry observers say is making Britain dangerously dependent on one fuel, and will find even more gas plants hard to justify to more cautious creditors under current rules.

“We are trying to repower and rewire the UK,” Nick Horler, chief executive of ScottishPower, told journalists on the sidelines of the conference.

“We are doing it a time when we have to bring quite rightly, greater discipline to the balance sheet and maintain credit ratings and at a time when we are in the UK in a global battle for capital.”

Britain was the first country to set legally-binding targets to cut emissions of the climate-warming gas, aiming for a reduction at least 80 percent by 2050 compared to 1990 levels. (Reporting by Daniel Fineren)