A boring treatise on why building a load of gas fired power stations isn’t as easy as it looks.

Yes, I’m afraid this piece is very long and probably quite boring, and you can skip to the denouement if you like, which is *here, but you might need to read through the stuff above it to allow it to make sense. So good luck, and start **here if you are really determined.

**Last week the Energy and Climate change Committee tried out a new method of getting its enquiry programme underway – it invited a number of industry and interest group stakeholders to discuss in some detail what the priority enquiries might be and how they could be set up. An interesting initiative which perhaps deserves a bit more airspace, but for the purpose of this piece, (and I hope the purpose will become apparent sooner rather than later) participants opined quite extensively about the fact that there does not seem to be an ‘energy plan’ and that the committee might spend some time investigating whether there is, and if not, why not (I paraphrase a little….)

This certainly seems to be true when we look at the inability of anyone to stick the recent series of random pokes , swipes and casual extinctions that have characterised Government ‘policy’ into any coherent framework of a plan for the future. Surely there has to be more to energy policy than that – there must somewhere be some sort of framework within which these measures can be placed, or at least held up against and measured (as in if you do x, then the effect is y and that means you need to do more of z to make up for it.)

So there’s the purpose of the piece – and with it come two curiosities.

The first curiosity is that there is, in effect ‘a plan’ in place at least as far as generation is concerned – carefully set out, consulted on, debated in Parliament etc. – namely the National Policy Statements for energy, agreed in July 2011 which are supposed to inform and be the reference point for all applications and decisions on large power infrastructure and plant. There are six of them covering fossil fuel generation, renewables, nuclear etc. and an ‘overarching statement’ which pulls them all together. They are supposed to ‘remain in force…unless withdrawn or suspended by the Secretary of State’ As far as I am aware, that hasn’t happened, so I guess they are in force at least for the time being.

And they make interesting reading. ‘Onshore wind farms’ we are told in passing ‘will continue to play an important role in meeting renewable energy targets’, and I am sure Lord Bourne failed to read the section on offshore wind when he took his recent lunatic decision on the Navitus Bay offshore windfarm recently.

The ‘overarching policy statement’, among other things, sets out the mix of generation and the indicative installed capacity that the policy statements envisage. ‘As part of the need to diversify and de-carbonise electricity generation, the government is committed to increasing dramatically the amount of renewable generation capacity’ the statement says, and it sets out just what new capacity we are likely to need by 2025. (What you need to know is that ‘installed capacity’ of about 1 gigawatt – or 1000 megawatts) is about the flat out capacity of one newish gas-fired power station. What actual electricity is produced from this installed capacity is another matter, but you need to have a known amount of installed capacity to be sure that you can deal in terms of production with all eventualities.) We will need, it says, 113GW of capacity compared with 85GW now, and of this 59GW would be new build. Within that, the statement says ‘around 33GW of the new capacity by 2025 would need to come from renewable sources’. 26GW would be non-renewable capacity, and the statement says (at the time) 6GW was under construction leaving some 18GW to come ‘from new non-renewable capacity’ – and finally, it concludes ‘government believes that new nuclear power should be free to contribute as much as possible’ because they want as much as possible of the 18GW to be ‘low carbon’.

Well, we may or may not get to the 33GW of new renewables capacity envisaged in the NPS. Currently about 13GW of wind, 7.8GW of solar and 3GW of biomass are operational, with another 13-14GW with consents and under or awaiting construction. But with the likely curtailment of most wind, some of this may not get built and certainly the pipeline of plans awaiting consent won’t. DECC is now estimating that about 30GW or so will be deployed by the early 2020s, with not much more to come after that. A shortfall in the 33GW projected capacity will all come essentially now because Government has deemed both onshore and offshore too expensive to underwrite, either through Feed in tariffs or Contracts for difference, and the supply chain will probably simply dry up.

We also know that nuclear will certainly not step forward to provide capacity – 2.3GW if that, from one power station by the mid-twenties.

So that leaves, pretty much one technology –gas, to fill in all the gaps. I know, of course that capacity margins between gas and wind are not the same, but we might come to that in a moment. The sums indicate perhaps 20-25GW of new power stations between now and 2025, which it seems is more or less now ‘the plan’ if Amber Rudds DECC blog of August 11th is anything to go by. ‘Gas’ she said ‘has a huge role to play, because moving too quickly to zero carbon energy risks driving the bills of hardworking people too high lots of new low carbon generation cannot be relied upon in the same way that gas fired power stations can’ – and to boot associated the new drive for shale with the indigenous powering of these new plants.

And here’s the second curiosity. Such a ‘plan’ would involve constructing perhaps 18-22 CCGT plants over the next ten years. All doable in terms of construction periods, except that it appears no-one, at present prices and conditions is very willing actually to build them. The government, it must be said is aware of this and with much trumpeting of the need to procure new plant, introduced capacity market auctions – essentially offering to pay people to build plants that might or might not actually supply electricity: fifteen year ‘capacity payments offered at auction. There were no takers this last year except for one putative plant that probably won’t get built: the vast majority of capacity payments went instead to plant that already exists (including coal and nuclear plants!) that would be likely to produce anyway. Ten more auctions to go – twenty plants to build.

Perhaps one of the key long term reasons that investment in new gas plants looks brittle is that even if wind is banished from the national generating asset books in future, there will be sufficient supply to make it likely that gas plants will be running at far lower loads than hitherto, with DECC suggesting in the gas strategy that plants will be running as low as 27% capacity, interestingly about that of offshore wind, which rather (and I said I would raise this earlier) puts the relative capacity margin argument into a new light. The return on investment will therefore need to be gained from this sort of prospect, but even on more generous assumptions on load the figures do not look good. Which takes us to the main reason right now, which is that, with the prevailing price of electricity as against gas price, they are not a viable commercial proposition. Estimates of the cost per mwh of new build gas from DECC and the Committee on climate change recently suggest that they would need a return of about £68 a mwh of electricity produced to cover investment compared with the present market range of electricity at £40-45 per mwh. In other words, unless electricity prices shoot up and remain permanently up, gas plant developers might be looking at a ‘gap’ of perhaps £23-28 per mwh that might need to made up from somewhere to facilitate the pouring of concrete into the ground.

Which in turn brings us up against the sheer unlikelihood that capacity auctions will in the foreseeable future ever approach that sort of 15 year underwriting to persuade building to take place. Indeed, Policy Exchange estimates that the last Capacity auction (clearing as it did at overall at £19.40 per mwh) represents in real terms a ‘subsidy’ to a would-be new build gas plant of about £4 per mwh. It no wonder that existing plants with amortised costs gobbled up short term contracts leaving virtually all new build far from the ring. In short, unless future capacity auctions clear at much higher levels, giving far more free money out to existing generators in the process, then they are not likely to be more successful at securing new build than the last one.

*The denouement: And here then, is a tentative conclusion from all this: that if the government indeed has a ‘plan’ to remove future wind from the equation and go for gas instead, than it looks like on present mechanisms, the amount of obligated subsidy falling on consumers and therefore increasing bills will come to something like the subsidy level that the government has cited as one of its main reasons for pulling the rug under wind (and solar, of course): because we all know, don’t we that capacity payments have an identical feed through effect on bills as do Renewables Obligations , feed in tariffs and contracts for difference , however we may decide to classify them as inside or outside the famous Levy control Framework. Oh, and of course there will be a much higher carbon emission outcome than had we continued to use that amount of subsidy to continue with wind and other renewables.

We will certainly continue to need gas in the system for a very long time, and the real challenge lies in how we develop a ‘goldilocks’ path of enough new build to sustain a reducing requirement over the next fifteen years, whilst not locking ourselves into generation paradigms which harm our path to long term carbon sustainability in generation. But that looks like quite a different ‘plan’ than the government apparently has in mind for us right now

On Pyhrrus and his campaigns

Well that went well, didn’t it? At least Ed Davey thinks so. I’m referring here to the results of the first capacity auction, the final results of which were posted earlier in the month. Here’s Ed responding to an intervention on the subject that I made during the recent Energy Prices debate in the house:

 

‘The results of the capacity auction were far better than we had predicted. The closing price – the clearing price – was significantly lower than we predicted, so there will be a lower impact on consumer bills.’

Hmm I’m not sure crowing about the low clearing price of the auction as a mechanism for protecting consumer bills (when that was nowhere in the specification of the auction) is a wise, long-term line to take. A bit like a general reporting that ‘our invasion force failed to land on the beaches and we were repulsed with huge losses. But we only sent ten ships, a far lower number than we had anticipated, so there’s a considerable saving to the taxpayer to take into account in evaluating the success of the operation’.

So were the results any good overall? Let’s start with what DECC thought the auctions were about when they set them up. Here’s what they say in the capacity auctions section of their website:

‘The Capacity Market will ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.’

And we also need to know that the idea of launching an auction for implementation in 2019 was primarily so that new power stations would have some investment security when they come on stream.

Well, yes, payments have gone out in the first auction to some generators, which one supposes will mean that they don’t switch off their generating capacity when it might be needed. Except to say that almost a fifth of the cleared capacity is coal plant which DECC is supposed to be running off the system in a few years, and extraordinarily, 7.8GW of nuclear power (which can’t be switched off without long term consequences even if the owners (EDF) go into a sulk) so that aspect of the ‘auction’ most certainly is free money with no gain in supply security. Most of the rest is money to existing gas plants, some of which arguably might have decided to mothball themselves if they hadn’t got a payment from the auction.  On the other hand, almost 4GW of gas plant didn’t succeed in clearing the auction, being displaced both by coal and (haha) nuclear. One might think that this will now INCREASE the likelihood that this plant will be mothballed in the not too distant future, decreasing overall energy security rather than making it more robust.

But leaving that all aside, what about the other aspect of what DECC thought they were doing with the auction – ‘encouraging the investment we need to replace older power stations etc.’? Well here the news is uniformly bad. Let’s remember that the same Department projects in its gas strategy that some 26GW of new capacity will be needed to provide that backup by about 2030. One power station (Trafford) that appeared to be in the process of commissioning anyway got a fifteen year capacity contract. The other station being currently commissioned (Carrington) did not.

So, to sum up, nuclear and coal did well, existing gas got shedloads of money, new gas got virtually nothing – oh, and demand side response measures got about 1% of share out. More fiasco then triumph, I think.

 But it is the central aspect of investment in new plant that is squarely in the ‘fiasco’ bracket. Let’s suppose, as they are scheduled to do, the Department tries again next year with another auction, which may procure some more I year contracts. Where does that leave new plant? It is, I concede, something of a paradox that the Government is bringing forward mechanisms to pay developers of gas fired power stations to run at relatively low levels of output, in order to balance the system that, by 2030, will be predominantly populated by non-gas generation. This is for the very good reason that if it does not, then we will forever be locked not just into high carbon generation, but generation at levels that by themselves will bust any targets on overall CO2 emissions we might set for the country.  We will need this backup, but it is beginning to be evident that capacity auctions are perhaps not the best method of ensuring that it is there. Maybe the drop in oil prices and the following (partial) drop in gas prices will come to the rescue of new development, in which case capacity auctions aren’t likely to be needed.

I wonder if longer term, new gas plant will need to be publicly built and then rented out to operators. At least then we’d know the plants were there, and by the way, that when we didn’t need them, they could be removed in an orderly fashion. Or we could (heaven forefend) revisit the idea of a strategic reserve of gas plants.

As for doing things in the present way the phrase ‘one more victory such as this and I am ruined’ springs to mind. He lost in the end (Pyhrrus, that is.)

Time for some turbo-expander expansion?

Things are stirring in the gas capacity market. Just last week, Centrica announced that it is to sell three of its largest combined cycle gas power stations, totalling 2.7 GW of capacity. Instead it will concentrate on investing in ‘smaller, more flexible’ power stations. Cornwall Energy, in their ever perceptive ‘Energy Spectrum’, speculate that, among other things, the capacity market auctions may be beginning to look a little lop-sided; existing power producers are disadvantaged by accumulated losses on plant, whilst new entrants can be ‘neutral’ on losses. These new plants can gaining long term contracts to build new whilst older plants close down to cut their losses. Maybe, Energy Spectrum ponders, it is quite possible that Centrica is hoping to gain some value from existing plant rather than mothballing it as it faces up to the wacky world of the capacity auctions. (N.B. Cornwall Energy didn’t say that last bit – I did. And it is indeed going to be a very wacky world if existing plant is demolished to make way for new plant doing roughly the same thing, simply because the capacity market makes that an apparently rational short-term choice for participants. I set it out here a few weeks ago.)

At the same time, some new entrants may be beginning to emerge. One, Stag Energy, is looking to build just the sort of – I guess – ‘smaller more flexible’ power stations that Centrica might have in mind. They have a proposal in the pipeline to construct a 299MW open cycle plant in Suffolk (that’s about a quarter the size of one of the plants Centrica is putting up for sale).

The above isn’t exactly what I wanted to write about this week but it does set what I do want to scribe on into some relief. Because if the gas industry really wanted to develop some quick, small and flexible new capacity, it could do to pay some close attention to its own gas supply lines. This is what one of the gas distribution companies, Scotia Gas Networks has done, albeit in a small way. They have put four interesting bits of physics together and produced some power out of them, more or less for free.

  1. Gas transmission pipes compress gas from the receiving points to very high bar pressures (up to 50 times atmospheric pressure) to transport it around the grid
  2. In order to draw off this gas into the distribution system, it must be radically depressurised, down to the 2 bar that we get through domestic gas pipes
  3. This process wastes huge amounts of kinetic energy as the reducing valves do their job
  4. Using turbo expansion valves (invented around a hundred and fifty years ago) much of this wasted energy can be captured and put to work making electricity

And voila! Free electrical power ensues, with a relatively short payback period on the fairly high initial capital costs of the plant to do it.

Scotia Gas Networks has been running the only such plant in the UK for a year or so now, at St Mary Cray in South London. It has a capacity of about 7MW altogether, combining a turbine and a CHP plant. Not much, granted, but there are about sixty or so pressure reduction stations around the UK, each of which could have such a plant operating at the point of pressure reduction. In other words such a scheme would create a rather larger cyber power plant running on nothing at all than the proposed actual power plant from Stag Energy running on the gas that comes through the pipelines in the first place. So shouldn’t turbo-expanders surely be in the frame for some of the billion-pounds-a-year capacity payments?

Ah but turbo expanders are not renewable, so they can’t get Contracts for Difference. Neither do they qualify as demand reduction so they won’t get to go into the DSR capacity auctions. And they are certainly not the shiny, new gas fired plant run on new style ‘capacity-paid-for’ gas that the auctions themselves seem set to bring about. Turbo expanders are just very efficient, and they make good use of what is there already, so they wouldn’t get anything. Which is a shame because with a modest amount of capacity payments behind a turbo expander scheme, turbo-expansion valves could get a turbo charge. Maybe even through Centrica’s future investments.