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 They are supposed to ‘remain in force…unless withdrawn or suspended by the Secretary of State’ As far as I am aware, that hasn’t happened, so I guess they are in force at least for the time being.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