EIC NewsBy Dan Parsons, EIC Risk Management Account Manager
Seven Year Statement
National Grid produces an annual Seven Year Statement (SYS) which considers how electricity demand and generation is likely to change in the future. This document is important for any existing and new electricity generator as it provides them with some of the data required to determine whether to build new - or to upgrade existing - generation facilities. Electricity users and traders also use the SYS to predict the direction of price movement during the next seven years.
Retiring power stations and their replacements
The EU Large Combustion Plant Directive (LCPD), introduced in 2008, set out emissions limits on nitrogen, sulphur dioxide and dust from large combustion plants with a thermal output of 50MW or more. Any power stations which were unable or unwilling to install emissions reduction equipment in order to meet the new requirement were said to have 'opted-out' and were given a limit of 20,000 hours of operation between 1 January 2008 and 31 December 2015. After this date, they must cease to operate. Currently, National Grid expects 12GW of coal and oil-fired capacity to retire before the end of 2015 as a direct consequence of the directive.
At first glance it appears that the LCPD will cause a huge decrease in capacity, especially considering peak winter demand was 59.3GW in 2009/10. However, connection agreements are already in place for an additional 17.1GW of Combined Cycle Gas Turbine (CCGT) generation, 11.7GW of wind, 4.4GW of coal, 1.7GW of other renewables and 1.7GW of interconnector capacity, by the end of 2017. Although the additional capacity expected to be provided by wind generation is welcome, it is wise not to include it in any forward capacity forecasts given its inherently unpredictable nature.
There are also plans for a net increase in nuclear capacity of 1.85GW over the same period, although much of the current nuclear fleet is due to be retired over the next seven years. National Grid has included two different demand forecasts within the SYS: their own calculations and those based on customer expectations. According to the National Grid forecast, by 2016/17 supply margins would be at 22 per cent if wind capacity is kept at zero. However, using the customer forecast, margins would be only 13 per cent. This lower level is not enough to meet minimum margin requirements (around 20 per cent), allowing for both planned and unplanned maintenance outages. Coupled with this, the report suggests that two new nuclear units will be generating within the seven year period. This is somewhat optimistic considering there have been significant delays on virtually all nuclear builds in Europe over the past decade.
The 1,600MW Olkiluoto 3 power plant in Finland is a prime example. The licence application for this plant was made in December 2000 and by May 2009 the project was still over three years away from completion and 50 per cent over-budget. The fact that building has not yet started on the Dungeness C (1,650MW) and Bradwell B (1,650MW) plants would suggest this type of nuclear technology is unlikely to be commissioned over the next seven years. The question is then raised on how the UK can 'plug the gap' until new nuclear power stations can be built.
The solution
Much of the additional wind generation due to come online over the next seven years is from the Scottish Highlands and islands. This is likely to limit any further opportunities for building new generators to the southern half of the UK, given that major upgrades to the transmission system in the north would be required to handle the combination of increased level of wind generation and other generating stations.
An assumed short-term solution would be to develop more gas-fired generation in the southern half of the country. However, with electricity prices increasing into the summer, and coal prices not rising as rapidly, it is beginning to look like it might be more profitable to use coal-fired generators as an alternative over the coming seasons.
The return of previously mothballed coal plants to service is an option. Alternatively, those that have opted-out of the LCPD could be fitted with the necessary emissions reduction equipment to enable them to continue generating beyond 2015. However, it is unclear who would be expected to invest the necessary funds to realise this scenario. As a consequence, it is likely that electricity prices will rise to encourage the level of investment required in new generation and the avoidance of a capacity shortage when older generation units retire.
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