Deadline looms for energy answers

Within the next four weeks, the government will decide on the future nature of UK power generation. The decision will affect tens of thousands of engineering jobs. Peter Mandelson, secretary of state for trade and industry, will announce the outcome of the reviews of fuel sources for generation, the structure of the market, clean-coal technology […]

Within the next four weeks, the government will decide on the future nature of UK power generation. The decision will affect tens of thousands of engineering jobs.

Peter Mandelson, secretary of state for trade and industry, will announce the outcome of the reviews of fuel sources for generation, the structure of the market, clean-coal technology and support for renewables.

His predecessor, Margaret Beckett, has already put the brakes on the development of new gas-fired power stations. A temporary moratorium was followed by the announcement of plans for a stricter planning regime. Mandelson is likely to inhibit such projects further.

First, he is expected to accept industry regulator Professor Stephen Littlechild’s recommendations for a fundamental change in the way electricity is traded. To reduce the market power of the large coal-fired generators which usually set pool prices the head of Offer proposes to replace the pool with bilateral contracts, with balancing and futures markets to guard against shortfalls.

By common consent, this system will lead to lower electricity prices. Generators will be paid the unit price they bid, rather than the half-hourly price set by the last plant called on to the grid. Many people think this could produce a 20% cut in prices which, on the benchmark of the average pool price in 1997/8 of 2.57p/kWh, could take prices below the point at which new gas-fired plants are commercially viable.

A related issue is Professor Littlechild’s determination to force the two largest coal generators, National Power and PowerGen, to divest several thousand more megawatts of their capacity (they have already sold off 6,000MW to Eastern). While Littlechild has yet to clarify how much capacity he wants divested, it is thought between another 6,000MW and 10,000MW could be sold off to a further three or four companies.

The regulator is prepared to take the matter to a Monopolies and Mergers Commission inquiry if the firms do not comply and Mandelson will have to pronounce on this. He is likely to support the regulator’s case, but for a slightly different reason. While Littlechild sees the move as vital to a more competitive market in generation, the Government sees the benefit of securing a larger market for British-mined coal.

New owners would want to generate more terrawatt hours annually from coal-fired plants divested by National Power and PowerGen, which run them infrequently to set higher prices for their gas-fired units that operate around the clock.

The divestment would therefore bring more cheap generation into the market, as old amortised coal plants have an operating cost of about 1.6-1.7p/kWh. New owners would have to factor in the purchase price, but they would probably still be able to undercut newly-built combined-cycle gas turbines (CCGTs).

The only caveat is that greater use of old coal stations will increase the industry’s emissions of pollutants, such as sulphur dioxide and the global warming CO2 gas. This could prove embarrassing for Labour and its commitment to a 20% cut in C02 emissions by 2010. Cleaner-coal technology is a potential answer, but until now it has not proved cost competitive with gas.

A third issue Mandelson must resolve is policy on support for clean coal: which technologies to back and to what extent.

Integrated gasified combined-cycle (IGCC) plants which convert the coal into a gas before running it through a combined-cycle gas turbine plant are acknowledged as the cleanest technology. But so far they have proved unable to compete with CCGTs fired by natural gas.

RJB Mining and National Power have suggested a 300MW unit they are looking at on the site of the former’s Kellingley colliery in Yorkshire would require an operating subsidy of £12m-£15m for its first five years.

Despite Labour’s commitment to coal, this degree of support would probably be too much for the Government. IGCC plants are more expensive to build than CCGTs they are the same unit with a gasifying plant on the front end but they have potentially cheaper long-term fuel costs.

Despite this, some players believe an operating subsidy may not be required. The independent company set up by British Nuclear Fuels to develop IGCC projects in the UK, based on a system engineered by Magnox Electric and Jacobs Engineering, believes that taking a medium to long-term view of natural gas prices its plants would not require a subsidy to be competitive. The only ‘help’ they would need is favourable consideration in the planning process.

This will be more welcome news to Mandelson, as it would enable the Government to favour coal over gas for new developments without recourse to the public purse.

Whether developers take the same view is not so certain. The worry is that the combination of industry restructuring and government policy will delay substantial new generating plants until well into the first decade of the next century.