Picking power is the burning issue

The moment is fast approaching where the Government will have to declare its hand on important energy issues principally the future for coal. The reviews it has initiated on energy sources for power generation, renewable sources, the electricity trading arrangements and clean-coal technology will be concluded in the next few weeks, and it will not […]

The moment is fast approaching where the Government will have to declare its hand on important energy issues principally the future for coal. The reviews it has initiated on energy sources for power generation, renewable sources, the electricity trading arrangements and clean-coal technology will be concluded in the next few weeks, and it will not be possible to defer the decisions on the coal industry for much longer.

The inclination to prevaricate is understandable, given the political fall-out that will ensue whatever action the Government resolves to take. If it allows the coal industry to wither away, it will be accused of betraying its Labour roots. Measures to preserve a market for coal in the UK notably a ban on the construction of further gas-fired power stations will expose it to the charge that it is prepared to interfere in free markets and so damage prospects for foreign investment in the country.

A critical report from the Commons Select Committee on Trade and Industry last week, which berated the Government for failing to act in its first year in office, seemed to want to have its cake and eat it.

It called for an end to the moratorium on construction of gas-fired plants, but also said there was a ‘sustainable case’ for maintaining some coal-mining capability in the UK.

A beleaguered John Battle, the energy minister, responded that the issues involved were complex, that the Government has inherited a flawed electricity market and that it was taking the time necessary to come to the right conclusions on how to correct it.

The structure of the present market has not helped coal’s cause. Generators submit price bids for their plants to the electricity pool for half-hour slots 24 hours in advance. The most expensive plant required in any 30-minute period sets the price for all plant called up for that interval. This has encouraged the use of coal-burning stations as ‘price setters’ rather than ‘price takers’.

Most independent gas-fired plants bid zero or close to it but receive the price set by coal. Because stations are called on to the grid in order of price bid, this ensures gas plant on ‘take or pay’ contracts keep running.

So while power generated from existing coal-fired stations (with capital costs long since amortised) is cheaper to produce at 1.6p 1.8p per unit (kWh) than the output from new gas-fired plants (2p 2.2p), gas powered plants get called up by the National Grid before coal.

The three big coal-fired generators, National Power, PowerGen and Eastern, all have significant gas-fired portfolios and have every incentive to keep pool prices at as high a level as possible level without incurring the wrath of the regulator, Offer, that they are abusing their market power. If they bid in large numbers of coal plants at cheap prices, pool prices would collapse.

As coal no longer meets baseload requirements, independent power generators, Offer and consumer groups can argue that a curb on further gas-fired capacity will mean higher future electricity prices than would otherwise be the case. It would impede the emergence of more competitition seen as the ultimate downward influence on prices in a market that is still dominated by a few big players.

Nor will the recently published interim proposals from Professor Stephen Littlechild, the head of Offer, for changes in the electricity trading arrangements significantly alter the equation. These would abolish the pool and the principle of price-setting and price-getting plants, and require generators to make bids direct to suppliers and then be called on to the system in order of price. But the three big coal-burners would still ultimately burn holes in their own pockets if they tried to use their coal plants to drive gas out of the market.

Only a radical restructuring of the generating industry that forced the big three to divest their coal-fired plants to individual companies would overcome this problem.

However, this is not a realistic proposition. Aside from the political flak that would ensue from such an interventionist step, the move could be self-defeating.

For assuming the existing generators were not forced to give their plant away, the price the new owners paid would be a capital cost they would have to amortise and would probably push the unit price up to or even over that of the cheaper gas-fired plants.

These older coal plants are also more environmentally harmful per unit of power generated than their gas-fired equivalents, producing about double the volume of global-warming CO2 as well as the acid-rain pollutants, sulphur dioxide and nitrogen oxides.

It would be imposssible for the government to square a lot more coal-burning with its ambitious targets for reducing CO2 by 2010.

While measures to preserve a market of 20m 25m tonnes of coal a year in power generation will probably emerge from the review, it is difficult to see use of the fuel doing anything but decline over the longer term.