Earlier this week, a former boss of National Grid claimed that the UK has enough energy capacity to meet demand. This pronouncement comes despite National Grid’s latest Winter Outlook suggesting the UK’s electricity margins are very narrow.
Even if the UK is not set for blackouts, there are still some troubling developments in the UK’s electricity market. The premature closure of many baseload power stations means the UK needs an environment to encourage new gas plant. In its 2012 Gas Generation Strategy, the Coalition Government said that up to 26GW of new Combined Cycle Gas Turbines (CCGT) capacity would be needed by 2030.
The trouble here is that the latest capacity auction – held in December 2016 – failed to encourage significant new gas plant. According to the provisional results, only 6.5% of awards went to new build generation with nearly 85% of the awards going to existing generation.
Tony Lodge – a CPS Research Fellow – estimated that around three to four large new CCGTs were needed from the auction to attract adequate investment into the energy sector. In fact, only two mid-sized gas plants were secured, leading analysts at Barclays to conclude that the auction “will largely be viewed as a disappointment by the UK government in terms of securing the significant levels of new gas generation capacity they hoped for”.
This potential lack of adequate baseload power may not lead to power cuts, but it could lead to a surge in power prices at any given point in time. For example, in September 2016 a series of incidents led to power prices temporarily surging from £40/MWh to £999/MWh. A lack of adequate baseload power could see this reoccur on a more regular basis.
Furthermore, the true cost of the government’s renewables policy is often massively understated. In this BBC report, it is claimed that the capacity auction – which effectively offers subsidies to baseload power plants to remain on standby due to growing intermittent renewables – is expected to cost £2-3 billion a year. This was followed by a statement from a government spokesman that back up for intermittent forms of energy will cost around £7 per household per year.
£7 per household equates to just £175m a year. It fails to account for the burden put on businesses (which, arguably, households end up paying for through higher prices or lower wages). Nor does it account for various network costs. The cost of balancing services required for intermittency is actually between £80 and £120 per household – if you take the £2 to £3 billion estimate. Some estimates suggest that the figure is even higher. And, of course, there’s the additional cost of direct subsidies for renewables, which will alone be £281 per household per year by 2020/21.
It is, of course, welcome that the former boss of National Grid believes that there will not be blackouts. But we must not lose track of the worrying trends in UK energy policy arising from growing renewables and a lack of adequate baseload power.