The conservative UK government boosted its climate credentials last year with its promise that all coal plants will be shut down by 2025. However, notes Mike Parr of consultancy PWR, this ignores certain inconvenient facts that will make delivery of this promise unlikely.
In November 2015 Amber Rudd, energy secretary, said that all British coal plants would be shut by 2025. Unfortunately, George Osborne (the UK’s Finance minister, Rudd’s boss and the person that defines UK energy policy) failed to consider that the companies owning the coal plants might be unwilling to close them. So it has proved.
The majority of UK coal plants have refused to sign up to the Rudd/Osborne scheme that would have seen them close automatically. Instead, 7 fossil stations will conform to the Industrial Emissions Directive (IED) – and thus run for as long as they want – rather than apply for an opt-out. The opt-out would allow them to ignore the IED targets but they would then close by 2023.
The UK has the highest wholesale electricity prices in Europe. This makes the coal stations extremely profitable
A related issue with respect to the decision of the stations’ owners to keep running is the fact that the UK has the highest wholesale electricity prices in Europe (circa €53/MWh in the second quarter of 2016 compared to e.g. €27 in Germany; source: Platts). This makes the coal stations extremely profitable, given that coal prices are also very low. In such a situation, companies owning coal stations want them to continue running, for as long as possible.
In October 2015, the Ecologist magazine profiled the takeover of energy policy by the UK Treasury department (run by Osborne). It was noted that this department lacks understanding of the power industry. This leads to the elementary policy mistakes, such as the one above.
Capacity market
The UK’s fossil stations are also the most highly emitting in Europe, which causes further problems for the Tory government which likes to claim that it is on-track to meeting its 2020 commitments (in the case of renewables, it is not). Although the stations are large emitters, they also account for around 25% of total generation (down from 31% in 2014). In an article I wrote for Energy Post in Janury 2015 I profiled in detail the failure of the Tory government to “encourage” the construction of any sort of new generation (apart from nuclear) through its capacity market mechanism. Renewables, apart from off-shore wind, are likewise dead in the UK. This rather closes off options for the Tory government.
On the one hand the Tory government wants coal stations to close, on the other it is trying to extend their lifetime
In terms of the coal stations, the Tory government could introduce primary legislation to force a shut down. However, this sits rather badly with Tory party ideology which is predicated on “let markets decide”.
Furthermore, some power stations, for example Drax, are moving towards wood pellets. Drax is converting three of its six units to burning wood pellets. EDF (part of the French government) has secured UK government money to help refurbish two of its coal plants to help them comply with the IED. Thus on the one hand the Tory government wants coal stations to close, on the other it is trying to extend their lifetime. Not so much a policy mistake as perhaps more “one hand of government not knowing what the other is doing”?
Complicating factor
Rudd will begin a consultation in 2016 with respect to the closure of the coal stations. Owners of these stations include Eon and RWE. The latter has extensive experience of another government (Germany) trying to force closure of profitable (old lignite) stations. RWE (with Vattenfall) was able to force the German government to compensate them for these forced closures. It is thus possible that something similar may happen in the UK.
A complicating factor is that the European Commission (DG Competition) will have the last word as to whether such “compensation” (in Germany and possibly in the UK) is state aid, or not. Assuming DG Competition is politically sensitive enough to wait until after the Brexit vote, it might be that the pair of amateurs (Rudd and Osborne) that are in charge of UK energy policy will have to “go back to the drawing board” with respect to the evolution of UK generation.
Editor’s Note
Mike Parr is Director of energy consultancy PWR which undertakes research in the area of climate change and renewables for clients which include a G7 country and global corporations. See his author archive on Energy Post.
Dave says
I find this article a little misleading – the conclusion is based on “UK coal power stations being very profitable”. They were once, but are no longer.
In fact, 3 out of the 11 remaining UK coal power stations are closing this March, exactly because they are unprofitable.
The running of coal power stations is collapsing, as gas prices have fallen faster than coal prices, and economics for gas are now ahead of coal.
What’s more, only 2 UK coal power stations (not 7 as said in this article) have committed to comply with IED. The other 5 are in the TNP, which is a derogation that defers IED to compliance to July 2020. None of these 5 have yet publically announced that they will comply with full IED.
The UK’s government forecast last year that coal generation would be 1% of the electricity mix by 2025.
Therefore, to legislate a coal phase-out is only to lock-in in advance what is expected to happen anyway – that the UK’s coal power stations are too old and dirty to continue running for much longer.
Mike Parr says
The stations are fully depreciated so only cost is O&M plus fuel. UK spark spreads Coal Euro27, gas Euro13 (per MWh). Expressed another way: you get 2.8MWh (elec) out of a metric tonne of coal which costs Euro40/Tonne. Given Euro53/MWhr (elec UK spot price) means for each Euro40/Tonne coal you get Euro148 – which does seem to leave a bit of wiggle room for O&M. So “Dave” UK coal on the above is “very profitable” – whichever way you calculate it. Of course on can always have an accounting loss – useful when you want to transfer profits – given the UK’s declining tax collection capacity – perhaps this is why some stations are “loss making”.
Economics for gas ahead of coal? – latest gas spark spread Euro13/MWh (coal Euro27.56 -oh dear) =- so I don’t think so.
UK forecast – coal 1% of energy mix – that would be a DECC figure. I’d no more trust DECC forecasts than I would the politicos nominally in charge of DECC. but I think I made that point in the article, didn’t I?
Dave says
Where is carbon price in your calc?
I make a negative dark spread of -ÂŁ0.35/MWh for this summer, before O&M and any fixed costs:
UK Baseload Power = ÂŁ33.39
minus Carbon = £21.07 (£18/t tax+€7.30/tETS x 0.9t/MWh)
minus Coal = ÂŁ10.67 ($39/t x 2.52 which gives 36% eff)
minus Coal rail costs of ÂŁ2
If you download our app at Sandbag.org.uk, you’ll see gas is running much harder than coal, even during this cold snap.
Don’t think I’m sticking up for gov policy, I agree with you on the “just a forecast”.
I certainly think we need robust legislation for the coal phaseout. I just think that coal power station owners should not find this legislation controversial, since it is unlikely to curtail their lifetime: by 2025, all bar one of the UK coal power stations will be over 50 years old.
Mike Parr says
I’d suggest that your wholesale pricing is too low the Euro53/MWh I used is from Platts – dunno where your figures are from. I’d add: “UK power market participants buy and sell power on the forward market for delivery over a wide range of timescales, and also trade additional power to meet the needs of their specific customer base” so it is somewhat tricky to get a clear view of what exactly a given ioperator gets, wholesale, for a MWh and in turn how profitable coal stations are. I can see your argument: they ain’t profitable so closing them costs nothing. I disagree with this approach (which is intellectually dishonest) – they are profitable (why run them – why not just close them? the companies that own them ain’t charities) – oh but hang on – this misses the retail link – which in theory does not exist – but in practise – you & I know does. So on an integrated basis (wholesale with retail top-up added) – the coal stations are massively profitable & marginally so standing on their own. My point rests: Tories warble on about the importance of markets – but only if it suits them. I’m not in favour of keeping old coal stations open – but building an argument to close them on their unprofitability is not argument at all.
Arthur says
I would like to understand why the retailer can’t just buy around the UK wholesaler. If the power generator has low costs and competitors have low sale prices, how can it be that they can get twice what their competitors get in Germany from the local retailers? Arthur.
Mike Parr says
UK retailers are also Uk generators, most generators have retail operations. The very high UK (wholesale) prices are thus a reflection of a “market” that is fixed, a regulator (Ofgem) that is fails to discharge its duty and a government that has not the slightest interest in getting good value for UK customers (working on the basis that actions, of which there are few, speak louder than words – of which there are many).
Arthur says
So how do we sort that out?! The directors of the retailer will have a fiduciary duty to always act in the best interest of the company. The company’s profits would be better if they shopped around (eg bought from Germany in this case) so they should be bound to shop around by their duty to the company. But who will bring a suit against them if, as you say, they are the supplier and customer too? If the board has no incentive to pick them up on it then the challenge is to find a legitimate way of allowing competition to prevail. The customers probably don’t have the means (or right?) to take them on OR to shop around in Europe themselves (vote with their feet!). Isn’t this where the regulator should step in? Pipedream maybe, but couldn’t local councils take on the invoicing of their local households/businesses and purchase direct on mass from the best offer available on their constituents behalf? That would give them some real buying power. If such schemes were put in place and the capacity of the interconnect to/from Europe from the UK was sufficient to supply all demand then the UK market would have to compete, no? The cost of administration at a local level could be funded from a small mark-up. Who do I talk to? My MP? I thought the Brits love an underdog. Has anyone tried this? Is there a reason why it couldn’t be pursued? If the result is halving energy bills it would surely win votes.
Mike Parr says
Without wanting to give the game away, I’m working with a large number of highly politically motivated people (a few hundred thousand) with respect to your “local councils” idea – although it does not need local councils to implement. You know who I am – e-mail me & I’m happy to give you more details on the not-so-new approach which we hope to implement – it’s going to be so much fun – but not for the power companies.
LR says
There is absolutely no possibility of UK coal stations, particularly Drax closing in the timescales suggested in any of the policies put forward by the EU or the stupid people in the UK government (both parties are equally as guilty and inept).
There is simply nothing to replace it. It’s such a large % of the UK power supply that taking it away would shut down British industry. You don’t even need to bother calculating the profitability with or without carbon taxes.
Everything w.r.t these stupid expensive taxes will have to change. In terms of the UK’s margin capacity, it’s virtually dead in the water even today – we are right at the margins and that is without a cold winter.
No energy company is really interested in investing in the UK now that the UK government has demonstrated the ability to just change their minds and withdraw incentives at the drop of a hat.
That is also true for all renewables, wind – solar and biomass, gas and there is now a lot of uncertainty with Hitachi because of the mess that the Hinckley project appears due to outdated and hugely expensive French technology.
The UK will be pleading and “paying” to keep the coal and biomass going as there is virtually no chance of nuclear being ready in anytime to prevent the margin capacity completely disappearing.
LR