UK conventional thermal and nuclear capacity in doubt

The life of the UK's existing nuclear capacity has been extended until September 2014 and preliminary approval has been given to a new site in Somerset. However, with the Kingsnorth coal-fired plant due to come offline in March 2013, and with nuclear capacity set to fluctuate due to additions and closures, the government must ensure its Electricity Market Reform guarantees replacement capacity.

The Office for Nuclear Regulation has approved an extension to the operating life of the Wylfa nuclear station in Anglesey, North Wales, which has already passed its planned shutdown date of December 2010. Although the site's second reactor has been dormant since April 2012 due to limited stocks of Magnox fuel, the nuclear decommissioning authority announced on August 9 that, following reviews, the site has been granted permission to continue to transfer partially used fuel from reactor 2 to reactor 1, although only until around September 2014. This reprieve means that Wylfa will become the oldest Magnox reactor still generating in the UK (the previous longest serving Magnox station, Oldbury, was closed in February 2012 after running for 44 years).

Also on the generation chopping block is the Kingsnorth coal-fired plant in Kent. The four-unit station - owned by E.ON - has a capacity of 1.94GW. Under the EU's Large Combustion Plant Directive, the plant can only operate for a total of 20,000 hours, of which less than 2,000 operational hours remain. As a consequence, it is expected to close by March 2013, removing a significant amount of capacity from the grid.

On the positive side for nuclear generation, however, is the news that preliminary approval has been given to EDF's proposed new nuclear station, Hinkley Point C, in Somerset. Indeed, on August 13 the Environmental Agency gave initial approval for the Bristol Channel to be used to discharge radioactive water.

If all permits and consultations work in its favor, the Hinkley Point C station will be built by NNB Generation Company Limited, a joint venture between EDF, Areva, and Centrica. The next step in the process will take place after November 9, 2012, when public consultation on the discharge permits ends. Licensing approval for the European pressurized reactor technology that will be used for Hinkley Point must also be obtained before construction can commence. A review by the Office for Nuclear Regulation could be completed by the end of 2012 provided that outstanding questions in the Generic Design Assessment process are satisfied.

The uncertainty created by these possible additions and closures over the next two years means that the government is under extra pressure to ensure that investment in replacement capacity comes forward. This is a key objective of its Electricity Market Reform (EMR), whose measures include a Contracts for Differences payment to low-carbon generators. The EMR is currently being refined by the Department of Energy and Climate Change following pre-legislative scrutiny.  

Written by Yasmin Valji

Analyst in the Datamonitor Energy & Utilities team

Conventional thermal power will continue to dominate the supply mix in the Netherlands

 

Datamonitor has released its latest forecast of power supply and demand to 2030 in the Netherlands. The forecasts include a breakdown of annual power supply into different generation types, and provide demand sensitivities.

The future electricity landscape is forecast to remain dominated by conventional thermal generation, albeit with an increasing element of renewable energy in the mix. Datamonitor expects that with the current rate of renewable project completion, the Netherlands will come close to having almost 20% of its total net production from renewable sources.

Conventional thermal power plants currently account for over 85% of power generation in the Netherlands. As in the UK, conventional thermal generation is expected to remain the primary source of electricity generation out to 2030, with natural gas making up over 30% of the generation mix in 2030. However, sources of renewable generation as well as nuclear will grow the fastest, but from lower bases.

Of note is Datamonitor's expectation that the Netherlands will change from being a net importer of electricity to a net exporter from 2013. Natural gas reserves currently exceed 38 trillion cubic feet and form the major source of conventional thermal power generation, far ahead of coal. Datamonitor expects that the lower natural gas prices will impact the import/export ratio such that the country becomes a net exporter, with a compounded annual growth rate of 16% to 2030 in net exports.

A second point of note is that nuclear generation is set to grow the fastest. Datamonitor forecasts that two new nuclear reactors will come online in the 2020s, leading to more than five times the level of generation in 2030 than at present. 

 

By 2030, the share of renewable generation is expected to double to 24% of the mix. The balance of renewables is forecast to be quite different in 2030: the proportion of renewable generation that comes from wind will increase to 63%, up from 52% in 2012, to the detriment of bioenergy. In fact, generation from wind is forecast to be more than double the amount of bioenergy generation in 2030.

On the demand side, transport demand is forecast to grow the most, driven by a sustained increase in demand for electric vehicles. Commercial and industrial sector demand is expected to grow moderately. Residential demand is expected to grow very gradually, dampened in part by government-led energy-efficiency measures, smart metering, and more efficient electrical appliances.

UK government's proposed Electricity Market Reform may put independent generators at a disadvantage

The UK parliament's Energy and Climate Change Committee has been scrutinizing the government's proposed Energy Bill. One of its conclusions is that independent generators may have difficulty in accessing the market and gain selling electricity to wholesalers.

The core part of the government's proposed Electricity Market Reform (EMR) is a feed-in tariff (FiT) with Contracts for Differences (CfDs), which is essentially a subsidy for all low-carbon generators. The problem for independent generators, however, is twofold. Firstly, there is the difficulty linked to the difference between CfDs and the current renewables support regime, the Renewables Obligation (RO), which forced suppliers to source energy from renewable generation in a physical sense. Under the RO, large, vertically integrated energy suppliers had an incentive to purchase power from independent generators. However, CfDs do not include any such incentive.

Secondly, there is the low level of liquidity in the market, which creates a barrier to entry for renewable generators. Selling in the market requires sufficient in-house trading capacity, but in addition to this, independent generators must also manage volume risks; namely, the risk that installed capacity generates less than expected. This is particularly a problem for intermittent generators. Therefore, until now, independent generators have tended to rely on power purchase agreements (PPAs), which are contracts to supply power to the buyer, usually at a discounted rate to reflect the reduced risk compared with selling in the market. 

The danger for independent suppliers is that the power asymmetry with large buyers will be exacerbated under CfDs. PPAs may be offered at a larger discount than before, meaning that generators would not actually earn the strike price promised under CfDs. The implication is a PPA market that fails to underpin renewable investment, which is clearly a serious problem for the government's low-carbon generation goals.

The route to market and low liquidity in the market are currently being reviewed by the Department of Energy and Climate Change (DECC).  Solutions being considered include mandating the "Big Six" vertically integrated companies to sell 25% of their generation output in the forward market; having an incentive built into CfDs to ensure low-carbon generation is purchased (such as a cost-reduction on the CfD in exchange for low-carbon power); having a buyer of last resort; and extending the RO regime beyond its closing date of 2017 for new entrants.

DECC is currently conducting a review of evidence on access to the market for renewable generators. A full energy bill is due in October/November 2012, with the approved legislation expected to reach the statute book in 2013.

Written by Yasmin Valji

Analyst, Datamonitor Energy & Utilities