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Energy & Environment

"United Kingdom Power Report Q2 2014" Published

New Energy market report from Business Monitor International: "United Kingdom Power Report Q2 2014" 2014-03-28 12:09:06
With the long-awaited UK Energy Bill having entered into law, the coalition government is clearly hoping that it will provide a stable regulatory framework that will ultimately unlock GBP110bn of investment in the country's stalling power sector. While the bill has been criticised for being overly-complex and opaque, such investment is certainly needed at a time when thermal capacity is being shuttered at a rapid pace in order to comply with EU emissions criteria. Critically this capacity has not been replaced as utilities have been deterred from investing because of the questionable economics of gas-fired generation, at the same time as the issue of rising electricity prices has been used as a 'political football' by the main political parties - something that is likely to continue in the run up to the 2015 general election. While we have seen some promising activity in the nuclear segment, we note that proposed nuclear reactors will come online too late to replace shuttered thermal facilities - stoking fears of a capacity deficit in 2015 and 2016.

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While the UK's economic trajectory improved significantly over the second half of 2013, our outlook for the country's power sector is complicated by numerous sector-specific factors - with the biggest remaining the uncertainty over future energy policy. While the coalition government's long-awaited Energy Bill was granted Royal Assent in December 2013, and there has been an uptick in activity in the domestic nuclear segment since the government agreed a strike price for two new nuclear reactors at Hinkley Point in Somerset, investment in traditional thermal generation capacity in UK's power sector continues to stall. To put the situation in context, Danish utility Dong Energy's UK Country manager, Benj Sykes, told the Daily Telegraph in December 2013 that it was extremely difficult to make investment decisions in the UK because energy policy was being treated as a 'political football'.

This freeze in investment has been brought into sharp focus in recent months, as vast amounts of thermal baseload capacity (mainly coal-fired capacity) continue to be shutdown or mothballed at an alarming pace as utilities decide to cut their losses rather than upgrade power plants in order to comply with costly European emissions reduction policies (such as the Large Combustion Plants Directive). While gas-fired capacity appears to be one of the favoured options with regards to replacing aging coal-fired capacity, unfavourable dark-spark spreads have continued to take a toll on investment in new power plants. This problem has been exacerbated by the rows over rising energy bills (referenced by Dong Energy), with both the Conservative and Liberal Democrat coalition and the Labour Party moving to make political capital out of efforts to curb rising bills in the run up to the 2015 election. Such uncertainty also casts a shadow over future investment in renewables.

This is the context in which it is hoped the UK's Energy Bill will create greater certainty for investors in much-needed new capacity - with the bill viewed as critical to establishing a stable regulatory framework. To this end, with the Energy Bill now having been granted Royal Assent, we believe it is at least indicative of the government's future policy direction - thanks to provisions for decarbonisation, nuclear regulation and, critically, a framework for Electricity Market Reform (EMR). Indeed, EMR is at the heart of the Energy Bill and aims to attract GBP110bn of investment to replace retiring power plants, reduce the risk of blackouts, upgrade the country's creaking grid infrastructure and ensure that the UK meets its emissions reduction targets. We believe that one of its most critical functions will be the delivery of a capacity mechanism that will incentivise gas-fired capacity additions. However, we remain cautious and highlight that much will depend on secondary legislation.

Key Trends And Developments

* In October 2013, the UK's Royal Academy of Engineering (RAE) delivered a report to Prime Minister David Cameron highlighting the urgent need for investment in new generation capacity in order to avoid electricity shortages - as well as the difficulties involved in delivering a 'modern, sustainable and secure service that will be the foundation of economic growth'. This followed a report released by the Department for Energy and Climate Change (DECC), which stated that a fifth of the UK's existing installed capacity is due to come offline over the next decade. Similarly, the regulator Ofgem warned, in June 2013, that the UK's risk of blackouts by 2015 was higher than previously thought.
* To this end, utility RWE npower closed its Tilbury, Didcot A and Fawley power stations in 2013. Furthermore, in early January 2014 the utility said that it had opted out of including its Littlebrook power plant under the EU's the Large Combustion Plant Directive, which means it must shut by 2015. The energy company is also opting out of the Industrial Emissions Directive (IED) for Aberthaw, Didcot B and four combined heat and power plants and, as such, has entered them into the Limited Life Derogation.

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Press Information

Published by
Bill Thompson

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