The capacity market was unexpectedly suspended, new low-carbon capacity has stalled and no-deal Brexit may disrupt carbon prices and the operation of interconnectors. <\/p>\n\n\n\n\n\n\n\n
After a legal challenge by Tempus Energy (a smart grid start-up)1<\/a><\/sup>, the European Court of Justice brought the UK\u2019s capacity market to a standstill in November2<\/a><\/sup>, suspending \u00a31 billion per year worth of capacity payments. These were supposed to go to generators and flexible consumers for ensuring availability at times of peak demand, leaving many firms in the electricity market with a hole in their finances. The UK Government believes this will not impact security of supply this winter3<\/a><\/sup>, and analysts agree that the effects won\u2019t be felt until this year. Some older power stations may resort to closing early on financial grounds4<\/a><\/sup>. This would lead to tighter supply margins, giving higher and more volatile prices next winter, possibly offsetting any reduction in consumer bills that would come from halting the capacity payments. New solar PV and wind capacity installed in each calendar year<\/em> <\/p>\n\n\n\n Finally, Brexit is just weeks away and will potentially have the biggest impact on Britain\u2019s power system. If the UK leaves with no deal it will leave the Emissions Trading Scheme, the EU-wide market which puts a price on carbon. Government plans to replace this with a carbon tax of \u00a316 per tonne, which would start in April 2019.9<\/a><\/sup> However, the European Commission has already suspended Britain\u2019s access to ETS carbon permits in an effort to limit disruption to the scheme.10<\/a><\/sup> This leaves a potential gap from January through to March 2019, where Britain has no underlying carbon price, and so power stations are only subject to the Carbon Price Support.11<\/a><\/sup> 1: http:\/\/www.nortonrosefulbright.com\/knowledge\/publications\/171502\/tempus-energy-and-the-capacity-market-in-the-uk<\/a> Authors:<\/em> Dr Iain Staffell<\/a>, Professor Richard Green<\/a>, Dr Rob Gross<\/a> and Professor Tim Green<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" The New Year brings new challenges to Britain\u2019s power system. <\/p>\n","protected":false},"author":2,"featured_media":976,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-387","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-q4-2018"],"acf":[],"aioseo_notices":[],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/387","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=387"}],"version-history":[{"count":5,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/387\/revisions"}],"predecessor-version":[{"id":1566,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/387\/revisions\/1566"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/media\/976"}],"wp:attachment":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=387"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=387"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=387"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
In the space of three months, Toshiba and Hitachi have shelved plans to build 9 GW of new nuclear reactors. Their combined capacity would have been sufficient to replace Britain\u2019s entire fleet of aging nuclear reactors. Toshiba is closing its UK nuclear business after it failed to find a buyer for NuGen, and so \u201cthe economically rational decision is to withdraw from the UK nuclear power plant construction project\u201d5<\/a><\/sup>. Hitachi have formally suspended investment into nuclear stations at Wylfa Newydd in Anglesey and Oldbury in Gloucestershire, describing them as \u201cincompatible with the company\u2019s economic rationality\u201d.6<\/a><\/sup>
Unless new partners or financing deals can be found, these announcements place a 9 GW hole in the amount of low-carbon capacity that will be available in the coming decade. One view is that this collapse \u201cshould be seen as an opportunity rather than a risk, for the UK to prioritise renewables instead\u201d7<\/a><\/sup>. However, the growth in wind and solar capacity has slowed down dramatically. In the last twelve months, fewer wind and solar projects were built than at any time since 2010 (see chart below). The government believes this slump will continue into the next decade.8<\/a><\/sup><\/p>\n\n\n\n![\"\"](\"https:\/\/reports.electricinsights.uk\/wp-content\/uploads\/2020\/09\/190211_Drax_Q4_Charts_3-1024x425.png\")
<\/figure>\n\n\n\n
Until Britain\u2019s relationship with the European Union is known, it is unclear what price fossil-fuelled power stations should be paying for carbon emissions during Quarter 1: around \u00a340 if there is a deal (ETS plus CPS) or \u00a318 if there is no deal (CPS only). Based on emissions during Q1 of 2018, this difference could amount to \u00a3450 million for Britain\u2019s coal and gas power stations.12<\/a><\/sup> If generators anticipate lower carbon prices, coal could make a comeback at the start of the year. Britain may also become a net exporter of electricity, including over the new interconnector to Belgium, as British generators will face lower carbon prices than those on the continent for the first time in five years.
However, those interconnectors may not be used as efficiently as they are today. Power flows over Britain\u2019s interconnectors would go from being automatic to being decided by traders.13<\/a><\/sup> At present, power implicitly flows from low- to high-priced countries: \u201cbuy cheap, sell dear\u201d. While this would be the aim of traders, they are not perfect, and the loss of efficiency is expected to add \u201ca couple of percent\u201d onto the cost of generation.14<\/a><\/sup>This may, of course, be lost in the noise of currency fluctuations, which affect the cost of imported coal, gas and electricity. Sterling is widely forecast to move by 10% either way against the euro and dollar, depending on how smooth the transition is.15<\/a><\/sup>
All in all, don\u2019t expect 2019 to be a quiet year for Britain\u2019s power system.<\/p>\n\n\n\n
2: Tempus argued that the scheme privileges generation over demand side response (DSR) due to the duration of contracts offered (up to 15 years, versus 1 year) and the means of cost recovery for DSR (all weekday winter evenings, rather than the specific periods of highest demand).
3: https:\/\/www.gov.uk\/government\/collections\/electricity-market-reform-capacity-market<\/a>
4: https:\/\/theenergyst.com\/the-money-and-the-power-what-next-for-capacity-market\/<\/a>
5: https:\/\/www.bbc.co.uk\/news\/business-46122255<\/a>
6: https:\/\/www.economist.com\/britain\/2019\/01\/26\/hitachis-exit-puts-britains-nuclear-policy-in-meltdown<\/a>
7: https:\/\/www.theguardian.com\/environment\/2018\/nov\/08\/toshiba-uk-nuclear-power-plant-project-nu-gen-cumbria<\/a>
8: https:\/\/www.gov.uk\/government\/publications\/updated-energy-and-emissions-projections-2017<\/a>
9: https:\/\/www.gov.uk\/government\/publications\/carbon-emmisions-tax\/carbon-emmisions-tax<\/a>
10: https:\/\/uk.reuters.com\/article\/uk-eu-britain-carbon\/britain-says-it-will-not-auction-eu-carbon-permits-in-first-quarter-2019-idUKKBN1OI1LT<\/a>
11: The Carbon Price Support of \u00a318 per tonne of CO2 is levied on British power stations on top of the ETS (or carbon tax).
12: If Britain\u2019s coal and gas stations emitted 20.5 million tonnes of CO2 (as they did in Q1 2018), they could expect to pay \u00a3370m for the Carbon Price Support (under no-deal), or \u00a3820 million if we stay in the ETS based on permit prices of \u00a322 per tonne (the average during January 2019).
13: https:\/\/www.gov.uk\/government\/publications\/trading-electricity-if-theres-no-brexit-deal\/trading-electricity-if-theres-no-brexit-deal<\/a>
14: http:\/\/www.ukerc.ac.uk\/news\/elecxit-could-cost-270-million-a-year.html<\/a>, Chatham House: Brexit \u2013 Deal or No Deal (25th January 2019)
15: https:\/\/www.telegraph.co.uk\/financial-services\/currency-exchange\/international-money-transfers\/pound-forecast-post-brexit\/<\/a>, https:\/\/www.theweek.co.uk\/98984\/what-the-brexit-vote-could-mean-for-sterling<\/a><\/p>\n\n\n\n