Time to take power supply seriously

Chris Paddey

The UK power sector was thrown into another crisis when Ofgem announced an investigation into the big six energy companies. Chris Paddey assesses the issues for the country’s energy supply and offers some solutions.

The issues facing the power industry today are largely similar to 10 years ago – security of supply, affordability and environmental impact.

We are now producing of our power 11% from renewable sources, likely to be above 15% by 2020, with a consequent impact on carbon reduction and security of supply. But incentive mechanisms to help establish a renewable sector are seen as adding too much to the cost for consumers.

So how do we generate power at reduced cost? Currently the cheapest source of power generation in the UK is coal. This is due to having existing assets in place and the cost of emitting carbon being extremely low. Utilisation levels at coal fired power stations in the UK rose from 41% in 2010 to 57% in 2013.

Cheap coal power has a knock on effect in that it currently makes gas fired power and nuclear power look expensive. In the UK today even the most highly efficient gas power plants are sat idle because they are too expensive to run.


We need base load power generation to power the country, approximately 36GW on average and 58GW at peak times. To create this power in the UK our current generation mix is in the region of 38% coal, 28% gas, 21% nuclear and 11% renewables.

It should be noted approximately 20GW of this base load power is scheduled to close between 2014 and 2023, according to the Association of Electricity Producers. This will create an issue around reserve margin which is expected to fall from 14% to 5% over the next two years.

New build gas fired power stations are the cheapest and quickest to build. The Government recently launched its gas strategy with a view to promoting this form of generation in the short term to offset the costs of renewables. However, gas-fired stations have been returning very low and in some instances negative spark-spreads – profit margins - which highlights the risks currently surrounding new build gas-fired generation. The current uncertainty around Ukraine and the related sanctions being placed on Russian will only increase concerns over security of supply.

So what do we need?

We need cross party support for a medium term energy strategy to meet our long term goal of reducing emissions by 80% by 2050, and we need a fully functioning energy market driven by fair and transparent competition. Ever since privatisation in 1990 the power industry has been used as a political football. Even the role of Energy Minister itself. How seriously are we taking our energy policy when we have changed the minister responsible for energy at least six times in as many years to my knowledge?

We have a number of incentive mechanisms, some implemented by Labour, some by the Coalition. Finalisation of the Electricity Market Reform (EMR) as part of the Energy Bill should be in place prior to the election next year. These two initiatives are expected to unlock up to £110bn of private sector investment according to DECC, assuming investor confidence is created. However, what certainty is there that this will be our long term energy policy if a non conservative/liberal democrat coalition government takes over?

We need a climate of certainty and political agreement to enable the flow of investment required to deliver the changes needed to our energy industry. In complete contrast to this Ed Milliband has recently created huge investment uncertainty in the short term by stating he will freeze energy prices if Labour take power in 2015. And the Ofgem investigation into the Big 6 power companies in the UK will further unsettle investors.

Financial organisations require investment security to release capital for long periods of time. Why then, when the reserve margin is known to be critically low and new build gas generation is financially risky, are we creating further uncertainty in the sector?

There could be a win win situation for the UK. New build power stations as part of a clearly defined medium term cross-party strategy would create jobs, investment would flow, businesses would be better protected from fuel price swings and the UK could rely on a long term, affordable and environmentally friendly power supply.

What a good medium term strategy would look like?

In my opinion we must have long term political will to create an investment environment conducive to long term financial investment. Hopefully the EMR will achieve this.

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Once this is in place we will need to start building more cost effective, low emission, fossil fuel power generation plants. The obvious solution here is high efficiency natural gas which delivers large scale base load power at least cost when compared to its environmental impact. It also offers flexibility to work with renewable power generation.

To make this financially viable we must revitalise the carbon price floor and/or create a functioning capacity mechanism. This is the element of the EMR that rewards both the provision of required capacity (as opposed to generation of energy) and demand side response (the ability to reduce consumption when instructed to do so).

I also see a place for nuclear as part of a mix of generating capacity along with new build coal, assuming carbon capture and storage can be developed cost effectively.

If these ‘traditional’ forms of power generation are adopted in the 2020s then they must be viewed as a stepping stone to a large scale renewable power led sector thereafter. I do believe predominantly renewable powered super grids are viable and will provide the majority of power around the world by 2050.

To this end we must create an environment whereby the continued investment in renewables technologies such as offshore wind, wave, tidal, sustainably sourced biomass, hydro, energy from waste, district heating, solar etc. are viable. This will allow costs to reduce with scale as has successfully happened with solar over the last few years.

Energy efficiency will be a key part of any strategy. Demand management and reduced use of power by industry, public sector, and domestic dwellings will all form part of a refined energy demand profile in the future. As a nation we must reduce the amount of energy we consume.

Short term opportunities - waste to heat and ESCos

Waste has started the journey of reinventing itself from being a dirty word for products seen as a financial threat on a balance sheet, in terms of a cost to dispose of, into a resource which has a financial, calorific and/or biogas value. Waste will certainly increase its role in our energy future.

I have seen first-hand in Europe how district heating and renewable heat can generate revenue streams whilst reducing individual generation of heat by industry. The Renewable Heat Incentive now helps to make the financial case for such schemes throughout the UK.

Finally I would like to make the case for innovative financial and ownership models in developing new power generation projects. I am talking here about the Energy Services Company (ESCo) model. This is something I have become more and more involved in over the last two years. Capex constrained organisations such as industrial companies, NHS Trusts, local authorities etc can now take advantage of innovative low, zero and in some instances revenue positive solutions to their energy needs. This can create reduced cost, revenue generation, increased security of supply and environmental benefits when looking at on-site energy generation and/or energy efficiency measures in the majority of cases. There are a growing number of companies who will work with organisations to supply free or low cost energy solutions in return for power purchase agreements.

It is entrepreneurial financial models like these that may well help us overcome the many political challenges we currently face.

Chris Paddey runs PADD Energy and is on the ACE Energy Sector Interest Group