Who Will Lose Out When There Is A Glut Of Power?
By Paul Homewood
It is generally assumed that nuclear plants, such as the proposed one at Hinkley Point, are technically capable of operating at around 90% of capacity.
However, there is a question mark over whether they will actually be able to sell all of their output.
John Constable, of REF, has this analysis at GWPF:
The UK government has, after some delays, given approval to Hinkley C nuclear power station. However, and in spite of subsidies intended to offset risks arising from renewables policy, it is still not clear that the project can actually make money. It remains to be seen whether EDF has the courage to proceed.
The British government has decided to approve the Hinkley C nuclear power station, subject to a number of conditions relating to the sale of EDF’s share. These are intended, it is said, to ensure that “the full implications of foreign ownership are scrutinised for the purposes of national security”. Future projects will have a similarly designed “special share” giving HMG the power to “ensure that significant stakes cannot be sold without the Government’s knowledge or consent”.
This gives the appearance of resolving the concerns aired when the Prime Minister delayed approval on the grounds of possible risks to national security arising from overseas investment in such infrastructure, particularly from China.
Unsurprisingly, this is nowhere near the end of the story. The British government has now given fair warning both to EDF and the Chinese government that it is only lukewarm about this project, and is unlikely to consider augmenting the fixed price, of £92.50/MWh, which will almost certainly be a large subsidy since wholesale prices are expected to be much lower than this for the majority of the project’s lifetime. If EDF were gambling on being able to obtain a little more support from the British consumer at a later date, from capacity payments perhaps, they should now realise that this is unlikely to happen. Is the deal as it stands sufficient to allow EDF and its partners to invest? Perhaps not.
The price per MWh, may look right now, but there is no guarantee that they be will able to sell enough of their output to turn that price into the required income.
Of course, it is widely assumed in much press comment that Britain is facing a crisis and desperate for electrical energy. This is not strictly speaking true. On current projections, the UK will have a vast renewable electricity generating fleet; 54.5 GW currently has planning permission, according to government’s own Renewable Energy Planning Database, and there is a further 10 GW of capacity still in the planning system. Together this capacity is sufficient to generate about 170 TWh of energy, more than 50% of current electricity consumption.
However, while this is a large volume, the renewable fleet is, for the most part, uncontrollable and cannot give a strong guarantee of delivering this energy at the rate it is required when it is required. Hinkley C, of course, can do exactly this. But it is entirely conceivable that however vital Hinkley might be to security of supply as a provider of joules per second on demand, it would ultimately be selling volumes of electricity amounting to rather less than the 25 TWh that could be generated annually if it achieved its theoretical 90% load factor. With a strike price of £92.50/MWh that 25 TWh would generate income of about £2.3bn a year, half of which would be subsidy assuming that wholesale prices are roughly as they are today. That may seem fairly generous when set alongside the capital cost of £18bn, but cost overruns, Operations and Maintenance, and less than maximal sales may pare away much of this buffer. It would be interesting to know what actual load factor is needed for the project to be viable. Perhaps EDF is not really sure.
Lest this seems a needless anxiety, it should be recalled that 25 TWh really is a very large quantity of electrical energy, about 8% of current total consumption. Assuming that current UK demand does not rise and all the renewable plant described above is actually built, Hinkley would be capable of producing about a staggering 20% of the remaining annual demand. We can be sure that EDF is hoping that it would run undisturbed as a base-load provider, but the reality is that it could face stiff competition for the remaining market, not least from new generation gas turbines, which will be very cheap, and extremely flexible.
Much therefore depends on the scale of future UK demand for their electricity, and this is notoriously difficult to predict. Writing in 1984, two very competent analysts, Bending and Eden, foresaw consumption of between 452 and 666 TWh per year in 2020 (Richard Bending, Richard Eden, UK Energy: Structure, prospects and policies (Cambridge UP: Cambridge, 1984)). Current consumption is somewhat under 300 TWh. Things may change in the next four years, but it is unlikely that demand will rise to anything like those levels. Indeed, British Final Electricity Consumption (FEC) has been falling since approximately 2005, when it peaked at 349 TWh per year, and it has now returned to levels not seen since the early 1990s, and continues to fall.
The question therefore, is whether EDF can be confident that the UK’s consumption of electricity will recover sufficiently to give Hinkley a market large enough to turn the strike price into the required cash flow. Scandalous though the subsidy for Hinkley genuinely is, the truth is that it may not be remotely sufficient to make this power station viable in the policy-distorted market that is already a reality and is set to get worse.
This is a topic I have raised before, what happens when there is a glut of power, although my view is that it is intermittent renewables, such as offshore wind, which will suffer, rather than Hinkley Point.
Let me explain.
Under the strike price mechanism, under which both Hinkley and future offshore wind projects will be contracted, the government agrees to top up whatever price is obtained in the market place to the agreed strike price.
If the market price is higher than the contract price, the difference is refunded to the government.
This effectively means that Hinkley Point can virtually guarantee to sell all of its output, as it can, if it needs to, sell at a penny per MWh, and still get paid the strike price of £92.50. In other words, it can undercut all competitors not guaranteed a strike price.
Initially, this will simply displace CCGT and existing nuclear plants.
However, offshore wind generators have a problem. Whereas Hinkley Point can sell all of its output via forward baseload contracts, wind operators are unable to, as they cannot guarantee to supply their power when needed.
According to OFGEM, baseload products account for 75% of all electricity trades, for obvious reasons. (Wholesale Energy Markets in 2016 – Page 41).
Currently, the small amount of wind power in the system can be absorbed into the spot market or as part of a product mix. Things, however, will change drastically as renewable output grows.
The Committee on Climate Change has prepared various scenarios for its Fifth Carbon Carbon Budget, but the no CCS option is perhaps most realistic.
This is the capacity assumption for it:
|Carbon capture & storage||0|
Note this does not include back up CCGT capacity.
Given that demand runs below 40 GW for much of the year, something clearly has to give. Below is the CCC’s chart, showing how wind, solar and nuclear output will often exceed hourly demand:
We naturally focus on what will happen when the wind does not blow, but often, with the huge amounts of wind and solar capacity planned, there will be too much power.
If Hinkley Point and other new nuclear are able to sell most of their output under forward baseload contracts, it will be wind and solar that feel the squeeze.
We frequently hear claims that offshore wind will soon become competitive with other generation, but this wholly relies on their being able to operate at optimal loading. The CCC, for instance, assume 42%. But this is only possible where all the output can actually be sold.
If this is not the case, there is a huge question mark over the viability of offshore wind projects at the much lower prices projected by the CCC.
It is sometimes claimed that nuclear plants cannot supply baseload, because they are sometimes offline.
This argument was raised again at the Lib Dem conference this week, when they voted to scrap Hinkley Point. (Why they think anybody should pay the slightest attention them, I don’t know!)
During an emergency debate on the issue in Brighton, Mr Brack – a former member of the party’s powerful Federal Policy Committee – said the Lib Dems’ existing policy was to oppose any future nuclear generation in receipt of public subsidies and Hinkley would get at least £2bn in government loan guarantees.
"We are against subsidy for nuclear and Hinkley is subsidy," he said. "It does not deserve subsidy. It is spectacularly poor value for money."
Renewable energy offered better value for money, Mr Brack said, with the cost of solar and offshore wind set to "plummet" by the time Hinkley was eventually built.
"The argument you need nuclear for baseload electricity is a total fallacy," he added.
"Nuclear stations are not on all the time. They have faults, they go off-line which means you have to build an equivalent amount of back-up to support them."
Mr Brack however misses the point. Hinkley Point is owned by EDF, who will sell its output as part of a package, which will include power from its other generators.
If Hinkley goes offline, its output can be made up from the other sources. At the worst, EDF might have to dip into the spot market, albeit at a price.
Unfortunately, Lib Dems don’t tend to live in the real world.