Why Investors Are So Reluctant To Build New CCGT Capacity
By Paul Homewood
RWE npower’s Pembroke Power Station in Wales
There are three very good reasons why the energy industry is so reluctant to build new CCGT power stations.
The first has been well discussed and concerns the problems of competing with subsidised renewables.
But there are two other factors, which have received less attention.
1) Economic Life Expectancy
From a technical point of view, gas power stations would be expected to operate for at least 25 yrs, which is the assumption made by BEIS in their recent study of comparative generating costs.
But would a new such plant, launched in say 2025, still be allowed to operate in 2050? Obviously, from everything we have been told, the answer would be no. Indeed, it may be forced to close much sooner than that.
This uncertainty is a huge problem in itself. The Capacity Market auction, for instance, only offers contracts for 15 years.
Naturally, a new power station that may only be operational for 10 or 15 years will need to sell its output at a much higher price than if it were to run for 30 years. If it cannot achieve that increased revenue, there will be big question marks over its viability.
2) Carbon Pricing
The other big uncertainty is what will happen to the carbon pricing.
Currently this is set at £18/tonne CO2 above the EU ETS price, a total of about £23/tonne at the moment. This equates to about £8/MWh for a CCGT generator.
However, the Committee on Climate Change expects the market price for carbon to have risen to £42 /tonne by 2030. Worse still, they are wanting the government to set a much higher “target price” of £78/tonne.
The latter would push the cost of carbon pricing up to £28/MWh.
With fuel and other variable costs of around £40/MWh, the marginal cost of a CCGT plant by 2030 could have risen to £68/MWh, well above the current wholesale price.
Unless you can at least cover your variable costs, you are better off stopping in bed.
Unless the wholesale price rises substantially, there would be no point in switching on. The only time they might cover marginal costs would be during peak demand periods, when spot prices rise.
And it gets worse! All government projections assume that the carbon price will have to carry on rising sharply after 2030. The BEIS study, for instance, assumes it will rise to £200/tonne by 2050 (all at 2014 prices).
Even if a new build CCGT can manage to turn a profit in the early years, it would quickly become totally unviable once carbon pricing starts mounting up.
Given all of these obstacles, it is little wonder that investors are not prepared to finance new projects.