Submission by Prospect to the Department for Business Energy and Industrial Strategy

Coal Generation in Great Britain Submission by Prospect to the Department for Business Energy and Industrial Strategy 8 th February 2017 www.prospect.org.uk Latest revision of this document: https://library.prospect.org.uk/id/2017/00289 This revision: https://library.prospect.org.uk/id/2017/00289/2017-02-09

Introduction Prospect represents professionals, managers and specialists in a number of sectors including energy. Our 140,000 members include around 25,000 professionals working as energy specialists. We represent members with a diverse range of professional, managerial and specialist roles including engineering, research, trading, asset management, and business development. Prospect is dedicated to supporting and championing the work our members do in the energy sector to provide safe, secure and affordable energy for domestic consumers and industry. Prospect is not affiliated to any political party and believes its political independence provides it with the stability and credibility needed to effectively represent its membership. Prospect believes that energy policy should be reviewed as a whole and should consider the broader impact of energy on wider industrial and skills policy. Our frustration is that the UK s energy policy has not supported innovation in thermal generation and that the UK faces the challenge of replacing most of its existing generation capacity over the next fifteen years with the closure of the first round of gas-fired CCGT stations, the closure of coal stations and the retirement of Britain s AGR fleet. Unlike other developed economies, the UK s energy policy has not encouraged the development of new cleaner coal plant such as the Advanced Supercritical Power stations being constructed in Germany, China, Denmark and Japan with emissions reduced by over 33% compared to the aged UK fleet. Similarly the Government has withdrawn support for two Carbon Capture and Storage (CCS) demonstration plants, one using new coal technology and the other developing gas CCGT technology, despite the importance of CCS if the UK is to meet its carbon emission targets for 2050. During their design life, the fate of CCS is as important for gas plant built around 2020 as for new abated coal. Therefore we face the closure of the remaining 14 GW of coal capacity, at a time when all coal capacity is required to meet winter peaks and to provide ancillary services such as reactive voltage and black-start. We do not believe that the replacement of peaking coal plant with small-scale diesel, reciprocating gas and Open Cycle Gas turbines (OCGTs) makes a significant difference to carbon emissions. At the same time, the retirement of coal plant by small-scale peaking plant reduces the ancillary services available to National Grid to secure grid stability and obtain the customer benefits of better management of the transmission system that improves security of supply and reduces emissions. Britain requires the replacement of its aging power generation plants but uncertainty about future prices and regulation is the barrier to new build, not doubts about when in the 2020s coal plant closes This response sets out our view on the Government s proposals Prospect submission on Coal generation in Great Britain Page 2

Energy Policy Given the current technical constraints on renewable and nuclear generation, there remains a need for thermal generation. Prospect believes in a balanced energy policy that meets the five following objectives for thermal power generation: Timing the replacement of existing plant so we avoid a capacity gap; Ensuring that the market rewards capacity and other services rather than just price; Maintaining long-term stability for thermal power including biomass to reduce financial risk and prices to consumers; Building on existing skills partnerships so the process of transition retains core skills and develops the complex technical skills for active networks; Retaining Government support for the commercial development of new technologies such as Carbon Capture and Storage Given the timescales for building new plant, we believe that a decision to force the retirement of all coal plant before 2025 is not in the public interest. In the rest of this paper we respond to the specific questions raised by the consultation document. Thermal Power The consultation paper recognises the importance of thermal power for load-following and broadly aims to encourage new CCGT gas build by setting a final closure date for coal that provides 15% of the UK s electricity capacity. Our experience of the sector and involvement in employment decisions gives us the perspective that any significant new power project is based on a 25/30 year design life when assessing decision to build any new plant to run between 2020 and 2050, the following factors are as important as the closure date for Britain s aged coal fleet: Income streams, in the absence of contracts for differences for gas, this is a major risk forcing up the cost of capital; Gas Supply contracts; Government skills policy; Transmission charges and their evolution as renewable capacity is built offshore; The emissions control measures required to meet the UK s 20250 target and their development over the next 30 years. The decision to change the policy on coal generation making investment in IED compliance redundant has increased regulatory risk; and The future support for CCS. The development of new modern generation capacity requires a more focussed policy approach than setting a final date for coal plant closure. In practice, current policy will restrict coal use to peak-covering by 2020 with closures driven by the cost of maintenance and the discovery of the need for major remedial work on aged coal plant. Prospect submission on Coal generation in Great Britain 3

Chapter3:1 Closure of unabated coal: response to questions The analysis is unduly optimistic about the prospects for coal plant running up to 2025 and beyond in the current commercial environment. We believe that some assessment of the low coal option is required especially as regulatory risk is a major inhibitor to further investment. The analysis also needs to consider ancillary services such as black-start and reactive voltage to understand the full impact of the loss of coal plant. Given the important role of the National Grid in managing energy demand and transmission constraints, these services are important for Grid stability. Further analysis is required to assess the system impact of the loss of these services with coal closures and its impact on system efficiency. In our experience, the construction of new large scale gas plant takes three-tofour years once planning permission and finance has been secured. The speed of new build and the willingness of investors to develop new gas capacity is not borne out by experience: for example, the latest capacity market process did not deliver significant new capacity. Indeed the capacity market is good at encouraging the retention of existing plant but is an ineffective instrument for encouraging the development of new thermal plant that would run from 2022 to 2050. We do not believe that the analysis fully assess the other factors driving investment in efficient large-scale gas plant. We believe that a managed transition from unabated coal to gas and abated coal requires some positive policy measures rather than simply accelerating the closure of existing coal plant. Given the age of existing coal plant and the lack of an effective contract for differences regime for CCS, the discussion over CCS demonstration is academic as it asks an unrealistic question. For CCS to be an effective commercial option, it requires a 25 year project life to recover capital like nay thermal or renewable power proposal. Clearly this requires new plant rather than the retrofitting of 50 year old power stations.if the UK is to secure the environmental and commercial opportunities of CCS, then a more effective regulatory regime is needed. The closure of existing coal plant provides a skilled and experienced workforce for CCS demonstration plants but in the absence of Government support for a new CCS initiative using existing grid connections, this opportunity is likely to be lost. Whilst biomass co-firing would reduce emissions and retain capacity as new plant is built, the current arrangements do not provide any new incentive to increase the proportion of biomass. The biggest threat from these proposals is that they penalise companies that have invested in IED compliance. Apart from Uniper other operators have invested in feasibility studies and design proposals. The current proposals increase the perception of regulatory risk, especially for new gas plant that may face similar changes in policy as the UK shifts to further restrictions on carbon emissions in the 2020s and 2030s. Moreover the discussion of retro-fitting CCS to aged coal plant without the commercial support provided to other low-carbon forms of generation fuels a perception that the Government is not minded to support CCS which is likely to become essential for new-build gas power stations during their operating life. Prospect submission on Coal generation in Great Britain 4

We believe that any changes should be introduced at the end of the 2025/6 financial years: given current trends in energy use, coal plant is only commercially viable during the Winter and a closure date before March 2026 is likely to make the effective date 31 st March 2025. Chapter3:2 Constraints before 2025 We believe that existing policy, particularly the IED emissions requirements constrain coal significantly from 2020 to 2025. Further restrictions run the risk of forcing up prices as coal plant closes before new gas plant can be both constructed and commissioned. Regulatory uncertainty remains unhelpful to investment and is a major reason behind the slow pick-up of new technology in the UK. We are particularly concerned that the premature closure of coal could result in the introduction of environmentally unfriendly plant such as small-scale diesel. Whilst we are not convinced by the case for further constraints in coal prior to 2025, if such constraints are deemed necessary to reduce overall emissions by encouraging the replacement of coal by lower carbon then they should apply to the coal fleet as a whole. Given the different investment strategies and technical profiles of remaining coal plant, then assessing the impact on the whole fleet rather than applying change uniformly to all coal plant is more likely to be effective. All coal-plant operators have practical experience of trading electricity, fuel and ROCS so a simple trading mechanism that encourages economic efficiency is practicable in this case. The capacity market is an effective short to medium mechanism for retaining sufficient energy capacity to meet demand. We believe that suitable reform of the capacity market would be more effective than introducing another set of regulatory arrangements that add to complexity and perceptions of regulatory risk Given that the age of coal plant and the IED emissions limits further investment in coal plant, there remains a clear signal that new capacity is needed. A more effective mechanism than constraining coal would address the other barriers to new gas and abated coal investment rather than forcing coal plant to run at less than the limits already imposed by the IED legislation. Whilst we believe that the Capacity mechanism should include some commitment to provide training as the shortage of skilled staff is an impediment to further innovation, we do not believe that placing further constraints on coal will improve the efficiency of the capacity market auction process. The introduction of new constraints is likely to push up prices to retain the same short term security of supply by deterring bids from coal plants and will add to the perceptions of regulatory risk that inhibit investment in new gas an abated coal plant. Chapter3:3 Security of Supply The experience of the Capacity Market auction does not give us confidence that the process is robust enough to secure security of supply if the closure of coal plant is accelerated by further environmental constraints. Prospect submission on Coal generation in Great Britain 5

Given that the electricity generation market is based on market forces and investment from multinational private investors, Government no longer has the ability to operate on the basis of command and control. In addition the use of interconnectors should not assume that there will be a return to a permanent electricity surplus in mainland Europe and this adds further complexity to the market, largely beyond the influence of the UK government. In these circumstances, there is sufficient doubt about the impact of policy that it is in the public interest for the Secretary of State to retain powers to suspend the closure date and constraints if security of supply is threatened. Any use of the Secretary of State s powers to suspend the closure should be accompanied by other policy steps to encourage flexible generation, A suspension that is clearly part of a coherent policy to improve investment in plant and skills is more likely to be successful than an isolated response to an emergency. We believe that the future build rates are over-optimistic: our view is that a combination of uncertainty about the commercial environment over the 25 year life of the CCGT plant and a shortage of skilled staff to operate and maintain new plant is a further constraint on the introduction of new plant. The skills required to successfully operate a new CCGT or OCGT gas plant are very different to the skills needed for construction. Uncertainty about the future of generation has led to a reduction in recruitment and has resulted in an aging workforce; continued uncertainty is likely to result in displaced staff from coal stations leaving the industry rather than being redeployed into new types of generation. Similarly the impact assessment uses a lower investment hurdle than most commercial organisations for the 25/30 life of anew CCGT/OCGT power station. Whilst the premature closure of coal plant may improve profitability in the first 2/3 years of operation, the capital investment per permanent employee for these plants is over 5 million and project planning assumes 25 years of operation. Therefore it would be prudent to use a higher rate of return of at least 12% to reflect: o commercial risk for plant operating in the most commercially-risky part of the electricity market, o past experience of significant losses by CCGT plant operators; and o investor concern that these proposals set a precedent for further restrictions on gas plant mid-way through their design life as the UK seeks further reductions in carbon emissions. Chapter 4: the wider impact of closures The impact assessment does not take into account the impact on local economies of coal station closures and the need for a more focussed approach to staff relocation than that used by Job Centre Plus in previous closures of coal-fired power stations and coal mines. In our experience, Job Centre Plus s ability to fund training is limited and that there was insufficient co-ordination between Job Centre Plus and employers with a need for engineering skills to determine what type of training and funding is required to convert skills. Prospect submission on Coal generation in Great Britain 6

This proposal remains silent about the skills challenges posed by a significant change in generation technology. We believe that Government should work closely with industry training bodies such as the National Skills Academy for Power to ensure that sufficient staff can be recruited and trained. We estimate the average cost of training a graduate or school-leaver to the professional standard required by generation companies is in the region of 90,000 to 175,000. Prospect submission on Coal generation in Great Britain 7