The lights will stay on in the UK

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26 October 2012, Electricity

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In accordance with the EU Large Combustion Plant Directive 12GW of coal and oil-fired capacity will come offline after reaching the allowed 20,000 hours of operation. In fact, these coal plants have been operating for more hours than anticipated due to the relative cheapness of coal compared to gas, and, in theory, should close before the expected deadline of December 31, 2015.

Ofgem's report shows the extent to which coal and oil capacity coming offline is expected to be replaced by gas, biomass, and onshore wind.

Contrary to alarmist reports of possible country-wide blackouts, Ofgem states that the capacity margin will simply be lower, falling from 14% to 4% in 2015-16 in the base case. This means that the risk of some disconnections would be higher (up from near zero now) if demand happened to outstrip supply in the event of several factors happening at once.

One of these factors is extreme winter weather. Ofgem's estimated base case already assumes peak winter demand under normal winter weather. Another factor is if gas supplies from Norway completely dried up, say in the middle of winter, or if liquefied natural gas imports were limited, or if an accident happened in one of the UK's nuclear plants. Such things are clearly difficult to model, and Ofgem has sensibly refrained from quantifying some risks that would simply skew the results.

That said, Ofgem's estimates of capacity margins do acknowledge large uncertainty. The estimates consider sensitivities around mothballed gas-fired plants coming back online and imports from the continent. In a high scenario, the capacity margin would be about 9% in 2015-16; however, in a low case (full exports to the continent and no new gas builds or old gas plants in operation), the margin would be almost zero. So if winter demand was unexpectedly high and the price differential in Europe was such that the UK was exporting at full throttle to the continent, then some lights would go out.

This is very unlikely in Ofgem's estimates. In the base case scenario, the chance of disconnection of some customers is approximately once in 12 years. Even then, demand side measures (including disconnecting industrial customers first) would mean that there would be "little or no impact on (residential) customers" according to the regulator.

While any blackouts are indeed very unlikely, what is more likely is a higher reliance on imported gas, which could translate into higher electricity prices. Although slightly more palatable than allowing Britons to walk around with candles, the policy response to the issues of security and cost effectiveness will be keenly awaited in the upcoming Energy Bill.

Source: MarketLine

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