OFGEM SBR decisions push green targets further out - SBR promises reprieve for ageing and costly UK coal-fired power stations

Issues affecting electricity generators and the energy market as a whole.

The results of Ofgems Supplemental Balancing Reserve (SBR) hit the headlines last week as the regulator handed over an extra 12.39m to National Grid to fund so-called black start contracts that the system operator finalised with both the Drax and Fiddlers Ferry coal-fired stations to keep them online should they be needed during period of peak demand over next winter.

Ofgems Supplemental Balancing Reserve (SBR) is designed to enable up to 10 ageing and soon-to- be-closed or mothballed power stations to stay on stand-by should they be needed during the peak demand period between 6AM and 8PM in winter weekdays, to help ensure we keep the lights on. The SBR was designed to offer up to 2.3GW of power collectively at outset but is currently set to provide nearly 3.6GW in 2016/17 following the December 2015 auction.

It is worth taking a closer look at the one year contract, just agreed between National Grid and SSE, which operates Fiddlers Ferry. Essentially one of four units at this site have been signed into the SBR for 2016/17, starting this month. SSE retained transmission entry capacity for the other three units set to produce 1,445 MW in 2016/17 between them.

The combined deal enables Fiddlers Ferry to keep running when it was slated for closure this month. The pragmatists describe this as a Just In Time deal which keeps National Grids options open to help us navigate the inevitable capacity squeeze next winter. The national media described it as a deal done in blind panic taking us further away from our decarbonisation targets which demand closure of all unabated coal-fired stations by 2025.

The UK has made a commitment to reduce CO2 by 80% from 1990 levels by 2050, cutting output from 556 Mega Tonnes of Co2 (mtCO2) to 124 mtCO2 in the next 35 years. Scotland plans to be carbon free by 2030. These targets demand an end to coal-fired power generation.

Because of speed of settling these new SBR deals and the fact that their terms are not published in full, some criticism has been expressed that they may be distorting the market and preventing competitive bidding. Sara Bell, chief executive of Tempus Energy, which provides electricity through the wholesale markets, has gone further to asked the competition watchdog and Ofgem to investigate.

This is a bilateral, behind closed doors transaction, in support of a coal plant that only a few weeks ago stated it could not continue to operate. Worse still, the sudden nature of the deal announcement has moved the market, to the detriment of other market participants. She said Tempus was also considering a legal challenge.

National Grid denies the allegations. It said the contracts were not unusual and the two companies had won a fair bidding process. A competitive process was launched for these services in February with the relevant information sent to all industry participants, it said.

The SBR auction linked to this declared a desire for 3.4GW of capacity to be made available for 2016/17 and bids promised nearly 3.6GW including 1.1GW from coal-fired stations at Eggborough and Fiddlers Ferry; so coal accounts for nearly a third of SBR capacity available to National Grid in the coming year.

Drax, which is the largest power station in the country, half of which is coal-fired and the other half burns wood pellets, secured a deal thought to be worth at least 10m, to keep its coal-fired boilers running in 2016-17. But Draxs boss, Andy Goss, warns that the Government needs to do much more to stimulate new gas, biomass and other fuel generation or it will need to keep coal-fired plants running beyond 2025, despite their age.

Mr Goss stark warning is that Draxs coal-fired boilers are ageing so fast that they may be in too poor a state to convert to biomass if they dont get Government support to do so within the next two years. Furthermore, he warned that despite the warmer summer months triggering falls in energy usage, National Grid might find it difficult to keep Britains lights on this summer because most (if not all) coal-fired plants are shut-down for maintenance potentially taking 9.6GWe out of the system.

The economics suggest that very few, if any, (UK) coal plants will be running over the summer, especially with the new (EU) emissions directive, he said.
It is starting to feel a bit like a Mexican stand-off between the dirtier coal-fired generators as capacity margins continue to be squeezed before new sources of generation come on stream.

The other coal-fired stations with units which are set to remain open beyond the end of this year are Eons Ratcliffe-on-Soar, RWE's Aberthaw and EDFs Cottam and West Burton, which are all eligible to bid for all the same capacity payments at Fiddlers Ferry. The fact that Fiddlers Ferry came so near to closing, while the rest didnt, suggests it is one of the least efficient plants of the lot, and that therefore the others should able to struggle on as well.

Its clear that coals days as a profitable fuel purely for generation look to be over. But it is being kept alive via the life support system of capacity payments. Quite how long that will last will depend on how much competition it faces in future capacity auctions or whether further last ditch back room deals can be done in the face of tightening capacity margins.

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