SSE boss cuts odds on power shortages

London – Bosses at energy major SSE have warned of power shortages in the UK over the next few years, due to changes in the regulatory and investment environment. The changes, they say, will force the company to reduce its own power output by around 15% over the next year alone.

Across Great Britain, SSE currently owns or has a stake in over 4,300MW1 of gas and oil-fired generation capacity, over 4,300MW1 of coal-fired generation capacity and 80MW of capacity at its biomass plant in Slough.

However, around 2,000MW of SSE’s existing thermal generation capacity is to cease operation during 2013/14 financial year. The cutbacks will affect SSE’s power stations at Ferrybridge, Keadby, Slough Uskmouth, and Peterhead, said the company, adding that there will be no new-build investment in gas-fired electricity generation in the UK until at least 2015.

The Government, therefore, needs to bring forward to 2014 capacity payments for existing plant if it wants to reduce the risk of a serious capacity ‘crunch’ in the next three years, according to a statement from the company.

“Ofgem recently expressed real concern about the tightening of the UK’s generation capacity margin that will follow expected plant closures in the next few years, predicting a 1:12 chance of ‘the lights going out’”, commented Ian Marchant, chief executive of SSE.

“It is unlikely that the majority of the reductions in generation capacity and the delays to new investment we have announced today will have been included in thisanalysis, which highlights that the situation is likely to be even more critical than even they have predicted,” he said.

Indeed, Marchant believes that the Government is significantly underestimating the scale of the capacity crunch facing the UK in the next three years and there is a very real risk of the lights going out as a result.

“The Government can reduce this risk very easily, by taking swift action to provide much greater clarity on its electricity market reforms and bringing forward capacity payments for existing plant from 2018 to 2014,” he suggested.

SSE’s power stations have to be able to operate economically over the medium term, added Paul Smith, managing director, generation, at the company.

“The market conditions for some of SEE’s older generation plant have become increasingly difficult, but these changes to their operating regime should ensure they continue to contribute to the company’s performance by safely delivering target levels of availability, efficiency, cost control and ultimately profit contribution.

SSE has committed to halving the carbon intensity of its generation portfolio every decade between now and 2050. This is to be achieved through a balanced range of new investments, primarily focused on renewable energy, but also in new CCGT plant. CCGT is a cleaner fossil fuel technology, which has the necessary flexibility to support security of electricity supply as the presence of wind energy on the electricity system increases.

However, the right market signals and support structures need to be in place before SSE can make the necessary investment decisions on these projects, warned Smith.

“Neither of these is currently in place and the kind of decisions SSE is taking, to close existing generation plant on the one hand and delay investing in new plant on the other, is likely to be reflected across the industry in the coming months,” he concluded.

In advance of its new financial year on 1 April 2013, SSE plc has completed a review of its existing thermal generation assets as well as its biomass plant at Slough.
The review, it said, was conducted against a backdrop of challenging energy market conditions with continued extremely low ‘spark spreads’ and many new emission regulations which have weighed heavily on the viability of thermal generation plant.

These include: Constraints imposed on power-generating plant not opted in to the Large Combustion Plant Directive; The early introduction of a Carbon Price Floor at an unexpectedly high level; and a move towards full auctioning of CO2 emissions allowances under the EU Emissions Trading Scheme.

The review, noted SSE, was also influenced by the prolonged and ongoing uncertainty around the UK Government’s Electricity Market Reform (EMR). In particular, a lack of clarity on both the timing and operation of a capacity mechanism means there is huge uncertainty regarding future revenue streams for existing thermal plant and what level of return might be achieved by new investments in thermal generation plant.