Western European power prices have surged lately, partly on the back of a review and shutdown of French nuclear plants, but coal-fired power plants have failed to capitalize as prices for seaborne coal have risen too.
As the Chief Executive of Uniper, Klaus Schäfer, told analysts this week, following the company’s Q3 earnings report: “A slight recovery in the price of baseload should not be overstated. Unfortunately, the spread between fuel costs and power prices haven’t moved very much, or actually in the wrong direction. Our power stations continue to face substantial margin pressures.”
Uniper is the former conventional generation business of European utility E.ON, and so is all too aware of the pressures on coal and gas power. Like many European utilities, Uniper is arguing for a new approach to remuneration, where power plants earn guaranteed payments to make capacity available—irrespective of whether they generate electricity—through so-called capacity markets.
The move has been prompted by the growth in variable renewables: electricity is dispatched to the grid on the basis of least-operating cost, and because wind and solar power have zero fuel costs, they are dispatched first. Their meteoric growth has pushed everything else down the so-called merit order, to the extent that coal and gas power plants may not be called upon at all.
Conventional utilities argue nonetheless that energy consumers need coal and gas power plants to keep the lights on during dark, windless days in winter, for example, when there is no wind and solar power. They say their gas and coal plants can provide this balancing service, but must be paid through capacity markets.
Various options are available for balancing variable renewables and guaranteeing security of electricity supply. These include conventional power, baseload renewables, battery storage, demand response, greater efficiency and grid build-out. The mix is still open, making the debate over capacity markets, which favor gas and coal, a hot topic.
They are even more topical as the European Commission prepares to publish its view on the conditions which might attach to such schemes.
Some countries that have already introduced capacity markets—Spain, Britain, Italy—are “energy islands” with fewer cross-border connections to balance variable renewables. They may need more back-up. Britain also has quite a narrow adequacy margin, which is the gap between total supply and peak demand, as it shuts down more polluting coal power plants.
Britain recently proposed introducing its capacity market one year earlier than planned, for delivery in 2017-18, to buy more capacity and to increase incentive levels to motivate new-build gas.
Last week, I met Uniper’s U.K. chairman, Felix Lerch, who is keen to invest in new generation, assuming higher capacity prices, and wants Uniper’s 2.1GW Ratcliffe coal plant also to benefit. Ratcliffe might stay open even beyond the U.K. coal phase-out date of 2025, Lerch suggested, if a demand for additional security of supply emerges from the government’s latest phaseout consultation. While the British government recently backed plans to phase out coal power by 2025, that was conditional on “no risks to the security of our electricity supplies.” Much has been invested in Ratcliffe to reduce nitrous-oxide emissions, but the power plant was built in 1968.
The Ratcliffe example shows how Uniper is pinning its hopes on capacity markets, going so far as to argue for giving a half-century-old power plant a new lease on life.
The question for policymakers is whether it makes sense to do so as they seek to balance cost, security of supply, and carbon emissions. Do long-term, multi-year capacity payments aimed at supporting gas plants and eking more life out of old coal plants make sense? Or can newer, cleaner technologies, including hybrid combinations of digital, decentralized technologies, compete better in the new energy economy?
There is no doubt about Uniper’s position. The company has applauded moves towards a capacity market in France, and argues that capacity markets also make economic sense in countries such as Germany, which is no energy island (it has massive cross-border interconnections) and has ample generating capacity.
This is what Uniper CEO Schäfer told journalists and analysts in his webcast earlier this week:
“The French government wants to ensure power plants are available reliably to fill the gap, and so make sure when there is practically no wind or solar power, there are power plants available to prevent excessively high prices. By contrast, Germany is adopting interventionist policies to address the problems created by the expansion of generating capacity. For example, the German federal network agency unilaterally terminated the common electricity market with Austria, which had been one of the best examples of cross-border European cooperation. This move sends the wrong signals, of individual country solutions rather than a European internal market. To make electricity affordable, we need a system where a price is paid for the provision of dispatchable generating capacity. Otherwise the remedies for the physical consequences of interventionist regulation cost the consumer. Economically, it would make sense to have a forward capacity market in Germany.
“It’s too early to say how the European Commission will position itself. We’re waiting for the winter package which will have something on the capacity market, and show the European conditions. Everything we heard so far, the Commission is not categorically opposed as it was in the past. The need for capacity markets is being recognized, and we might already get the first indications of what such markets will look like. I think this will be a positive development. From my point of view, Germany will open up to this tendency.”