Economic Report 2013

In addition there is already another, relevant instrument: • A Carbon Price Floor – legislated by HM Treasury through the Finance Act 2011, this sets a minimum price to be paid for carbon emissions through the Climate Change Levy and is intended to encourage power generation by low carbon means. It took effect on 1 April 2013, but only applies in the UK, raising our power prices relative to those in other Member States of the EU. It is difficult to reach any conclusionwhich does not recognise the inherent complexity that these measures will engender. Indeed, it has to be a matter of concern that such complex measures underpin the whole strategy for low carbon generation. Furthermore, much of the decision making in power generation will be moved from companies and markets to government departments and ministers. As stated in the last of six conclusions of Oil & Gas UK’s response in March 2011 to DECC’s consultation on its proposals for electricity market reform: “A greater degree of realism is called for. Policies should be simplified and de-risked; they would have a better chance of success.” However, Oil & Gas UK was pleased when DECC announced and, in late 2012, released its gas generation strategy. This recognises the necessary role that gas fired power generation will to have to play over the next 15 to 20 years and probably for many years thereafter, if carbon capture and storage (CCS) can be made to work at power station scale. Under the Large Combustion Plant Directive (LCPD), whose effects are already being felt, some 12 giga-watts (GW) of coal and oil fired power generation capacitywill be closed by the end of 2015. In addition, under the Industrial Emissions Directive (IED), up to 18.5GW of

coal and 18GW of early gas fired generating capacity will be closed by the end of 2023, when most of the coal fired plants will be 50 years old anyhow (although some of it is being converted to burn biomass). In aggregate, these represent a very substantial share of the country’s total power generating capacity, to which must also be added the progressive closure of 9.5GW of nuclear capacity within the same time-frame, because of old age, and premature closure of some early gas power plants which are now uneconomic, owing to the low price of coal mentioned above. Meanwhile, construction of the first of the planned new nuclear power stations, at Hinkley Point in Somerset, is slipping further, through a combination of difficulties in raising the necessary finance, continuing negotiations about the ‘strike price’ under a CfD (that is the size of the subsidy to be paid by customers), and concerns about the cost and complexity of the reactor’s design. A potential rival type of nuclear reactor, meanwhile, still needs to go through its Generic Design Approval for use in the UK (a procedure likely to take two to three years) and it needs to gain planning permission before construction can begin. This means that it is now unlikely that any new nuclear power plant will start operation in Britain much before the mid-2020s and there will be less nuclear generating capacity throughout most of the 2020s than there is today. It is therefore inevitable that a fleet of new gas fired power stations (mainly combined cycle gas turbines (CCGTs)) will have to be built to cover the considerable shortfall in base-load generating capacity and to provide back-up for intermittent renewable power, especially offshore wind, where substantial expansion of capacity is planned. There is no other technology available that can fulfil these needs on this scale, with the necessary reliability and within the time-frame mentioned above.

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