Offshore wind and gas power plants are expected to fill Britain’s capacity gap amid uncertainty over the future of the contested Hinkley Point nuclear project. The UK government approved plans by Dong Energy to expand a wind farm in the North Sea to a size that would produce nearly as much electricity as the two Hinkely Point reactors.
In a surprise move, Britain pushed back a final decision on Hinkely Point C in the early autumn – upsetting Chinese project sponsors who agreed to come up with one third of the financing. EDF has taken FID on the project on July 28, but Britain’s new government under PM May delayed it the following morning.
Offshore wind vs gas power
Gas generation is now back on the cards as a quick solution to fill Britain’s looming capacity gap. By 2030, only one of the country’s nuclear power stations will still be operational, while the most polluting coal-fired power plants will be closed.
In 2015, gas-fired plant produced about 30% of the UK’s electricity needs – yet it is poised to take over much of coal’s 30% market share, unless offshore winds proves easier to finance.
Dong Energy in February agreed to build the 1.2. GW Hornsey Project One by 2020; it has now received planning permission for Hornsey Project Two which envisages another 1.8 GW.
Financing for gas power hard to come by
The UK government has for long been trying to promote the capacity market as a tool to avoid any shortfall in available power generation capacity. Yet, it failed to tackle a “legacy of under-investment.” Capacity auctions did not make any new gas power project forthcoming as lenders are holding back – even if a project developer had secured a capacity contract.
Power producers deem the price of the second UK capacity market auction “too low to advance investment in new, large-scale gas power plant projects.” The latest auction, held by National Grid in December, secured 46.345 GW at a clearing price of £18/kW – over £1 cheaper than last year. Yet, investors deem £35/kW to for new-builds.
To achieve the 2050 carbon reduction targets, the government needs to close oil, coal and eventually gas power stations – one more reason lenders are reluctant to provide financing to proposed gas power projects such as Trafford.
“There were misguided policy assumptions in 2010 that the decarbonisation would be funded by the private sector, which were believed to be willing to conjure up €1.2 trillion capital cost by 2020,” said Peter Atherton, managing director at Jeffries. Yet at current fuel and power prices, most new-build assets are not economical, “hence, the state needs to direct that investment, effectively renationalising the investment-making process.