High gas prices hasten UK energy crunch
Britain is heading towards an energy supply crunch sooner than expected as many of the country's coal-fired power stations face early closure under European Union environmental regulations.
Eight coal-fired plants are due to close by 2015 as part of efforts to cut harmful emissions but several are set to shut before then as companies rapidly burn through their remaining EU production allowances.
Coal has become the preferred source of electricity generation in recent months as profit margins at gas plants have slumped because of higher prices. Poor returns on gas are discouraging investment in the new plants needed to replace the coal-fired fleet, deepening long-running concern over a looming power supply shortfall towards the end of the decade.
Coal accounted for 43 per cent of generation in January compared with 26 per cent for gas, far more than normal, according to National Grid.
Gas prices in Europe are still heavily linked to oil prices, which have been driven up by political tensions in the Middle East. This is in marked contrast to the US, where the shale gas boom has driven domestic natural gas prices to a 10-year low, making many coal-fired plants uneconomic.
In Britain, however, the so-called "dark spread" - the profit margin made from burning coal and selling the resultant electricity - remains higher than the equivalent "spark spread" for natural gas.
Some 11GW of mainly coal-fired generation is due to close by 2015 under the EU's Large Combustion Plant Directive. As coal is cheaper at the moment, most of the plants have been pumping at more than 75 per cent capacity, compared with 25 per cent a year ago.
Analysts are now forecasting that most of this capacity will shut in 2013 or 2014 as plants quickly eat up the remaining hours they are permitted to operate before closure. Eon, the German utility, last week announced its 1,940MW Kingsnorth plant in Kent would close in March 2013.
In addition to higher gas prices, coal usage has been encouraged by low prices for burning carbon under the EU's carbon trading scheme as the eurozone crisis has cut demand. This has created the unintended consequence of helping coal remain competitive.
"The current carbon price of around €10 a tonne [of carbon dioxide emissions] is not enough to bridge the gap between coal and gas producers, even though generators have to buy more carbon credits," said Peter Atherton, head of utilities research at Citi Investment.
David Fuller's view This is largely a problem of our own creation because the UK government has squandered £billions on unreliable wind farms while discouraging our North Sea gas and oil production by over taxation. The government has also dragged its heels on developing the country's modest shale gas reserves and much needed new nuclear facilities.
Consequently, we are at the mercy of Russian and Middle Eastern gas suppliers. This is also a European-wide problem, further damaging our economic recovery prospects. It is in sharp contrast to the USA, where thanks to private initiative, domestic gas supplies are both abundant and cheap.
(See also Eoin's item below on Australia's plans for developing its considerable reserves of natural gas.)