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Government pushes gas generation

The government has outlined plans to end coal-fired generation by 2025, in favour of gas-fired plants.
November 26, 2015

'Uncertainty' has been the buzz word around UK government energy policy since even before May's general election. Uncertainty, that is, over its impact on the companies powering the country. In the six months since Amber Rudd was appointed as Secretary of State for Energy and Climate Change, renewable energy has been in the firing line. A premature end to renewable obligations subsidies for onshore wind and biomass power generation, as well as smaller solar projects, dented share prices for some renewables energy companies at the time. The government has now outlined plans to end coal-fired generation in favour of greater gas power.

Speaking at the Institution of Civil Engineers, Ms Rudd announced plans to consult on closing unabated coal-fired power stations by 2025 and restricting their use from 2023. "Perversely, even with the huge growth in renewables, our dependence on coal - the dirtiest fossil fuel - hasn't been reduced. Indeed, a higher proportion of our electricity came from coal in 2014 than in 1999," said Ms Rudd. This means all coal-fired power plants will be closed by 2025, unless they can be fitted with carbon capture storage by then. Instead, the government wants new gas-fired plants to be built. So what does this mean for the UK's energy groups?

Firstly, the move to shut coal-fired plants is unsurprising, given the general direction of European energy policy and the targets binding the UK to reduce its carbon emissions such as the International Energy Directive. Second, the fact that dark spreads - the price received for power generated less than the cost of coal - have sunk to such a level that it has become uneconomical for energy companies to run coal-fired plants.

The plans added to share price volatility for some companies in the sector. Shares in Drax (DRX) - which runs three coal-fired units - fell 4 per cent following the proposals, but soon recovered. Yet, the shares are still trading around a 12-month low. This is unsurprising given the fact that the end to renewable obligation subsidies throws a spanner in the works for plans to convert a fourth coal plant to co-fired biomass generation. Of course, Drax could install carbon capture storage for its plants, however this technology is expensive and critics say therefore unviable. In September, Drax announced it would end future investment in the White Rose carbon capture and storage project. This was in response to a "drastically different financial and regulatory environment," according to Drax group operations director Peter Emery at the time.

For Centrica (CNA) - which has already shifted its focus towards its consumer-facing businesses - the proposals are unlikely to have a great impact. SSE (SSE) has already announced the closure of its coal-fired Ferrybridge plant, after it failed to gain funding via the first capacity market auction last December. The energy generator wholly owns three gas-fired stations - Keadby in Lincolnshire, Medway in Kent and Peterhead in Aberdeenshire. The group also has a 50 per cent stake in gas-fired plants at Marchwood and Seabank. While Keadby was removed from the market in March 2013, SSE this year announced it would return to the market following extensive upgrades. However, while agreeing to maintain its existing assets, SSE management has said due to the pricing pressures of new-build gas, the group has no intentions to build new gas-fired capacity in the foreseeable future.

How the government will incentivise energy providers to build new gas-fired facilities will be key in shifting the energy mix more towards gas and away from coal. Ms Rudd has proposed subsiding gas through the capacity auction system, which involves companies pledging to produce an amount of energy in return for payment. However, the government will need to figure out how to do this without contravening European Union rules, which prevent the government favouring one type of generation over another.