A new £710m gas-fired power station opens on Monday, the first large-scale gas plant of its kind to come online in Britain for four years.
But a stone’s throw away, on the same spot in Carrington, near Manchester, there is a patch of weed-strewn concrete where a second gas station was meant to be. It is the latter wasteland, say critics of the UK energy market, that is the real monument to Britain’s ambitions of revitalising gas-powered energy generation. A combination of poor returns and the success of renewable energy has made investors turn their backs on gas, even though it is seen as vital to ensuring Britain has enough electricity capacity.
The new gas plant is an 884-megawatt power station owned by ESB, the Irish state-owned company. It will generate four times as much electricity as the disused coal plant, closed in 1991, that used to stand on the same sprawling site. But plans for an adjacent 1.9-gigawatt gas station, to be built by Carlton Power, stalled last year as the company struggled to raise investment. It ultimately had to give up a £450m government contract that required it to start producing electricity in late 2019.
A succession of energy ministers have been trying to encourage more gas-powered generation to keep the UK’s lights on, particularly during periods when renewables are not generating electricity as there is little wind or sun. But investors and utility companies have been reluctant: in recent years the margins between buying gas and selling the electricity produced to the market have been wafer thin
The reasons are linked to big changes in the UK’s energy market. Coal-fired power stations, which used to be relatively economic to run, have been closing at a rapid rate since the carbon price floor — a tax on emissions — was doubled in April 2015. As the government tried to meet carbon emission goals (it wants all coal plants closed by 2025) there was a surge in renewable energy generation, powered by subsidies.
This in turn led to calls for more large gas and nuclear plants to be constructed to ensure sufficient capacity for those times when intermittent wind and solar power is not available. But investors say there is no incentive to back a new combined cycle gas turbine (CCGT) plant without subsidy when they could plough their funds into a wind farm, which does receive government support. They also fear that rising renewables capacity will further undermine returns on capital from gas plants, which risk being left idle at times when there is plenty of electricity coming from wind turbines and solar panels.
“As you look forward, all [investors] can see is a power market that is hugely distorted by a whole series of government interventions,” says Peter Atherton, of Cornwall Energy, a consultancy.
For Carrington, ESB received finance from a banking consortium including HSBC, Royal Bank of Scotland, Lloyds, Santander, and BBVA. It obtained planning permission in 2008 but only went ahead in 2012.
Other companies, including ScottishPower, are keen to build new gas plants but will not do so without state support. A system of subsidy auctions was created in 2014 to try to incentivise large new gas plants but so far the price at which contracts have been awarded has been too low to encourage the likes of ScottishPower to press ahead.
Indeed, the auctions have had unintended consequences. Diesel generators and other small schemes have been able to bid at low prices, helped by extra subsidies known as “embedded benefits” that are available only to modest projects that connect directly to local distribution networks and bypass the national transmission system.
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Ofgem, Britain’s energy regulator, has proposed hefty cuts to such benefits. Without those distortions, it is hoped that future auctions could clear at a price that would encourage new large-scale CCGTs. Carrington Power has won two smallish awards, £6m for the winter of 2017-18 and £19m for 2020-21.
But critics of the system say it is broken, and that the lack of new gas-fired plants proves it.
The Institute for Energy Economics and Financial Analysis says that £3.4bn has been awarded through capacity market auctions but the scheme has yet to incentivise a single large new power plant.
Even ESB has shelved plans for new gas plants. Pat O’Doherty, chief executive, said he was confident Carrington would be profitable but it would be harder to justify building it today.
ESB wants to develop a 1.65-gigawatt CCGT at Knottingley, in West Yorkshire, but the project is on hold until prices rise. “There is a need for new plant but the annual capacity auction is now the material issue. We didn’t bid last time because the price was not good enough,” Mr O’Doherty said.