DO WE NEED KINGSNORTH TO KEEP THE LIGHTS ON?

x

John Rhys. October 2008

Being forced to consider the possibility of new coal-fired generation looks prima facie like a failure, either of policy or of the market to anticipate and deliver requirements for sustainable low carbon electricity. This might be because the price signals on the cost of CO2 emissions (largely through the EU ETS) have so far been wholly inadequate, or because of other market failures. Or it might be that the policy simply lacks credibility with markets because market participants do not have confidence that the reward to low carbon generation will grow and persist. Or it might be that government itself has given mixed messages over its willingness to support nuclear or renewable alternatives. Not surprisingly Kingsnorth has become a “line in the sand” for many people concerned about UK policy in relation to emissions and climate change. This note does not dismiss out-of-hand the possibility of a case for Kingsnorth. But it does attempt to ask the questions that should be relevant to rational discussion of the issue, and which government and promoters of Kingsnorth should be prepared to address, and answer, before proceeding further.

It is sometimes difficult within a power sector of powerful industrial interests to get unbiased sources of analysis. Some of the relevant data sets and analyses, once collected automatically and subject to some public scrutiny while the industry was in public ownership, are either not collected at all or are protected as commercially confidential. However the need for public information about the policy justification for Kingsnorth is every bit as great now as it would have been if the proposal were being promoted by a publicly owned and publicly accountable Central Electricity Generating Board (CEGB). This note attempts to set down at least some of the questions that would have been put by the Treasury to the old CEGB, and need to be answered in any economic or policy justification of Kingsnorth. If the defence of Kingsnorth is that it represents a "market" solution, then we need to know how UK emissions targets are factored into the market calculations.

1. How reliable are the demand forecasts, particularly of winter peak demand, which supposedly establish the “need” for Kingsnorth?

- What are the forecasts and where do they originate within the sector? Are they taken from aggregation of supplier estimates, which would be obviously unreliable in a competitive market, or are they based on high level “top down” Departmental or other economic forecasts linking demand to GDP growth and relative prices.

- If the latter then there is an obvious criticism to be made: it is that since privatisation there has been no comprehensive programme of market and load research to assist in the production of soundly based forecasts? Long term projections based solely on econometric models often differ little from naïve trend projections, with a constant GDP/kWh elasticity, tend to fail in spotting new developments and have a poor track record.

- Even within a modelling approach do the forecasts reflect the most recent economic developments? We are probably going to lose the equivalent of at least one year’s growth in a recession, and quite possibly significantly more. Kingsnorth forecasts will presumably have been constructed on the assumption of steady trend GDP growth.

- Similarly do the forecasts reflect the likely downturn in house construction and new household formation, one of the drivers of residential electricity consumption in particular?

- Do the forecasts reflect the effect of higher fuel prices ? Much of the growth in domestic sector demand in the 1990s is likely to attributable to substantial falls in real prices which re-established electricity as a significant element in space and water heating (although this is not detected in official estimates, perhaps because we no longer had the basic load and market research that would have allowed actual measurement of aggregate consumption between usages). One might expect higher prices to reverse at least some of that growth over the period to 2020.

- Finally, do the forecasts take into account energy conservation savings anticipated from White Paper measures? If so, how?

2. Are there no other sources of incremental capacity?

One of the arguments for market forces is that a higher price, and reward for availability, will induce suppliers/generators to “find” additional capacity, not least by sweating existing assets a little bit harder. We should expect that with the right incentives, a surprising amount of additional capacity could and would be found. Options that would need to be explored include:

- any residual mothballed plant

- increasing the rated capacity or potential output of existing fossil plant

- life extensions to existing nuclear plant, including the cost of continuing to comply with nuclear safety requirements

- emergency generation facilities that would only be used at peak, or lower capital cost specialist peaking plant

- the possibility of emergency derogations for standby capacity under the EC Large Combustion Plant Directive (LCPD)

The last of these options is a particularly persuasive alternative. It would be somewhat contrary to achieve compliance with the LCPD only by engaging in an environmentally far more damaging investment in new coal plant.

3. If Kingsnorth were not permitted and no alternative capacity were available, for whatever reason, what other options would be open?

Most obviously we would take much stronger demand side measures to reduce the risk of actual disconnections and hence limit the economic and social damage. Bearing in mind that peak load is typically the main issue in the UK and that the capacity concern may centre on a relatively short period of winter and very few individual hours in any given year, there are a variety of strategies:

- more load management for large industrial consumers, with appropriate incentives and tariffs

- pricing and tariff strategies targeted to reduce peak loads

- initiation of smart metering techniques and tariffs which would extend the concepts of time of day pricing, and identifying more disconnectable load

- contingency planning within the National Grid, for example for voltage reductions[1], within current legal limits, to minimise actual forced disconnections

- broader contingency planning to mitigate the consequences of outages if they occur

4. Even assuming the worst case, where there are blackouts and rota disconnections, how do the estimated social costs compare to the estimated social costs of emissions?
Obviously a lot of assumptions go into this, such as the life of Kingsnorth as a baseload station, whether and at what point it would be fitted with carbon capture, how severe the shortages might be, and so on. But just to give a feel for orders of magnitude:Social cost of emissions. A 2 GW baseload power station operating at 85% load factor might on average consume about 6 million tonnes of coal a year. This equates to about 15 million tonnes of CO2, or 300 million tonnes over a 20 year life operating at baseload without CCS. Valuing the cost of the latter at a comparatively modest (ie only a little above Stern Review) figure of £ 80 per tonne, this would imply an annual cost of £ 1.2 billion, £ 6 billion over 5 years (say), the presumed period when Kingsnorth fills a gap, and a lifetime cost of £ 24 billion.[2]

Social cost of supply disruption. If we start with an England and Wales consumption of perhaps 275 TWh, this might give a typical peak period hourly consumption of about 1.8 times average hourly consumption, amounting to about 55 million kWh. Assume the absence of Kingsnorth meant that 3% of total load in England and Wales could not be met for 3 hours a day over a period of 30 days (ie a fairly prolonged period of severe disruption that is arguably worse than more likely, expected value, outcomes). Adopting a conventional valuation of lost load, £ 5 per kWh, that supposedly underpinned the old public sector standard of generation security, would put a value on that disruption of about £ 770 million in the year in question. Over 5 years that would be about £ 3.85 billion.

In other words the social costs[3] of emissions are certainly of the same order and may well outweigh the social cost of supply interruption, even in each individual year of Kingsnorth operation without CCS.

Now of course all these numbers are approximate and simplified “back of an envelope” calculations, without the benefit of sophisticated power system modelling, and are only part of the overall economic calculus. But prima facie it would take a significant change in these parameters, or in the cost of carbon or lost load valuations, to demonstrate an “open and shut” case for building Kingsnorth simply because it enabled the power system to avoid limited supply interruptions. Purely in terms of these cost-benefit calculations, even when the “need” is taken as given and assuming no other mitigating action can be taken, the case looks decidedly marginal as between proceeding with a high emissions project or accepting that there will be supply problems over a limited period. It would be even harder to make in the absence of firm guarantees on carbon capture, or guarantees that Kingsnorth would downgrade to low merit status as soon as the period of shortage had been overtaken by new carbon-free capacity. At the very least the cost-benefit question needs to be asked, and the detailed parameters examined very critically.

It is worth adding that the case for subsequent coal-fired plant, expressed in these terms, will be more tenuous, since the hours of outages avoided should decline rapidly with each subsequent unit of capacity built.


Footnotes[1] Under conditions of severe strain the National Grid will normally reduce voltage, within statutory limits, before it orders any disconnection. This on its own represents a significant safety margin, albeit at some cost to the quality of supply to consumers. But voltage reduction causes far less social and economic damage than actual forced disconnection (outages).[2] Ignoring for the moment the relatively small effect of discounting a set of emissions costs with a rising profile.[3] Of course these are largely discounted future costs, whereas the costs of supply interruptions are immediate.