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Unequal players in the power game

Nobody can be surprised that the privatised electricity industry is milked for profits, even at the expense of national interest. The Department of Trade & Industry's current review of energy sources for power generation politely exposes the tricks, but has yet to find the remedies.

When President of the Board of Trade Margaret Beckett set up the review last November, she was prompted by the 'dash for gas' and the threat of imminent coal mine closures followed by the demise of the country's coal- fired power stations.

Most of the public will probably see the continuing moratorium on further gas-fired stations as a means of rescuing coal. But the coal industry has not asked for favours, and Beckett does not want to subsidise it.

Fortunately for her, consultant Merz and McLellan, electricity regulator Professor Stephen Littlechild and the DTI have now exposed serious distortions in the electricity market which give unfair advantage to gas over coal. So the market will have to be sorted out - and that will take a long time because nobody yet knows how to do it - before further approvals for combined cycle gas turbine stations are considered.

Were fears for the demise of coal genuine? Wood Mackenzie, gas consultant for the review, reckons that gas could be fuelling 76% of electricity supplies by 2020 unless constrained. Britain has more gas today than it can use but in five years' time imports could be needed, and up to 90% of its gas could be imported by 2020.

Nuclear power stations currently provide 25% of the electricity we use, and enjoy privileged priority to feed what they generate into the grid. Add to this unfettered gas growth and continuation of the present pricing system, and coal will be dead shortly into the next millennium.

What is so unfair about these sleek new gas stations, which are energy efficient and reduce emissions, and incidentally provide many construction jobs?

Commercially, gas-fired stations are much more profitable than their coal-fired equivalents, despite their higher production costs. The price bidding system allows the new stations to get higher than pool prices for what they feed into the grid.

Also, electricity is generated with cheap gas supplied under long term contracts but only piped in when it suits the gas companies to provide it. If the weather is cold and the gas consumption elsewhere is high, the power stations are cut off. Stand-by oil, if it exists, is sufficient only for a few days.

Technically, the new gas plants are deliberately restricted in how much their loading or frequency can be altered to suit the grid's supply requirements. This makes them cheaper to build and operate. Balancing hourly and daily demand for electricity is left to the coal stations, with no recompense.

Why has this 'red card' foul been allowed? The only obvious explanation is the much-vaunted eagerness of the regulator to encourage new generators and increase competition. Bumper profits for new gas stations have obviously helped.

In his first evidence to the DTI, Littlechild was confident that the industry's demand for coal would be stable, even if go-aheads for new stations were allowed. He did not state at what level. Only his second bite of evidence noted that trading arrangements would need reform if all plants were to play a full role in competition.

Two weeks are now left for anyone who wants to influence the DTI review team before it presents proposals for action. I don't recall such complex technical and commercial issues being offered for consultation before, rather than being sorted out behind closed doors. That is welcome.

Dealing mainly with coal and gas generation, this review is only a first step. A further report on renewable energy is expected in the coming months. Sooner rather than later, Beckett will need to sort out the privileges enjoyed by nuclear stations if there is to be fair competition for all fuels.

She has also made a mistake in promising lower electricity prices. If Britain's energy requirements in the middle of the next century are truly to be secure and diverse, renewables need to be encouraged. That cannot be done commercially if prices fall.

A shrewd policy would introduce another 'non-fossil fuel obligation' levy, not a subsidy this time for the nuclear generators, but a boost to establish a substantial market for 'proven-on-merit' wind, bio-fuel, solar and tidal and wave power. That is where construction's true long- term interests really lie.

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