RWE npower: wholesale electricity prices ‘must double’ to meet UK targets

At a presentation at the Oxford Energy Futures conference on June 11th, Andy Duff, non-executive chair of RWE npower, made some controversial assertions about the future of electricity in the UK. He focused on three propositions.

a)      The UK cannot meet its carbon targets without new nuclear

b)      Electricity demand will grow at 1% less than GDP growth

c)       The UK will not have enough electricity capacity by the latter part of this decade unless UK society accepts a doubling of wholesale electricity prices, which is the minimum required to free the capital investment required to 1) meet demand and 2) decarbonise sufficiently fast.

In summary, we need nuclear and we all need to accept a substantial rise in electricity prices to pay for it.

Are these propositions reasonable? I think a) is probably correct but the other two need to be closely dissected. If you work for an energy company, you might want to believe these hypotheses but current evidence from the UK does not provide strong support.

Proposition b) Electricity demand growth

UK electricity demand has been falling for four years. The reasons include continued export of manufacturing to overseas locations and some progress in energy efficiency, particularly in industry. The recession of 2009 produced a further cut in electricity use.

Total electricity supply, as defined in the government’s Energy Trends (table 5.2) was about 375 TWh in 2009, down from about 410 TWh in 2005. The total decline is about 8.3% over four years. GDP fell sharply in 2009, but was still slightly ahead of the 2005 figure. Expressed as an index, 2009 GDP was 100.9 compared to a figure of 100 for 2005. This equates to an annual rise of 0.2% in GDP.

To summarise, electricity demand has fallen by about 2.1% a year over the last four years, compared to an average annual 0.2% rise in GDP. Therefore electricity use has been declining at a rate of 2.3% less than GDP, not the 1% mentioned by Andy Duff.

Why does this matter? Our decisions on how much to invest in electricity generation over the next ten years crucially depend on our expectations of future growth in demand. So Mr Duff is arguing we need to put huge sums more into building new power stations than the recent past would suggest was necessary.

Let’s assume that the UK goes back to 2.25% trend growth over the next ten years. If Andy Duff’s projection is right, we would need to plan for 1.25% increase in electricity demand. But if my figures continue into the future, we would not need to add net electricity generation capacity (though we would need to replace old coal and nuclear plant, of course) because 2.25% growth is less than the 2.3% trend fall in electricity demand per unit if GDP. (I’m sorry this is a bit complicated). The difference is about one gigawatt of power station capacity a year, at an investment cost of at least £2bn per year or £50 a year for every adult in the UK. Real money, in other words.

Will electricity demand continue to grow at the low levels I suggest? No-one can know of course, but National Grid is probably in the best position to judge. Its central estimate is that demand will rise by 0.2% a year for the next seven years over its transmission network. (See National Grid Seven Year Statement, May 2010). In other words, its figure is about 2% lower than the expected trend rate of growth of GDP of 2.25%, compared to my figure of minus 2.3%.

What about the opinion of npower’s German parent RWE? The press release announcing the 2009 results said

The anticipated economic recovery will have an effect on energy demand, but only to a limited degree. This is because energy-intensive industries will continue to feel the negative economic impact in 2010 and subsequent years. “We expect that it will take several years for the European economy to return to the level seen in 2008″, said Juergen Grossmann, (CEO). ‘

(http://www.rwe.com/web/cms/en/37110/rwe/press-news/press-release/?pmid=4004547)

Once again, very limited support here for Andy Duff’s bullish views on demand growth.  Opinion outside the UK electricity industry seems to be very clear that electricity use and GDP have now been decoupled. A rapid growth in heat pumps or electric cars, which are potentially major users of electricity, would change that trend but experts such as the National Grid appear to see no sign of these two sources of extra electricity demand within the next seven years.

Proposition c) The possible supply gap at the middle of this decade and the need for higher prices

At every meeting at which the electricity industry talks to consumers, regulators or government a Powerpoint chart is flashed on screen showing the UK’s working generating capacity falling below peak electricity needs between 2015 and 2020. The unbearable cliché about the lights going out usually follows.

The facts are these. Some of the UK’s coal fired power stations will close by the end of 2015 as a result of European pollution legislation. Many of the UK’s nuclear generating plants will shut before 2020. But, fear not, the industry has already responded to this future shortage by planning huge amounts of new gas-fired capacity, much of which is either already in construction or has planning permission and the other consents.

National Grid expects 12 Gigawatts of coal and oil fired capacity to leave the industry by early 2016. But over 17 Gigawatts of replacement combined cycle gas plants are projected, as well as 12 Gigawatts of wind and almost 2 Gigawatts of other renewables. These other renewables will be principally biomass and waste to energy plants, so their output can be relied upon 24 hours a day.. By 2017, there may also be new nuclear generation, and this figure is included in the National Grid central case. The important point is this: if the Grid is right, there will be no prospect whatsoever of electricity shortages during this decade. Please will the electricity industry begin to include the new gas fired power stations in its public presentations rather than simply showing the shroud waving chart that shows demand falling below power supply in 2016?

Of course gas is not carbon-free and so the rush to gas is not going to allow us to meet the target to almost decarbonise generation by 2030 on present trends. But we must not mix up the need to increase the pace of renewable installations with the issue of the ‘lights going out’. As things stand, the stream of new gas plants will easily match the UK’s prospective needs, even if npower is right about the underlying rate of demand growth.

Mr Duff’s core point remains. The currently low price of natural gas means that the wholesale price of power is well below the level at which his company could contemplate investing in nuclear power in the UK. At the conference, he told us that the ‘price of electricity must double’ to create the circumstances in which banks will back RWE’s nuclear plans. As he said this, he was showing a chart that provided an estimate of the underlying cost for nuclear power, which seemed to indicate a price of about £70-75 per megawatt hour, compared to today’s baseload price of about £40-£45 per MWh. So either nuclear must be directly subsidised or the price of alternative fuels must be hiked to push wholesale electricity prices up to at least £75, and this must happen with some guarantee of permanence.

In fact, as Mr Duff said, the shortage of finance for large private sector infrastructure projects means that the wholesale price must be reliably held at an even higher level in order to ensure that capital starts to flow. That’s presumably what he means when he says that the electricity price must now double. But, to restate the point, this is not because the UK faces a ‘supply gap’ or because of the continuing growth in demand but simply because all sources of low-carbon energy are far more expensive to produce than power from new combined cycle gas power stations. We may not be able cut the carbon from electricity generation fast enough without a price guarantee for nuclear.

What does a doubling of wholesale price to about £80-£90/MWh mean for retail prices? Probably about 16p per kwh, a premium of about 30% over today’s levels (which are slightly higher than would be justified by today’s spot wholesale prices). Is it politically possible to get the government to create the circumstances in which this price becomes standard? Probably not. As a result, we will not get new nuclear power.

  1. Carlo Ombello’s avatar

    Dear Chris,

    I particularly like the enlightening end of your article. The nuclear industry plans rely heavily on forcibly increasing existing sources costs to open up the market to expensive, slow-built, huge nuclear plants. And they have even less of a point when – as you stress – they don’t account for the massive roll out of new, cheap and more environmentally friendly gas cogeneration plants.

    To all this, I would add that while traditional resources costs (including nuclear fuel and raw materials prices) will keep climbing slowly but steadily as the economy recovers (coming oil crunch aside, which would tell a different story), renewable energy will enjoy an ongoing decrease in costs throuought the supply and construction chain. Once the huge impact of solar PV will be apparent to most countries and offshore wind will start making its way this side of 2015, I see even more trouble coming for the nuclear industry.

    Overall, I believe the overwhelming issue with nuclear lies in its complexity and inevitably slow pace of its possible rollout, which directly affects its already high overnight costs. That industry simply can’t compete with the other technologies and therefore does not constitute a solution to today’s energy problems, let alone tomorrow’s. Once a plant is built in ten years, it will be already old as a concept and made redundant by some by then cheaper, more modular, quicker-do-deploy and ubiquitous renewable sources.

    Nuclear could have been the answer to fossil fuels in the slow-paced old days, now it’s just too late. Today’s progress in energy technologies is too fast for it to compete.

  2. Gregor Margetson’s avatar

    Interesting hypothesis.

    Is this what we all secretly acknowledge but are loath to admit because energy bills are already a big concern without these rises which will inevitably impact consumer prices later?

    Or should we choose to disagree and instead continue to push for more clean energy (wind, solar, etc.) rather than zero-carbon nuclear which cannot be described as “clean energy”.

    Credit is due to RWE for their newly confirmed enormous wind farm off the welsh coast, but I cannot completely ignore that German and French power companies are heavily into nuclear and obviously want to persuade us that we ‘need’ new nuclear. The last time I crunched the numbers, it did indeed look like we could not avoid new nuclear, but I sincerely hope that we grow and encourage clean renewable supplies as much as possible before we resort to ‘dirty’ nuclear plants.

    Even though 5% is an already ambitious target for Wind contributions to the Grid, the potential for demand reduction through building and housing efficiency upgrades is at least three to four times this amount, even allowing for GDP growth. We must accept that until we eliminate energy wastage we will not be able to accurately justify the building of expensive and polluting new nuclear plants.

    but what do you think?

  3. Andrew Smith’s avatar

    Regarding proposition a) “The UK cannot meet its carbon targets without new nuclear”:
    Given that PriceWaterCooperhouse, McKinseys, EREC and others have all demonstrated independently that both Britain and Europe can meet their carbon targets without any new nuclear, that proposition is definitively settled in the negative – the UK and Europe *CAN* meet their carbon targets without new nuclear. All those reports demonstrate that a 100% renewables supply is viable: so the question for nuclear is not “do we need it”, because it’s now well established that we don’t. The question is, “do we want it to displace some renewable generation”?

    On (b) Electricity demand will grow at 1% less than GDP growth: well, that completely depends on how fast we electrify heating and the car fleet; at some point, we will, and that will cause big increases in electricity demand, (but large drops in overall energy use)

    On (c), costs and financing new build, there are many ways to get the plant built:

    Rising consumer prices are one way, and have the advantage of adding pressure to the drive for energy efficiency – and this requires lots of complementary measures to protect the poorest. Another way would be power-purchase agreements by the public sector, backed by loans at preferential rates, to renewables. One option is for the govt to underwrite (not finance, not build, just underwrite) a significant rollout of onshore wind. At about £1bn/GWp, and 25% capacity factor, then building 40GWp of onshore wind would take 4 years (if we gear up to USA deployment rates), the total financial outlay (at 4% financing, 20 year payback, which is about where gilts are trading today) would be about £90bn, and would give 200GW-years of energy (40GW x 20 year lifetime x 25% capacity factor).

    And that works out at about 5p/kWh, which isn’t far off today’s average wholesale price. Add in O&M costs would still only make it 5.5p-6p/kWh. So we can decarbonise a fair part of the grid very quickly and at a similar cost to today’s electricity, even before pricing in any of today’s costs of pollution. Such a programme would give total carbon savings of about 1GT of CO2e (taking it as displacing emissions at the rate of 570gCO2e/kWh, which may be conservative – it would be mostly coal being displaced, at more like 900gCO2e/kWh).

    Not only that, but all that investment would go into UK manufacturing and know-how too – by committing to a large-scale building programme, then turbine-makers would get the confidence to build factories here.

    I can’t think of a good reason why we shouldn’t do that right now (apart from the fact that turbine aesthetics upset a few over-sensitive souls).

  4. Mike Parr’s avatar

    A very fine article and the numbers agree almost exactly with PWR research on this issue (particularly the “supply gap” non-problem). What is difficult to understand is that once the Nat Grid spreadsheets on generation have been number curnched the supply-gap non-event is there for all to see. This raises the question of “why talk about something that does not exist”. I think the article goes some way to answering this.

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