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). ‘


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.