SSE’s announcement to close a unit at its Fiddler’s Ferry coal-fired power station has come as little surprise as challenging market conditions continue for the technology, and the government remains committed to phasing out coal-fired generation by 2025.
The Fiddler’s Ferry plant in Warrington, Cheshire, has a capacity of almost 2GW – the unit to be closed has a capacity of 485MW. The remaining three units at the plant will continue to operate as normal.
This is the second coal closure announcement this year, following EDF’s decision in February to close its 2GW Cottam plant from September 2019. Once both Cottam and the unit at Fiddler’s Ferry are closed, GB will have approximately 8.4GW of remaining coal capacity, significantly below the 23GW on the system as recently as 2012. Remaining coal plants will include RWE’s Aberthaw (1.6GW), Drax Units 5 and 6 (each 645MW), Uniper’s Ratcliffe (2.0GW), EDF’s West Burton 2.0GW, and the remaining Fiddler’s Ferry units (1.5GW).
What’s driving the decline in coal?
It’s no secret that the economics for coal-fired power generation in GB are deteriorating, as gas-fired plant and an ever-increasing volume of renewables capacity displaces the technology in the electricity mix and leads to reduced running hours and revenues.
The first and foremost reason for unfavourable economic conditions has been rising carbon prices. Emitters in the UK face a total carbon price that is made up of the EU Emissions Trading Scheme (ETS), plus the UK’s carbon price support (CPS). With the CPS set at £18/t until 2022, and EU ETS carbon prices currently trading at ~£19/t, the total price for emissions is ~£37/t. As coal-fired plant emit more than any other technology in the electricity mix, they are impacted the most and the reality is that coal can’t live with carbon prices at this level.
Figure 1 shows the declining clean dark spread (CDS) over time. The CDS is the theoretical profitability of a coal-fired power station, accounting for the cost of fuel inputs and emitting carbon. Recently, the CDS has turned negative and effectively means that coal stations would operate at a loss on the wholesale market, which has led to record low levels of output.
Furthermore, the gas market is in backwardation. This means that gas contracts for delivery further in the future are trading at a lower price than contracts for delivery in the near-term. This will act to push coal further out of merit, with gas-fired plant becoming more economically favourable relative to coal.
The Capacity Market (CM) has also meant that, despite declining running hours for coal, stations have been able to stay open and provide electricity to the system when demand is high. SSE’s Fiddler’s Ferry plant has three contracts currently in place to provide electricity capacity from October 2017 to September 2019. However, all four units are without agreements for future delivery years but have prequalified for the upcoming T-1 auction.
We estimate that a coal-fired power station will need at least £20/kW in CM auctions to break even – well in excess of the clearing price in the last T-1 auction of £6/kW – a fact that will certainly be factored into any decision when closing a plant. However, other factors have been keeping the remaining coal plant online, including system services, ancillary services, the option value (i.e. the ability to capture better prices if prevailing market conditions change) of generators, and deferring the costs of decommissioning.
Negligible impact on system security, for now
Government’s commitment to close all unabated coal by 2025 is playing out, as higher carbon prices, increasing levels of renewables capacity, prevailing conditions in the gas market, and low CM clearing prices have deteriorated the economics for coal generation.
With the upcoming T-1 CM auction, expected to be held this summer, oversubscribed, we anticipate that this closure announcement will have no impact on clearing prices and have negligible impact on system security in the near term. However, it does once again raise the question of what will fill the capacity gap in the 2020s?
With coal set to be off the system by 2025, and significant uncertainties surrounding the future of nuclear in the UK following Hitachi’s announcement to suspend work at the Wylfa nuclear project and the scrapping of the planned Moorside plant in Cumbria by Toshiba, new capacity will be required.
Eyes will now turn to the upcoming Contracts for Difference auction in May, where up to 6GW of renewables capacity will be awarded contracts.