The economics have changed, new baseload power is likely dead

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Centrica’s withdrawal from the Hinkley and Sizewell projects will damage government’s nuclear ambitions. Image credit: Topato

Centrica has announced that it will not be going ahead with the construction of new nuclear power stations at Hinkley Point and Sizewell.

Via Centrica pulls out of UK new-build nuclear | Solar Power Portal.

Centrica is one of the largest energy companies in the U.K. They decided to pull out of the proposed nuclear power stations at Hinkley Point and Sizewell based on the economics: “Since our initial investment, the anticipated project costs in new nuclear have increased and the construction timetable has extended by a number of years.”

Time is money, and increasing the length of time until commercial operation means a lot more money. Perhaps more importantly, though, is the advent of retail competition, distributed generation, and alternatives that can be built more quickly.

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In the past when utilities had captive customers, they could take chances on large capital cost power plants because, with the regulators’ blessings, they could charge any overages to captive customers. With retail competition, they will only be able to charge market prices, whatever those turn out to be. So, the risk associated with an extremely large capital investment that could be delayed several years has become far, far more extreme.

Distributed renewable generation, especially solar, is falling in price and being promoted by many governments. This not only shrinks available markets, but is radically affecting market prices. In both Australia and Germany, with large amounts of solar, midday peak prices are  consistently tamped down, meaningfully affecting generator revenues, especially baseload generators. (Australia is the extreme poster child; it is estimated that 30% of revenues came from 30 hours of the year.)

Finally, significant amounts of solar can be installed with just a two or three year lead time. Solar does not produce the same amount of energy per MW installed, but you can install many more MW much faster, although perhaps not by individual companies as opposed to thousands of individual consumers. With much shorter lead times the risk associated with market prices much less.

What does this mean for future baseload power? Companies typically finance merchant power plants with about 80% debt and 20% equity. The model the companies use is to line up the debt, line up the construction documents, and get a purchased power agreement (PPA) for a 20 year term for a portion of the power plant sufficient to cover the debt service. Once they have the PPA, they lock in their debt costs, their construction costs and time frame, and their fuel costs for the specified portion of the plant. Because all these costs are locked in, the only risk to the lenders are operations and maintenance to ensure the plant can produce the required energy. The equity investors take the risk on the balance of the plant and manage the fuel prices and contract sales to, they hope, produce an outsized profit.

From the mid-1980s until recently, this merchant model worked in many parts of the world, including the U.S., U.K., and Germany. In the mid 2000s it started working very well for utility scale wind developments, too. More recently, though, with the increased uncertainty in the market, there are fewer and fewer wholesale entities willing to sign a 20 year PPA to purchase power. That, in turn, means the lenders have to take the market risks, which has caused them to begin charging rates that some developers describe as “usurious”, which makes them furious.

The project started many years ago to open up electric generation markets is bearing fruit, though not necessarily what the regulators may have thought they were planting. It turns out that risk is far more expensive than we might have believed, especially in times of change when many lenders have had past investments go very sour. That will make electricity cost more, favor quickly implemented small projects over long lead time large projects, and favor consumption efficiency over profligacy.

The only return to large scale, large capital cost electrical generation projects I can see is if the government makes the investment with taxpayer money, or otherwise guarantees a private investment. Given the recent concerns in the U.S. with the government picking winners and losers based on its investments in cleantech, I do not see large-scale investments for power plants in the future. Similarly, with the U.K. government in the hands of the conservatives, it is increasingly difficult for them to justify largesse that benefits private companies, and PPAs or guaranteeing purchases does just that.

The most recent support for this view comes from Texas. The Electric Reliability Council of Texas’s (ERCOT) Long Term System Assessment is a biennial report submitted to the Texas Legislature on “the need for increased transmission and generation capacity throughout the state of Texas.” The December 2012 report concludes that with correct assumptions regarding how solar and wind operate, the best energy mix to meet Texas’ future needs will be predominantly wind and solar, with a significant amount of combustion turbines to meet a small number of peak hours per year. (See BAU All Tech with Updated Wind Shapes, below.)

I believe battery storage will obviate the need for most of the combustion turbines, with the remainder supplied by price responsiveness during very high priced hours. I doubt there will be load response that gets paid to not consume; the high prices will be enough. We will move to a mix of intermittent resources with various ways to meet demand/supply imbalances. The economics have changed, new baseload power is likely dead.

ERCOT Resource Forecast 2012

Adapted from table in Appendix 4: Resource Expansion Analysis Results, Long-Term System Assessment for the ERCOT Region December 2012

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