Author: admin

In a previous post we looked at how the UK’s existing fleet of coal-fired plant had been saved from being made subject to the “emissions performance standard” or EPS under the Energy Act 2013 provisions for Electricity Market Reform (EMR).  This happened when the Government reversed an amendment that would have applied the EPS to existing coal-fired plant if its operators were to choose to keep it running in the long term by fitting the equipment necessary for it to comply with the new limits on emissions (in particular of NO_x) that will apply to it from 2016 under the Industrial Emissions Directive (IED).  In this post, we explore the choice which operators have to make under the IED – and why the Government may have thought it worth keeping them out of the EPS. 

Existing plant faces a choice under IED.  In broad terms, it must either upgrade to meet the new emission limits, or run for a limited number of hours – for example, by opting for the “limited life derogation” (LLD).  The LLD allows plant to run in its current form for 17,500 hours before closing no later than 2023.  Subjecting existing coal-fired plant to the EPS if and when it upgraded to comply with IED NO_x limits would have made it likely that its operators would opt for the LLD rather than upgrading, and at the load factors at which UK coal plant has been operating recently, most plants would probably burn through their 17,500 hours by 2020, if not before.

Why should that worry us?  Wouldn’t it just be another example of EU legislation that isn’t about climate change being more effective at tackling CO₂ emissions than the EU Emissions Trading System?  (Most UK coal plant closures to date have been driven by the Large Combustion Plants Directive, which the IED replaces, and which was designed to combat effects such as acid rain rather than “global warming”.)  To understand why the Government was so keen to keep existing coal plant out of the EPS, we have to look at the work it is doing in the generating mix. 

In 2012, the UK’s total combined cycle gas turbine (CCGT) capacity (35.57GW) exceeded its total coal and oil-fired “conventional steam” generating capacity (30.97GW) for the first time.  But that same year, gas’s share of electricity generation fell from 40% (in 2011) to 28% and coal’s rose from 30% to 39%.  (Greenhouse gas emissions from the UK energy supply sector increased by almost 6 per cent as a result.)  Coal’s high share of UK generation persisted, and appears to have increased slightly, in 2013. 

Why is this?  Coal-fired power over this period has simply been cheaper than gas-fired power (partly because the availability of shale gas has hit US coal prices).  It can keep the lights on at lower cost.

Much of our coal-fired electricity comes from just 10 coal-fired plants, with a combined capacity of over 18 GW – about a fifth of generating capacity connected to the grid.  Now that the 1 January 2014 deadline for indicating their operators’ intentions as regards the LLD has passed, and with the threat of EPS removed, we might expect that there would be some clarity as regards their future, but in fact there is still a degree of uncertainty about most of them.

• The future plans of three (Drax, Eggborough and Rugeley, together representing some 6.8GW of capacity, and all owned by generators who are not in the “Big 6”) appear to depend in part on plans to convert to burning biomass.  The success of these plans is likely to depend on whether they are allocated EMR Contracts for Difference (CfDs), and meet the conditions for those CfDs to take effect (more on all this in a later post).
• One (E.ON’s Ratcliffe, 2GW) appears fully prepared for IED compliance.  Another (SSE’s Fiddler’s Ferry, just under 2GW) has development consent to fit the necessary equipment.  A third (Scottish Power’s Longannet, 2.3GW) is testing new technology to comply with IED.
• The operators of four of them (Aberthaw, Cottam, Ferrybridge and West Burton, representing together some 7.5GW) have provisionally decided not to invest in the equipment necessary to comply with the IED.  Instead, EDF, RWE and SSE have said they plan to use the LLD. 

The story is clearly not over.  EDF, RWE and SSE have all indicated that they may still choose to upgrade some of their plants to IED standards.  So their choice of the LLD may be more about keeping their options open than representing their preferred long-term option for these four plants.  RWE commented: “Only after we have political clarity on how the energy market will operate under the Government’s new energy legislation as well as any other political changes to be enacted, will we be able to make [a] final decision with confidence.”.

The reference to the uncertainties still surrounding a number of aspects of  EMR reminds us that some existing plant may be looking to the EMR capacity market as a means of funding investment in IED compliance.  More on how the capacity market may work for coal and other types of plant in further posts.  For the moment, though, note two more points.  First, if operators wish to revisit their decision to choose the LLD and opt back in to the IED, they will be relying on, and will need to fit in with, the UK’s Transitional National Plan (TNP).  The TNP permits plants to ease in to IED compliance by 2020 rather than 2016.  But the UK’s TNP has so far not been approved by the European Commission as required by the IED.  Second, according to Defra, RWE, EDF and SSE do not have to reach a final decision on IED until the end of 2015.  This may be a very convenient deadline, since it comes after the next election, when operators will know whether Labour’s ambitious “Green Paper” proposals for further market reform are likely to be enacted.   

So, we are a long way from having heard the last of the power-politics of coal – although there are a few more legal elements to the debate than there were in the good/bad old days of the 1960s and 1970s.  There is no doubt that coal still counts, but it looks as if we will have to wait a little longer to see how far we can still count on some of our existing coal-fired plant.

Summary

The title given to Sir Ian Wood’s “UKCS Maximising Recovery Review: Final Report” (published on 24 February 2014), should ensure that his name is immortalised as the abbreviation most will use, the “Wood Review”, and rightly so. This former chairman of oil field services company Wood Group has become a figure-head for reform and has set a CEO-style vision, in addition to his Government remit to make recommendations to: “enhance economic recovery of oil and gas reserves in the future”.

With this in mind, the Wood Review is not overly compromised with detail. The central proposal is for a new, independent, and much more proactive regulator to maximise economic recovery (MER).  This could be criticised as fragmenting current regulation, but Sir Ian’s pragmatic rationale is clear: “a new body…to focus solely on MER will give a clear signal. The Review believes that simply increasing the resource…within DECC is likely to be perceived as a re-badging with little material change.”

Context

The imperative for MER is production apparently falling by 38 per cent between 2010 and 2013 and a sharp decline in exploration and discovery.

Given the right “stewardship,” the UK is said to have the potential to recover an additional 3-4 billion barrels of North Sea oil over the next 20 years, with a resultant £200 billion boost to the UK’s economy.

The final Wood Review is consistent with and builds upon its Interim Report, published in November 2013.

Obstacles to overcome

The Wood Review identifies outdated “light touch” regulation as a key hindrance to the exploitation of hydrocarbons in the North Sea. A regulatory regime designed for an era of large fields and large operators has apparently not evolved to adapt to the new reality of a basin with over 300 fields, much smaller new discoveries, many marginal fields and far greater interdependence in exploration, development and production.

Specific obstacles to growth highlighted in the Review include fiscal instability, insufficient collaboration between industry players in respect of third party use of infrastructure, a lack of sharing of geophysical information, excess time spent on commercial and legal negotiations and inadequate use of technology (including Improved and Enhanced Oil Recovery (EOR)). Floating Production Storage and Offloading vessels are for example noted to have higher operating costs and poorer field recovery than using existing infrastructure where available. Over 20 instances in 3 years of “operators” failing to agree terms for access to processing and transport infrastructure, has led to more expensive / lower recovery developments.

Key recommendations of the Wood Review

The Review advocates a tri-partite strategy involving HM Treasury, industry and the proposed MER regulator. Whilst collaboration may be implicit, it is notable that the involvement of existing regulatory bodies is not emphasised. Some re-alignment of regulatory responsibility is suggested with the new MER regulator perhaps being given responsibility for carbon capture and storage, and with a potential on-shore remit. The Review also recommends new sector strategies be developed for: exploration; asset stewardship; regional development; infrastructure; technology and decommissioning.

The Review envisages that the proposed new MER regulator would be encouraged to make more robust use of existing enforcement powers and may be given new powers or access to licensees, both in the practical sense (for example by being able to attend operational and technical meetings; make recommendations; have greater data access; and to implement a “non-binding” dispute resolution function), and by way of potential new licence terms (relating to maximising economic recovery, achieving acceptable production efficiency and agreeing collaboration on cluster developments). It is further suggested that consideration of past MER performance, should be specifically taken into account for future licence applications. Formal sanctions to encourage MER compliance may include a system of issuing private and public warnings, before removal of operatorship or suspension or termination licences. Interestingly, it is said that the MER regulator should have the right to apply sanctions to the whole consortium or just those who are deemed to be failing to meet licence obligations, or indeed, MER requirements. Whilst it appears there is significant detail to be ironed out here, the collective responsibility intention is notable.

Flexibility

There is also a recognition of a need for flexibility where necessary. The four year exploration and four year development terms in Traditional Seaward Production Licences are noted as appropriate for mature areas, but the Review suggests that six year periods are more suitable for frontiers like the West of Shetland, where the drilling season is short, and in High Pressure High Temperature plays. It is said that licensees shouldn’t be compelled to drill commitment wells where new information suggests they would be unviable. The flexibility theme is also discussed in the context of the almost exclusively gas producing Southern North Sea, which is in danger of apparently premature decommissioning, given the lower market value of gas.

Competitive disadvantages of the UKCS versus the Netherlands are another interesting theme and is, in part, attributed to the Dutch Government’s active ownership of infrastructure. Differences in commercial models are also noted whereby, for example, NOGAT BV (whose business model is solely to operate pipelines and processing facilities) actively seeks to attract new transport business, versus the apparent reluctance of UKCS operators to facilitate third party infrastructure use business as an adjunct to their core production business.

Fiscal incentives

Such issues are intended to be bolstered by HM Treasury’s better use of: “fiscal levers to incentivise MER”, perhaps including: extension of field allowances to incentivise EOR; or incentives for seismic and the drilling of exploration or less prospective wells by operators who currently lack production. In addition, a need for commitment to a simpler and more stable fiscal regime is acknowledged (although tax is beyond the specific remit of the Wood Review).

What is next?

Government and industry appear to publically welcome the initiative, which is to be industry-funded. Indeed, Ed Davey (Secretary of State for Energy) has announced that legislation to implement the new body, will be introduced in the fourth parliamentary session (ie. autumn 2014) but it would be expected to become law in 2015, and may be dragged out by a need for secondary legislation. Ed Davey has hinted at an informal “shadow” arrangement in the meantime. Such break-neck speed perhaps seeks to capitalise on the Review’s current good will, and will hope to minimise potentially significant industry delay in making new investments, pending uncertainty as to the new regulations.  It may also reflect the UK Government’s desire to show oil and gas policy leadership before September’s referendum on Scottish independence, and the spring 2014 publication of detailed Scottish oil and gas proposals for maximising economic recovery, which also intends to consider the Wood Review. Time will tell whether all remain so keen, once detailed provisions take effect, particularly given the Review’s criticism of some current areas of apparent self interest which are to be targeted.  As currently proposed, reforms may touch all areas of the UK oil industry from operators down, both on and off-shore.

The Silk Commission, set up to consider possible changes to the powers of the devolved government in Wales, have recommended a new division of responsibilities between UK and Welsh Ministers as regards the consenting of energy projects (click here for their report).  The Commission propose that “responsibility for all energy planning development consents for projects up to 350 MW onshore and in Welsh territorial waters should be devolved to the Welsh Government”.  This would bring Welsh Ministers closer to parity with their Scottish counterparts in energy consenting: they have long complained that there is no good reason why proposed generating stations with a capacity of more than 50 MW should be determined by UK Ministers if they are Wales, but by Scottish Ministers if they are in Scotland.  Although the proposal is not tied to particular technology types, sub-350 MW schemes are always likely to be renewables projects.

As in many parts of the UK, new renewable developments are not always popular in Wales.  In Wales there have been particular problems as a result of the relevant Welsh Government planning policy document, TAN 8, which encouraged developers to focus their proposals for wind farms on a number of designated areas.  So, in Powys, for example, a conjoined public inquiry is currently being held (on behalf of the Secretary of State for Energy and Climate Change) into five proposed wind farms with a combined capacity of several hundred MW.  As well as being unpopular with local residents, this kind of concentration of development in a given area presents major logistical problems for developers: the capacity of the road networks to cope with the large numbers of outsize loads that would need to be transported on them to build the wind farms is severely constrained in the largely rural areas involved.

Under the Commission’s proposals, Welsh Ministers would have to deal with the consequences of TAN 8 as decision-makers on individual applications.  But UK Ministers have so far been very reluctant to give up their decision-making powers over larger Welsh wind projects, even though the objections to them are not confined to Wales itself: the proposed line of pylons that would carry power from mid-Wales wind farms to the Grid in England would pass through Shropshire and has excited plenty of opposition on the English side of the border.   Whilst the Commission’s overall plan is for new primary legislation on Welsh devolution by 2017, they point out that the competence of the Welsh Assembly could be expanded by secondary legislation on a shorter timescale.  However, it seems unlikely that any action will be taken that would result in Welsh Ministers, rather than the Secretary of State, determining the five Powys applications.

The Commission also recommend giving Welsh Ministers the power to approve “associated development” such as roads and substations as part of a development consent order for a “nationally significant” generating station under the Planning Act 2008.  At present, absurdly, this can currently be done for English, but not for Welsh projects, meaning that the supposed “one-stop shop” provided by the 2008 Act for consenting complex projects is nothing of the kind in Wales.

In a politically charged area where there are probably no perfect solution, the Commission’s proposals deserve serious consideration.