UK COST RECOVERY OF POLLUTION CONTROLS AT RISK
The UK energy markets are facing major change. Against a background of huge infrastructure additions in the gas market, altering the gas supply fundamentals, the power market is also facing a transformation-not through additions of new generating capacity, but through shifts in the utilization of existing power generation assets. These shifts could be forced from compliance with new environmental regulations, which bite in 2008, and from the potential for continued low gas prices. Because of these new environmental regulations, a number retrofits of flue gas desulfurization (FGD) equipment to existing coal-fired plant are under way as owners wish to increase annual production and potentially extend a plant's useful life. We will soon know whether these retrofits will be completed in time for the start of 2008.
*The ""dash for FGD"" resulting in 8 gigawatts of additional FGD capacity was, perversely, largely driven by the carbon Emissions Trading Scheme's (ETS) National Allocation Plan, which delivers larger volumes of free carbon emission allowances to FGD fitted plants than non-FGD fitted power stations during 2008-12.
*European and national policy on implementing emissions regulation led to late decisions and may create additional volatility in spot markets. The FGD retrofit program has led to large coal-fired power plant outages in 2007 and could lead to restrictions in 2008 through potential late implementation of FGD systems. Increased power and gas price volatility can be expected during this period. In the worst case some security of supply concerns may be raised in late summer or autumn 2007.
*Companies retrofitting FGD to their coal plants may face difficulty in recovering their investments. Lower gas prices will reduce coal plant utilization, and lower carbon prices (resulting in part from lower gas prices) will reduce the value of the free allowances firms received by opting to fit FGD. The combination of these two effects could put the recovery of FGD investments at risk. Companies need to take steps to mitigate the risk inherent in Phase II of the ETS.
*The combination of greater levels of FGD and lower gas prices highlights again the need for a portfolio approach to the generating mix. Companies and investors that depend too heavily on coal in the United Kingdom should diversify their holdings.
