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Decline in UK industrial electricity demand to help alleviate capacity crunch

London, 14 March 2012 - Commodities Now

Recently published statistics by the UK government indicate that electricity demand in the UK fell by 3.4% in 2011, reversing the minor recovery in 2010, and leaving demand at levels not seen since 1999. Domestic demand fell by 5%, the steepest decline in over 20 years. Although this can partly be accounted for by seasonal factors (November 2011 was the warmest on record and the average temperature in 2011 was the highest since 2006) it would suggest that higher electricity prices may finally be encouraging consumers to become conscious of consumption.

However, the really interesting finding was the drop in industrial demand, falling by 4.1% to levels not seen since 1995. The conventional wisdom is that UK industry has had a good year, but these figures indicate otherwise. Frost & Sullivan believes the actual explanation is that whilst lighter manufacturing has enjoyed a modest recovery, energy intensive industries continue to face pressure from electricity costs that exceed those of some key European competitors such as France, and are well above costs found in other regions. Whilst UK heavy industrial plants are not faced with imminent closure, it would suggest that marginal production is being focused elsewhere to limit costs. For industries such as chemicals and steel, energy is the key cost besides raw materials.

So what could this mean for the UK power generation industry? The UK’s installed capacity in 2010 was 89GW; of this 11.3GW of coal and oil-fired plant is required to close by the end of 2015. The current price of coal relative to the price of gas and the low price of carbon permits mean that coal is the preferred option for generators. Many of those plants will close before 2015, because they have used up the operational hours allowance given to them by the Large Combustion Plant Directive. Does this mean that the UK capacity crunch forecast for 2015-2016 could come even earlier? In Frost & Sullivan’s view this will not be the case and in fact Frost & Sullivan believes that a capacity shortage in 2015-2016 is unlikely.

Approximately 1.5GW of gas capacity was added in 2011 and a further 5.5GW of capacity is currently under construction. This alone will replace most of the 8GW of coal capacity closing (the 3.3GW of oil capacity is rarely used). Added to that, approximately 7GW of wind capacity should be online by 2015, with the existing gas plant base providing back up power, albeit with some technical modifications for certain plants to make them either fully flexible or peak demand plants. As for nuclear, closures should be able to be pushed out to 2020 (most UK nuclear plants will be under 40 years old even by 2020). Finally, there is the decline in industrial power demand; it is now becoming clear that it will be some time before 2008 levels are reached again and this substantially eases the pressure.

What the above scenario described does mean though, is that the UK will gradually lose the flexibility it now enjoys in being able to switch between coal and gas. In the future, the UK will be more dependent than ever on the global gas price and this could cause major headaches for politicians.
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