Over the years, UK electricity generation has been dependent upon various technologies. For much of the 20th century, King Coal dominated energy generation – and was often at the centre of bitter disputes: the long-lasting strikes of 1926, 1972, 1973/4 and 1984/5 remain part of the UK’s industrial history.
For a short period in the 1960s, oil became a feasible alternative until the quadrupling of oil prices in the mid-1970s meant that oil-fired output became uncompetitive.
The same era saw the development of nuclear power, once famously described by Lewis Strauss, a leading member of the Eisenhower administration, as “too cheap to meter”.
At privatisation in the early 1990s, the attractions of new efficient combined cycle gas turbine (CCGT) plants gave rise to heavy investment for the subsequent decade.
Recently, though, CCGT investment has virtually stopped. Given that coal-fired plant is to be phased out by 2025, this scenario raises real concerns about the future availability of baseload capacity.
The table, which shows conventional thermal and CCGT output every quinquennium since 1970, provides a stark illustration of how UK generation is changing.
Last year’s figures have also been included: they show how renewables output is beginning to achieve mass. Furthermore, for the first time, generation from thermal sources fell below 60 per cent of total output.
Clearly, the UK generation market is undergoing radical reform.
And although Germany is investing in new coal plant – with the installation of the requisite carbon abatement equipment – the UK’s planned closure of all existing coal plants by 2025 looks nigh irreversible.
Furthermore, the prospects for new CCGT plants look grim until they have a better chance of operating consistently as baseload stations; otherwise, the financial returns simply do not stack up.
In recent years, much emphasis – and formidable effort – has been placed on the third-generation 3.2GW Hinkley Point C plant, due to cost c£20 billion. The contract for difference (CfD) is of unprecedented generosity – an inflation-linked 35-year contract with a 2012 base price of £92.50p per megawatt-hour. Last year, winning offshore wind bids were struck at below £60/MWh.
Indeed, aside from renewables and Hinkley Point C, investment in generation is dangerously low, mainly because potential investors question the projected returns.
After all, for many of the big six, generation activities have been a tale of woe.
Centrica has sold off a swathe of generation plants, mainly CCGTs; heavy generation division losses had been reported. It is now focusing on its retail and commercial customer base, both in the UK and in the US, although the stock market is far from convinced.
Iberdrola – owner of Scottish Power – has also suffered. Its 2017 figures showed that the liberalised element of its UK generation market was still underperforming.
Iberdrola cited lower margins and higher government obligations, although the closure of the Longannet plant distorted the overall numbers. By contrast, Iberdrola’s renewables business was improving, with higher output and increased capacity.
RWE’s UK generation returns in recent years have been as dire as its share price performance. Its focus now lies in reinvigorating its powerful position in the German generation market.
Drax, by contrast, has very much blown with the wind – or, more accurately, with biomass. As the owner of the eponymous plant – once the largest power station in the world – it has been progressively converting its coal-firing operation into one which burns a vast amount of imported wood.
While Drax continues to benefit from formidable biomass subsidies, it is other renewables that are playing a key role in driving the fundamental changes in the UK market, where the era of huge plants – Hinkley Point C excepted – is seemingly ending.
It is widely accepted that there are seven renewable technologies: wind, hydro, marine, biomass, geothermal, solar; and fuel cells. Well over a decade ago, Iberdrola’s prediction was that wind generation would take off far more quickly than other renewable technologies and that, in the long term, solar would also prosper, especially in the south of England. This viewpoint has been firmly vindicated.
To be sure, onshore wind has stalled on the back of less accommodating planning rulings and the phasing-out of subsidies. But offshore wind looks to be a real winner. The government has been pushing for costs to fall from £140/MWh to £100/MWh by 2018.
Last year’s successful bids by Engie to build offshore windfarms – off the Moray Firth with Portugal’s EDP Renovaveis – and by Orsted (formerly Dong Energy) off Hornsea – for £57.50/MWh – represented a dramatic step forward. It also highlighted the generosity of the Hinkley Point C CfD.
Indeed, this pricing scenario raises the question as to whether any other new nuclear projects, such as Bradwell, Moorside and Wylfa, will materialise. If any do, the financial terms will be radically different.
As such, offshore wind power seems set to boom over the next decade. Hydro power has been operational for many decades and is key in Scotland. However, the best sites have long been exploited, so that hydropower’s growth since 1970 has been muted at best.
Marine-based generation is struggling. The two most high-profile projects – the various Severn Barrage proposals and Swansea Bay – are “parked”. The former is very expensive and complex while the latter is predicated on vast, long-term financial support.
Biomass remains dominated by heavy subsidies for the Drax conversion strategy, while geothermal power – ideal for Iceland – cuts little mustard in the UK.
And fuel cells, despite some promise, are still very much work in progress.
However, solar power is now taking off with several quoted solar funds, such as NextEnergy Solar, reporting solid operating performances from solar farms, often located in remote areas of south and central England.
Against this background, some individual companies remain well placed. The share price of Spain’s Iberdrola has outperformed that of its big six peers in recent years. And various renewable energy funds, which enable an element of risk-sharing, have also prospered.
On the basis that offshore wind generation will boom; three quoted companies stand to gain. First, Germany’s Siemens, which has wide-ranging assets outside the electricity sector, leads the way in constructing massive offshore wind turbines.
Second, Denmark’s well-known wind turbine manufacturer Vestas is now recovering after a torrid period when its very existence was in doubt.
Its latest share price of around DKK440 is about 20 per cent off its aggressive rating a decade ago. But, by November 2012, its shares had plunged to just DKK 26.
Third, Orsted looks set to play a major role in generating offshore wind power.
Generation sector losers, notably thermal plant operators, have already seen their share prices plunge in recent years; they include RWE and Eon, while shares in the nuclear-dominated EDF have performed poorly.
More change is undoubtedly afoot – others may seek to emulate RWE and Eon, which are currently restructuring with a vengeance.