Peterhead gas cut highlights wider energy concerns

Cuts in capacity at Peterhead gas power station highlights concern over gas prices, transmission charges, the supposed ‘dash for gas’ and plays into the independence debate.

Another good energy story from Steven Vass in yesterday’s Sunday Herald, covering the decision by SSE to slash capacity at its Peterhead gas fired power station by two-thirds from next year - from 1.1GW back to just 400MW. They insist this will have no impact on Peterhead’s CCS demonstrator bid in the UK Government’s £1bn competition.

The company is blaming the uncertainty around electricity market reform and the transmission charging system that discriminates against northern generators further from the centre’s of population – the same reason that prompted a previous reduction from 1.8GW three years ago. The high gas price is likely to be another factor.

SSE has previously warned of generation capacity problems in the UK. They are making a pretty substantial contribution to those concerns with their own capacity reductions of more than 2.5GW. The company has also written down the value of its stations by £278 million.

SSE is clearly not convinced that ‘Project Transmit’ will deliver for them. My quote in the Herald story reflects on this:

“Dave Watson, Scottish Organiser of trades union UNISON, said that Peterhead was "pretty vital" to the Scottish system. The more you rely on intermittent renewables, the more important the station becomes," he said. "Ofgem's new proposed system of transmission charges will be better than before, but it doesn't mean companies like SSE are happy. It's still not doing all the things that they would want it to do. They still feel Ofgem hasn't moved from its basic ideology that power should be generated nearer the market."

For once I agree with Scottish Government Energy Minister Fergus Ewing that SSE's decision was, "yet another warning bell to the UK Government over the uncertainties being caused by delays to electricity market reform". However, I am less convinced over his view that this demonstrates the, “continued importance of Scotland's role as an energy exporter to the UK as a whole”. You could reasonably argue the opposite.

The decision also has consequences for the Chancellor’s ‘dash for gas’. Energy UK, the industry association, wrote to Westminster Energy Secretary Ed Davey saying clarification of the role of gas-fired power for the future was "urgently needed". A Westminster energy forum last week was told the UK "dash for gas" is more of a crawl as big uncertainties remain over supply, demand and policy. In fact Environment Agency chairman Lord Chris Smith expressed concern over a spike in coal-fired generation. He said "We are in the midst of a dash for coal," as cheap US shale gas has displaced coal onto the global market and brought prices down. This led to a "distressing" 11 per cent rise in sulphur dioxide emissions last year, which had previously been on a downward trend.

On gas prices, the Guardian highlighted that some of Britain's biggest energy suppliers were holding back gas in storage tanks at a time when the market ran into an acute shortage two months ago, triggering a doubling of wholesale prices. This triggered further concerns over allegations of market manipulation. Ofgem and the Financial Conduct Authority have been urged to act to ensure markets work more efficiently and transparently as they have so far failed to act on whistleblowing allegations made last November. Meanwhile, the price of wholesale gas has now fallen back to 70p per therm, but still remains unseasonally high and compares with 57p a year ago and 28p in May 2009.

SSE’s Peterhead decision reflects wider concerns about our so called energy market. It isn’t delivering security of supply or tackling high energy prices as Which? highlighted yesterday. We need more than modest energy market reform to break DECC out of its complacency.

Crossposted at Utilities Scotland.