This article is more than 2 years old

This article is more than 2 years old

Gas power plant operators will scoop millions of pounds in state subsidies in coming days to go on standby next winter, but the owner of the UK’s largest gas fleet has warned the fossil fuel faces an uncertain future as a cornerstone of UK energy.

Auctions starting on Tuesday for contracts in the capacity market, the government’s insurance policy for ensuring reliable electricity supplies, are crucial to the survival of gas plants.

But nuclear, renewables and energy imported from European markets could change British energy provision within two decades, according to Tom Glover, the UK chair of German energy group RWE.



Glover said the outlook for new gas plants – quicker and cheaper to build than atomic sites or offshore windfarms – remained unclear.

“It’s uncertain, when you look across 15 years. You’ve got to look at how interconnectors [power cables to other countries], how new nuclear, renewables will develop. It’s very uncertain,” he said.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Glover’s caution comes despite the government confirming the phase-out of coal. Gas has cemented itself as the top source of electricity over the past two years as coal declined dramatically in the face of a carbon tax.

The North Sea’s gas, together with pipelines from Europe and ships from Qatar, regularly supplies more than 40% of the UK’s power, and on cold, still days earlier in the month has at times been providing nearly 60%.

This month the government spelled out how it would force the last of Britain’s eight coal plants to close in October 2025 to meet climate change goals, and how that would help gas.

Officials said they expected the plan would lower the cost of funding gas plants, and lead to higher revenues because the power stations would be used more often.

But a look at the official estimates of how much new gas capacity will be built in coming years helps explain Glover’s concern, despite the current dominance of gas.

The Department for Business, Energy and Industrial Strategy (BEIS) this month revised the amount of new gas plants it expects to be built by 2035 to 6GW, down from the 14GW it predicted last year. In comparison, its forecast for new renewables, which it expects to generate more power than gas by 2020, remained largely the same.

The economics of gas-fired power stations today largely hinge on the capacity market.

Peter Atherton, energy analyst at Cornwall Insight, said: “[Large gas plants] are entirely dependent on the capacity market really, it needs to cover something like 60-80% of the economics of those plants. That leaves maybe only 20% of the economics to the wholesale market,.”

The Energy and Climate Intelligence Unit (ECIU) calculates that £3.4bn worth of capacity market subsidies have already been promised to power station operators, many of them gas-fired operations.

Yet so far the scheme has failed to bring forward any new plants on the scale of the large ones built during the “dash for gas” of the 1990s.

Gas plant owners complain that, despite reforms over the past year that should diminish the role of small local power stations and battery storage plants, the capacity market is still not a level playing field.

They are concerned by competition in auctions for capacity market contracts next month from new interconnectors – long-distance power cables – being planned for the early 2020s to Belgium and France.

Gas supporters argue those interconnectors can compete for a lower price because they do not have to pay the same costs as gas operators in the UK, such as the carbon tax.

Experts think the price of the contracts awarded in the auctions will be the same or lower as previous years, because of how many firms are bidding for them. Bernstein bank expects prices for the four-year ahead auction to clear at £18-19 per kilowatt, compared with £22.50/kW last year.

There is little comfort in wholesale gas prices either, which are historically relatively low, even after a brief surge in December during disruptions to European gas supplies.

Some companies have begun to transform their portfolios. British Gas owner Centrica sold off the last of its large-scale gas power stations in 2018, to focus on smaller plants.

Mark Futyan, Centrica’s merchant power director, said: “The rapid expansion of renewable energy has created a growing need for flexible power that has in turn triggered a shift in focus from large centralised power plants towards smaller units that can respond quickly to changes in demand.”

Despite this seemingly gloomy picture for big gas plants, companies are either keeping them running or exploring building new ones.



SSE looks likely to keep Scotland’s last fossil fuel power station open at Peterhead in Aberdeenshire, after it generated fears from unions by announcing a review of the plant a year ago. It also hopes to build a new plant in North Lincolnshire if it can secure a contract in the capacity market.

Drax Group is looking to convert its coal power units in North Yorkshire to a huge 3.5GW gas plant. RWE is consulting this year on plans for a major new 2.5GW gas power plant at its former biomass power station at Tilbury, Essex.

Glover said that despite uncertainty, gas will remain a key component of power supplies, especially if electric cars reverse years of falling demand.