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Update of UK's power sector: Green energy and regional links drive investments [free access]

April 6, 2016

The United Kingdom (UK) has been relatively resilient to energy security challenges. Investment requirements have arisen in recent times due to the growth in electricity consumption and the government’s target of reducing carbon emissions. While the forecasts for renewable capacity addition have been slashed recently in response to the government’s decision to phase out subsidies and incentives, the contribution of renewables to the overall energy mix will continue to remain substantial in the coming years.

 

The transition to increased renewable generation as well as the focus on improved efficiency in electricity consumption has necessitated massive investments in networks. Investments are being made to build onshore and offshore transmission assets not only to evacuate and transfer electricity from upcoming renewable energy plants but also to replace and refurbish aging infrastructure. Similar to the rest of Europe, the development of interconnectors remains central to the UK’s strategy of building energy security in a low-carbon scenario. 

 

Changing energy mix

The UK has committed to meet 15 per cent of its energy needs from renewable sources by 2020 under the European Union’s (EU) legally binding targets. This requires the country to install sufficient green energy plants to generate 30 per cent of electricity, 12 per cent of heat and 10 per cent of transport energy.  The electricity sector is leading the change, with the share of renewable energy in the installed generation capacity increasing from 4 per cent in December 2010 to 9 per cent in December 2014. Over the five-year period, the installed coal-based generation capacity decreased, while the installed wind-based generation capacity increased at a compound annual growth rate (CAGR) of over 25 per cent and other renewable generation capacity grew at 92 per cent.

 

The growth of renewable energy is expected to continue, though at a slower than expected pace.  The new government formed in the UK in May 2015 by the conservative party has renewed the focus on gas-based power generation and simultaneously weakened the green energy incentives. The Department for Energy and Climate Change (DECC) has announced plans to phase out all renewable energy subsidies over the next decade.

 

In November 2015, DECC reduced the forecasts for renewable capacity by more than a third over the next decade. While the department originally expected 34 GW of new renewable capacity to be added by 2025, the forecast has been revised down to 22 GW. This includes 10 GW of offshore wind capacity. By 2030, DECC expects 27 GW of additional renewable generation capacity to be added. This is against the assessment that the country needs to add at least 40 GW of renewable capacity in order to meet its carbon emission reduction targets. DECC is now forecasting a higher deployment of new gas-fired generation capacity, particularly in the 2030s. With this, the country is likely to miss the 2020 target by 2 to 4.5 per cent.  

 

The government’s renewed interest in fossil fuels is also reflected in the new Energy Bill, which calls for the establishment of the Oil and Gas Authority (OGA) as an independent regulator. It also envisages setting up mechanisms for comprehensive pricing of environmental and decommissioning permits and licences for offshore oil and gas industry. In the renewable segment, the Bill empowers local authorities to approve planning applications for large onshore wind farms (over 50 MW), effectively ending the consent needed from the Secretary of State.

 

Network development

So far, the UK has emerged as the world leader in the development of offshore wind-based generation capacity. As of June 2015, 5 GW of such capacity is operational or under construction, while another 11 GW has received approval, 6 GW is in the planning stage, and 11 GW is in the early stages of development. These installations are being supported by the transmission system being developed and operated by offshore transmission owners (OFTOs).

 

The licences for offshore transmission assets are being awarded through a competitive tender process. Three rounds of tenders have been launched since 2009. So far, nine OFTO projects awarded in round 1, and four awarded in round 2 have become operational, while two OFTO projects are at the tendering stage. Two OFTO projects are at the tendering stage under round 3. This includes transmission lines to connect the Westermost Rough and the Humber Gateway wind farms. Tendering under round 4 is expected to take place during 2016. So far, EUR1.4 billion has been invested in OFTO assets, and another EUR1.5 billion is in the tender process.

 

Following the success of the OFTO contracts, the UK’s Office of Gas and Electricity Markets (Ofgem), in its Integrated Transmission Planning and Regulation (ITPR) project completed in March 2015, announced plans to introduce competitive bidding in the onshore electricity transmission network. The first onshore project tender is expected to be launched in 2016 or 2017.

 

Ofgem also plans to improve the network infrastructure planning and regulation process. Under the proposed system, Britain’s transmission system operator National Grid will have the added responsibilities of identifying the future needs of the onshore and offshore networks, and assessing the value of more interconnections with other countries. This is expected to ensure efficient, economical and coordinated network planning and operation.

 

An analysis of the projects under development in the UK as per National Grid’s Electricity Ten-Year Statement 2015 reveals that about 3,860 circuit km of net transmission lines and cables will be added to the national network between 2016 and 2024. This includes about 5,696 circuit km of existing lines that are planned to be decommissioned during this period.

Between 2016 and 2020, about GBP11.32 billion is planned to be invested in the UK’s onshore transmission network (including load and non-load related capital expenditure). About 70 per cent of the planned investment will be made by National Grid, 18 per cent by Scottish Hydro Electric Transmission Limited (SHETL) and the remaining 12 per cent by Scottish Power Transmission Limited (SPTL).

 

Interconnections

The new government has reiterated its commitment to developing interconnection capacity. Compared to the previous year, DECC doubled the expected new-build interconnector capacity in its 2015 forecast. At present, the UK is also involved in developing various interconnection projects with Belgium, Ireland and France. These include:

 

 

Smart grids

Another key dimension of the UK’s electricity sector is the development of smart grids in order to improve the efficiency of power consumption in the country. The decrease in consumption will entail the extensive adoption of demand-side management programmes.

 

DECC has set the ambitious target of rolling out smart electricity and gas meters to all UK homes by 2020. Ofgem has announced plans to provide GBP500 million through the Low Carbon Networks Fund to support smart grid trials sponsored by the Distribution Network Operator companies. Previously, DECC provided GBP2.8 million to eight smart grid demonstration projects through the Low Carbon Investment Fund.

 

Going forward

Recent developments in the UK have raised doubts over the long-term commitment of the government to developing large-scale renewable generation capacity. Nonetheless, investments in building new generation assets in the UK are imperative over the next couple of decades as several gas, coal, nuclear and oil-based power plants in the country are approaching the end of their operational life. Further, the government is yet to clarify its plans to meet the legally binding EU targets for emission reduction given the reduced forecast for renewable capacity addition.

 

Meanwhile, the outlook for transmission investments in the country remains positive. New transmission assets will be required not only to evacuate and supply power from upcoming generation plants, but also to manage the high degree of grid integration of intermittent renewable energy capacity.

 

Figure 1: UK’s changing installed generation mix (MW)

 uk_feature_754

Note: The table does not include data for Northern Ireland and captive generation capacity. 

Source: Department of Energy and Climate Change, UK; Global Transmission Research

 

Table 1: Planned investment in UK's transmission network (GBP million)

 

2016

2017

2018

2019

2020

NGET

        1,927

        1,694

        1,718

        1,422

        1,164

SHETL

           515

           381

           355

           344

           413

SPTL

           378

           246

           186

           271

           302

Total

        2,820

        2,321

        2,259

        2,037

        1,879

Note: NGET – National Grid Electricity Transmission; SHETL – Scottish Hydro Electric Transmission Limited; SPTL – Scottish Power Transmission Limited; OFTO – Offshore Transmission Operators

Source: Scottish Power Transmission; National Grid