U.K. Coal-Plant Profit at Five-Month High Amid Nuclear Gap

Sep 04, 2014 8:35 am ET

(Updates with Clean Energy comment in sixth paragraph.)

Sept. 4 (Bloomberg) -- Profit from U.K. coal-fed power plants is at the highest in more than five months, spurring use of the fuel to fill a gap in supply left by halts of nuclear reactors that will extend into the start of winter.

The next-month clean-dark spread, a measure of coal-plant profitability, has almost quadrupled from a four-year low in July, according to data compiled by Bloomberg. Power generation from coal reached the highest level since May yesterday, National Grid Plc figures showed.

Coal and gas plants are needed to generate power around the clock after Electricite de France SA said today four of its U.K. reactors that were halted last month following the discovery of a defect in a boiler at one unit will start later than planned. Gas is more expensive to burn after prices surged the most in three years on ICE Futures Europe in London in August.

“The recent increase in coal-fired generation is predominantly to do with reduced nuclear capacity and subdued wind generation,” Dorian Lucas, an energy market analyst at Lytham, England-based Inenco Group Ltd., said Sept. 2 by e-mail. Coal plants are “filling that gap in the mix instead of gas- fired generation picking up the shortfall,” he said.

Wind Energy

Gas overtook coal in the U.K. power-generation mix for the first time in four years in June as ICE prices dropped for a seventh month following the warmest European winter in seven years. Gas rose last month as tension escalated in Ukraine, the transit route for supplies from Russia accounting for about 15 percent of European demand. Wind generation fell to the lowest level in a month yesterday, according to National Grid data.

“With some nuclear plants offline, there is naturally more pressure on the remaining generation capacity,” Nick Eagle, director of sales and trading at Clean Energy Trading Ltd. in London, said by e-mail today. “With the geopolitical risk factors, there’s potential for further spikes and higher volatility.”

The month-ahead clean-dark spread was at 14.35 pounds ($23.54) a megawatt-hour at 1:08 p.m. in London, set for the highest close since March 17, according to data compiled by Bloomberg. It settled at 3.65 pounds on July 11. Coal generation reached 12.3 gigawatts yesterday, the highest since May 20, while wind power touched 232 megawatts, the lowest since Aug. 2, according to National Grid figures. ICE’s front-month gas contract advanced 23 percent in August.

Pollution Rules

Wholesale power prices in the U.K. are among the highest in Europe, while the nation’s capacity buffer is set to drop below 2 percent next winter as pollution rules force some coal plants to shut and previously unprofitable gas generators are mothballed. Demand was forecast to peak at 38.5 gigawatts at 5:15 p.m. today, according to Bloomberg’s model. National Grid’s consumption model projected a demand peak at 39.7 gigawatts at 5 p.m., its website showed.

Coal accounted for 31 percent of U.K. generation today, compared with 42 percent for gas, 17 percent for nuclear and 1.2 percent for wind, according to National Grid data.

“Over the winter, during periods of peak demand all forms of generation will be required,” Inenco’s Lucas said. “However, it is likely that coal-fired generation will make up a larger proportion of the baseload mix.”

EDF’s Heysham-1 unit 1 and Hartlepool-1 reactors in northern England are due to start Nov. 30, the company said on its website, compared with the respective previously planned dates of Oct. 7 and Oct. 26. Heysham-1’s unit 2 and Hartlepool-2 will start Oct. 31, three weeks later than the prior dates. The company’s Hunterston B-8 unit halted Aug. 1 for maintenance and is scheduled to start on Oct. 3.

--With assistance from Alessandro Vitelli in London.