Review of Thermal Generation Operations

RNS Number : 4976A

SSE PLC

21 March 2013

SSE plc

REVIEW OF THERMAL GENERATION OPERATIONS

· Around 2,000MW of existing thermal generation capacity to cease operation during 2013/14 financial year.

· Changes will affect SSE's power stations at Ferrybridge, Keadby, Slough Uskmouth, and Peterhead.

· No new-build investment in gas-fired electricity generation in Great Britain until at least 2015.

· Government needs to bring forward to 2014 capacity payments for existing plant if it wants to reduce the risk of a serious capacity 'crunch' in the next three years.

In advance of its new financial year on 1 April 2013, SSE plc has completed a review of its existing thermal generation assets as well as its biomass plant at Slough.

The primary focus of this review has been to ensure that all generation assets contribute to the company's performance by safely delivering the required levels of availability, efficiency, cost effectiveness and, ultimately, sustainable commercial viability. The review has also considered the changes necessary to support SSE's primary strategic objective for its Generation business, of moving towards a more flexible and lower carbon portfolio of assets.

The review has been conducted against a backdrop of challenging energy market conditions with continued extremely low 'spark spreads' and many new emission regulations which have weighed heavily on the viability of thermal generation plant. These include:

· the constraints imposed on power-generating plant not opted in to the Large Combustion Plant Directive;

· the early introduction of a Carbon Price Floor at an unexpectedly high level; and

· the move towards full auctioning of CO₂ emissions allowances under the EU Emissions Trading Scheme.

The review has also been influenced by the prolonged and ongoing uncertainty around the UK Government's Electricity Market Reform (EMR). In particular, a lack of clarity on both the timing and operation of a capacity mechanism means there is huge uncertainty regarding future revenue streams for existing thermal plant and what level of return might be achieved by new investments in thermal generation plant.

The convergence of these market conditions and prolonged public policy uncertainty, all of which run counter to achieving security of electricity supply for Britain, has led SSE to conclude that it can no longer absorb the impact of them without a significant adjustment to its electricity generation portfolio, and it is for this reason that SSE has made the decisions outlined below in respect of:

· existing operations; and

· new investment in Great Britain and in Ireland.

OPERATIONAL CHANGES

Across Great Britain, SSE currently owns or has a stake in over 4,300MW¹ of gas and oil-fired generation capacity, over 4,300MW¹ of coal-fired generation capacity and 80MW of capacity at its biomass plant in Slough.

As a result of the review of these generation assets, SSE has decided to change the operating regime of a number of generation plants, the net effect of which is to reduce SSE's thermal generation capacity in Great Britain by around 2,000MW over the next year.

Ferrybridge, Yorkshire (coal-fired)

Unit One (490MW) and Unit Two (490MW) at Ferrybridge power station are opted out of the Large Combustion Plant Directive (LCPD) and are therefore required to close once they have used up their allowed 20,000 operating hours, or by the end of 2015 at the latest. These units are both currently expected to reach their 20,000 allowed operating hours limit before the end of 2013/14 financial year. Each unit will cease operation immediately and permanently once the allowed hours limit has been reached. SSE will therefore notify National Grid that it will be releasing around 1,000MW of electricity Transmission Entry Capacity (TEC) at this site from 31 March 2014.

The closure of Units One and Two will result in a reduction of up to 50 full time roles, from the current 225 employed at Ferrybridge. This change has been expected for some time and discussions have already begun with employees and their representatives. The current expectation is that the reduction in headcount will be achieved through normal attrition over the next year.

Unit Three (490MW) and Unit Four (490MW) have been retrofitted with Flue-gas Desulphurisation (FGD) technology to enable them to comply with the LCPD. They have also been opted-in to the Transitional National Plan under the Industrial Emissions Directive (IED) which provides a number of alternative options for how they will operate through to at least the end of June 2020. SSE has not made a decision on how the plant will operate and this will depend on market conditions and the effects of any future capacity mechanism.

A new 68MW multifuel generation plant is currently being constructed at the Ferrybridge site as part of a £300m joint venture between SSE and Wheelabrator Technologies, called Multifuel Energy Ltd. This project is progressing well and is expected to be completed and generating its first electricity in early 2015. It will create around 50 new full time jobs at the site once fully operational.

Keadby, Lincolnshire (gas-fired)

In the light of challenging market conditions for gas-fired generation, SSE has undertaken a comprehensive £100m programme of upgrade works at its Keadby and Medway gas-fired power stations. The works have included upgrades to gas turbines, steam turbines, boilers and process control systems and have been designed to increase the flexibility and efficiency of the plants. The upgrade programme at both Keadby and Medway has proceeded successfully and is now complete. Both plants are now ready to be recommissioned.

The economics of electricity generation at gas-fired power stations remain very poor, with spark spreads - the difference between the cost of gas (plus carbon) and the price of the electricity generated from it - at historic lows and even turning negative on several occasions. When combined with ongoing uncertainty about the timing and future operation of a capacity mechanism for existing gas-fired generation plant, SSE has concluded that now is not the right time to bring Keadby back into operation.

Keadby will therefore be 'deep mothballed' - effectively meaning the plant at the power station will require up to one year to recommission. This decision will mean the immediate withdrawal of all 735MW of capacity at Keadby. SSE will continually monitor market conditions but it expects Keadby to remain in this state for at least the next two years. Nevertheless, if and when it is required to generate electricity in the future, Keadby will be able to operate in a more flexible and efficient way as a result of the investment made during 2012/13. SSE would also expect to bring this capacity back into operation before commissioning any new investment in gas-fired capacity.

The 'deep mothballing' will be a phased process over several months and is expected to be complete by late summer. There will also be a phased reduction in the 55 roles on the site, with around 40 roles expected to be lost in total by the end of the summer. A total of between 10 to 15 employees will remain at the plant. SSE has a range of alternative local employment opportunities across its businesses which are available to the skilled employees affected by this decision. These include locally, at Ferrybridge, Aldbrough (its gas storage facility) and its new wind farm development under construction immediately adjacent to the Keadby site. Consequently it has been able to identify redeployment opportunities for the vast majority of the people affected by this change.

A further 25MW of emergency gas turbine generation maintained at Keadby will also be 'deep mothballed'.

SSE is currently in the process of refining the planning consent it already has to build a second 710MW CCGT plant at its Keadby site. The decision to mothball the existing plant will not affect this and SSE will continue to progress with the development phase of what is known as 'Keadby 2'. It does not, however, expect to make an investment decision to construct this project until 2016 at the earliest.

The work to upgrade Medway power station is fully complete and it is now able to operate at a higher efficiency with the increased flexibility necessary to satisfy the trading requirements of the local transmission system. Medway is due to commission in March 2013 and provide 700MW of commercial availability from May 2013.

Uskmouth, Gwent (coal-fired)

Uskmouth is the UK's oldest and least efficient coal-fired power station and the plant is reaching the end of its technical life. The removal of free CO₂ emission allowances has impacted heavily on the already weak economics of Uskmouth, and it will be loss-making this financial year 2012/13.

The financial outlook for Uskmouth for the coming financial year 2013/14 is also negative, particularly following the introduction of the Carbon Price Floor. Nevertheless, recent improvements in market conditions and the productivity of the station have suggested that Uskmouth will be able to operate profitably in the coming year, if changes are made to the operation of the station and steps are taken to reduce ongoing maintenance costs.

Unit 13 (120MW) will, therefore, cease generation and be closed from April 2013 and by doing so avoid the cost of a major statutory outage that was otherwise planned for 2013/14.

This decision will result in a reduction of around 20 roles at the site (just over 100 people are currently employed at Uskmouth). SSE will actively seek to redeploy these people within its wide range of business operations in South Wales or meet the reduction through other voluntary means such as early retirement. It has already begun discussions with employees and their representatives about how this can best be achieved.

Following this change Uskmouth will have a generation capacity of 240MW through its two remaining units.

Given the ongoing financial challenges at Uskmouth, SSE will notify National Grid that it will release all 345MW of the TEC for the Uskmouth site from 31 March 2014.

This will mean that if market conditions suggest the station is able to operate profitably after this date, SSE will need to purchase the required level of TEC in the open market. A decision on how SSE will operate Uskmouth beyond March 2014 will be taken in early 2014.

SSE had been considering alternative options for the Uskmouth site including conversion to biomass, but recent policy decisions on ROC (Renewable Obligation Certificate) banding for new biomass have ruled these out.

Slough, Berkshire (biomass)

Slough will be loss-making in 2012/13 and faces a similar challenging financial position in 2013/14, particularly following the removal of the Carbon Credits system which will see a reduction of over £1m in revenue for the site. On economic grounds Slough has also terminated its agreement with the Non Fossil Fuel Obligation and will now trade its output outside this agreement.

Two units at Slough use ageing fluidised-bed biomass technology, which are becoming increasingly uneconomic. SSE will therefore decommission both these units, and associated infrastructure, on a phased basis over the next six months. Both units will cease generation completely by Oct 2013.

Slough's remaining boiler and steam turbines will continue to operate as normal and SSE will invest approximately £8m to increase the output and efficiency of this unit and broaden its fuel envelope. The station will provide 20MW of capacity after this upgrade.

The net effect of these changes will be a reduction in capacity of 60MW. These changes will also require substantially fewer people to operate the plant and consequently there will be a total reduction of around 40 roles over the next six months. SSE will actively seek to redeploy these people within its wide range of business operations in southern England or meet the reduction through other voluntary means such as early retirement. It has already begun discussions with employees and their representatives about how this can best be achieved. 50 people will continue to be employed at the site.

This plan is fully consistent with SSE honouring its existing obligations to the Slough Trading Estate and will have no impact on these customers.

Longer term, SSE is pursuing the development of a new 40MW Multifuel facility at Slough. The project is currently at the public consultation stage and a full planning application is expected to be submitted to Slough Borough Council towards the end of 2013.

Peterhead, Aberdeenshire (gas-fired)

Peterhead is one of the UK's most efficient gas-fired power stations and technically has an installed capacity of 1,840MW. However, because of the impact of high transmission access charges in the north of Scotland, SSE took the decision in March 2010 to release TEC at Peterhead, effectively constraining the available generation capacity of the site to 1,180MW.

Transmission access charges continue to be excessively expensive in north of Scotland and, given the challenging market conditions for gas-fired generation, have resulted in the need for SSE to take steps to safeguard the future financial viability of Peterhead.

SSE will, therefore, notify National Grid that it has decided to reduce the TEC for Peterhead to 400MW from 31 March 2014, effectively constraining the total generation capacity of the site to this level.

This decision will significantly reduce the costs associated with operating Peterhead power station but is unlikely to have any impact on job numbers at the site as all existing employees will be required to operate the remaining plant.

This decision also has no impact on the proposed CCS project for Peterhead being developed in partnership with Shell UK.

NEW THERMAL INVESTMENT - GREAT BRITAIN

SSE has a strong pipeline of new thermal projects under development in Great Britain. In addition to those mentioned at Keadby, Ferrybridge and Slough above, the current status of its other projects is outlined below.

Although CCGT projects such as Abernedd are 'shovel ready' and others such as Keadby 2 are at an advanced stage of development, unless there is a significant change in Government policy around EMR and the timing and operation of a future capacity mechanism, and clear market signals suggesting the need for increased gas-fired generation capacity, SSE does not expect to take any final investment decisions to construct these projects until at least 2015. This will effectively mean no new capacity will come into operation until 2017/18 at the earliest, given the lead times for constructing new CCGT plant.

Abernedd, South Wales

The 470MW CCGT project at Abernedd is fully consented and 'shovel ready'. SSE issued an invitation to tender for the construction of its planned combined cycle gas turbine (CCGT) plant at Abernedd in 2011 but now does not expect to take an investment decision on Abernedd until 2015.

Seabank 3, Bristol

The Seabank 3 project is a proposal for a new CCGT plant with up to 1,400MW of capacity immediately adjacent to the existing 1,140MW CCGT Seabank plant that SSE has a 50% ownership interest in. The project is about to commence pre-application public consultations with the aim of submitting a Development Consent Order to the Planning Inspectorate in early 2014. However, SSE does not expect to take an investment decision on Seabank 3 until 2016 at the earliest.

Fiddler's Ferry, Cheshire

All four units (combined 1990MW) at Fiddler's Ferry are compliant with the LCPD and opted-in to the Industrial Emissions Directive Transitional National Plan (TNP).

SSE will conclude a significant trial investment on one 485MW unit in the next few months, which, if successful, will reduce the emissions of NOx and provide the option of increased generation under the TNP. Further investment in similar technologies could be extended to the other three units at the plant, as well as to the two remaining units at Ferrybridge. This would give SSE significant optionality to operate this coal-fired plant up to and beyond 2020 and support SSE's commitment to a diverse, flexible and cost-effective generation portfolio.

This investment decision will be heavily influenced by the government's policy on the operation of a capacity support mechanism and the level of any future carbon price support.

NEW THERMAL INVESTMENT - IRELAND

Great Island, Co Wexford

SSE acquired the 460MW CCGT project at Great Island as part of the portfolio of assets acquired from Endesa Generacion in October 2012. Construction at the site is well advanced, with the first turbine on site and about to be installed. The plant is expected to be commissioned in summer 2014.

The Single Electricity Market (SEM) in Ireland already has an effective capacity mechanism in place that remunerates generators for fixed capital costs when plant is made available. This mechanism was a key factor in SSE's decision to progress with the development and means it is able to proceed with investment in new thermal electricity generation plant in the Irish market, which is in contrast to the position in respect of the Great Britain market.

Ian Marchant, Chief Executive of SSE said:

"Ofgem recently expressed real concern about the tightening of the UK's generation capacity margin that will follow expected plant closures in the next few years, predicting a 1:12 chance of 'the lights going out'. It is unlikely that the majority of the reductions in generation capacity and the delays to new investment we have announced today will have been included in this analysis, which highlights that the situation is likely to be even more critical than even they have predicted.

"It appears the Government is significantly underestimating the scale of the capacity crunch facing the UK in the next three years and there is a very real risk of the lights going out as a result. The Government can reduce this risk very easily, by taking swift action to provide much greater clarity on its electricity market reforms and bringing forward capacity payments for existing plant from 2018 to 2014."

Paul Smith, Managing Director, Generation, of SSE said:

"We have made it clear that all of our power stations have to be able to operate economically over the medium term. The market conditions for some of our older generation plant have become increasingly difficult, but these changes to their operating regime should ensure they continue to contribute to the company's performance by safely delivering target levels of availability, efficiency, cost control and ultimately profit contribution.

"These decisions have not been easy ones to take, particularly when they have been forced upon us despite the best efforts of the teams at each site to do everything possible to improve the efficiency and productivity of their generation plant. I am therefore pleased that we will be able to retain many of the staff affected by these changes through redeployment to other roles and that any job losses will be significantly reduced as a result.

"SSE expects to maintain a diverse generation portfolio over the medium and longer term, but with a significantly lower carbon intensity than now. We have already committed to halving the carbon intensity of our generation portfolio every decade between now and 2050.

"This will be achieved through a balanced range of new investments, primarily focussed on renewable energy, but also in new CCGT plant. CCGT is a cleaner fossil fuel technology, which has the necessary flexibility to support security of electricity supply as the presence of wind energy on the electricity system increases.

"However, we are also clear that the right market signals and support structures need to be in place before we can make the necessary investment decisions on these projects. Neither of these is currently in place and the kind of decisions SSE is taking, to close existing generation plant on the one hand and delay investing in new plant on the other, is likely to be reflected across the industry in the coming months."

-ends-

Notes:

1. SSE's current gas and oil-fired capacity in GB includes the following plant over 100MW:

Peterhead 1,180MW

Keadby 735MW

Medway 700MW

Seabank 610MW (SSE share)

Marchwood 420MW (SSE share)

Barking 305MW (SSE share)

SSE's current coal-fired capacity in GB includes:

Ferrybridge 1,990MW

Fiddlers Ferry 2,020MW