Power prices will probably be more volatile and could rise from next year as new European Union environmental controls bite, the director of markets at energy regulator Ofgem said. The European Large Combustion Plant Directive (LCPD), aimed at cutting pollution by limiting how long coal and oil-fired power stations can operate, means around 12 gigawatts of UK plants can only run for about 27 months in the next seven years. Faced with limited running time, the owners will want to save their generation credits for the 20,000 hours from 2008-15 when they think wholesale power prices will be highest. So if network operator National Grid needs more plants to start up at times of high demand and narrow supply margins it will have to pay them handsomely to change their plans. The cost of balancing supply and demand across the national network is shared by the generators but any wholesale power cost increases will inevitably be passed on to the consumer. After January 1, the 11 power stations that will have their output capped will still be there, but National Grid will have to offer their owners more than at present because they will be holding out for bigger returns in future. “It’s not a security of supply issue,” Ofgem’s Steve Smith said in an interview. “You may just see slightly higher and more volatile prices.” The biggest impact on wholesale power prices of National Grid paying companies to fire up their plants, who because of the LCPD would not otherwise run them, will be on electricity bought for immediate use. The problem is made worse because generators are deemed to have used up one hour of their allowances even if they have only been running one of several units at the power station. So generators may shut down a whole power plant if a problem forces them to stop one of the units, further depriving the system of electricity. If National Grid only needs one unit to start up to balance the system and the generator does not want to run, the network operator would have to pay for all the units to run. “That is pretty daft, Every time they run a single unit they are using up one of their hours. It’s just not sensible,” Smith said, adding that government lobbying in Brussels to change the rules had failed. Which way power prices will go over the next seven years is hard to predict and power generators are understandably reluctant to say when they plan to use their credits. But with several nuclear power plants closed by problems linked to ageing and power prices quite strong, the effect of the LCPD might not be felt immediately. This is because wholesale prices are currently high enough for generators to make a healthy profit by using some of permitted hours now. “The general view seems to be at the moment that UK power prices are so strong for this winter that it’s not actually going to be a constraint. Most of them want to run anyway,” Smith said. “That’s telling you that most of them aren’t sufficiently bullish on prices in the long run that they wouldn’t rather take the money today at today’s pricing levels. “The view in the market is that you would have to see a fall in gas prices and therefore a fall in power prices for LCPD to really bite.” The LCPD aims to cut emissions of sulphur dioxide, nitrogen oxide and dust which acidify soils, rivers and lakes, damage plants and even corrode buildings by imposing caps on how much oil and coal burners like power plants and refineries can billow into the atmosphere. Some of Britain’s biggest coal-fired plants, like Drax in Yorkshire and Longannet in Scotland, have opted to trade certificates in a nationwide scheme which caps the total emissions of all the facilities in the plan, in accordance with EU limits. Others will work within their own limits.

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