E.ON UK Seeks Clarity of Government Emission Caps as it Plans for Major New Gas-Fired Generation

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). The power generation industry in the United Kingdom is concerned with the way forward for major investment in new power plants relative to the possible closure of old plants and the necessary commissioning of new cleaner energy units.

Dr. Paul Golby, Chief Executive Officer of E.ON UK (formerly Powergen) (NYSE:EON) (Coventry, UK), said that the industry can only spend the billions of pounds that need to be spent if it was confident that the government was putting in place a long-term policy that allowed for a return on investment.

Speaking at the re-opening of the Killingholme 900-Megawatt gas-fired station in Lincolnshire, Golby pointed to the application E.ON had just made to the government to construct a new $455 million gas-fired station at Drakelow in Derbyshire. The new 1,220-Megawatt unit will be built on the site of an old coal-fired power station. Golby says, "The U.K. urgently requires major investments, such as this, as we try to bridge a generation gap that will only get wider as more coal-fired and nuclear power stations close their doors for the last time."

The U.K. and European power industry is facing the challenge of handling a series of initiatives, including the European Emission Trading Scheme (EU ETS), the Large Combustion Plant Directive (LCPD), the National Emission Ceiling Directive (NECD), and the Integrated Pollution Prevention and Control Directive. The EU ETYS deals with CO2, while the other directives deal with sulfur dioxide (SO2), nitrogen oxides (NOx) and particulates.

Golby said, "As a first step we’d like the government to define how a coal plant will operate after 2008 under the LCDP. The role of long-term CO2 targets is also critical - as a minimum, the government needs to confirm the CO2 emission caps for Phase 2 of the EU emissions trading scheme, which runs between 2008 and 2012, as soon as possible." "That is essential as it will help us to understand when new power stations are needed to secure energy supplies for the U.K.," he added.

The directives require companies to either fit flue gas desulphurization systems to power stations, or if they decide to opt out, they must limit the time the plants are allowed to run. LCDP will be in force from 2008 to 2015.

There are clearly stated regulatory pressures on U.K. power generators. Companies must comply with their Renewables Obligations by October 1, 2005. These obligations are monitored by the national electricity and gas regulator Ofgem (Office of Gas and Electricity Markets). The period under inspection is from April 1, 2004 to March 31, 2005, and according to information received from suppliers by Ofgem, the total Renewables Obligation on electricity supplied to customers in England and Wales is 14,315,784 Megawatt hours and on electricity supplied to customers in Scotland is 1,445,283 Megawatt hours.

Renewal Obligations can be met by suppliers for the year to March 31, 2005, by either presenting Ofgem with Renewables Obligation Certificates (ROC’s) to the value of 4.9% of electricity supplied to customers, by using a buy-out clause which allows them to pay $41 per Megawatt hours for any shortfall or by using a combination of ROC’s and buy-out. The government’s Renewables Obligation began at 3% in 2002 and will reach 15.4% in 2015.

The introduction of carbon emissions trading in 2005 and the LCPD coming in 2008, combined with the retirement of most nuclear stations, is expected to result in the need to replace nearly 50% of U.K. power stations before 2016.

E.ON has returned the Killingholme to operation after the unit has been down since March 2003 and the company believes that this is this a world’s first for a gas-fired power station to be returned to service after a complete shutdown. The unit’s control system has been updated so that E.ON’s gas-fired 395-Megawatt Cottam Development Center in Nottinghamshire can be controlled remotely from Killingholme. Golby said that the start-up and control arrangement showed just how flexible and responsive the company could be to the ever-changing market conditions.

If the application for the 1,220 Megawatt Drakelow power station is successful, the first of its three units could produce power by 2009. In addition to Drakelow, E.ON has asked for government consent and tenders from suppliers for the Isle of Grain power station to be converted into the most powerful gas-fired station in Europe. Currently, the power station is oil-fired and only runs when an extra power boost on the grid is required. The cost of conversion to a 2,400 Megawatt gas-fired unit is estimated at $1 billion.

E.ON has applied for the consent to convert two units (650 Megawatts each) at the station to gas-fired, with each unit having three gas turbines fitted. Existing infrastructure at Grain, including the steam turbine and the water-cooling system, will be involved in the new plans. Drakelow and Isle of Grain would both be classed as "high efficiency gas-fired power stations."

E.ON UK currently has 9, 978 Megawatts generating capacity of which about 36% is gas-fired. It has plans to build a 1,000 Megawatt wind farm on the U.K. coast with Shell. An E.ON UK spokesperson told Industrialinfo.com that,"On the renewables front, we hope to increase our capacity to 1,000 Megawatts by 2010. At the end of 2004, capacity stood at 663 Megawatts. We need a balance of generation capacity to ensure security of supply."

E.ON is reported to be considering a cash offer of over $13 billion for Scottish Power (NYSE:SPI) (Glasgow, Scotland), which this year has negotiated the sale of US PacifiCorp to Warren Buffet’s Mid American Energy Holdings.

In Europe, E.ON (24.5%) has signed an agreement with Russia’s Gazprom (51%) (LSE:3313181) (Moscow, Russia) and BASF (NYSE:BF) (24.5%) (Ludwigshafen, Germany) to build a $2.5 billion pipeline to transport Russian gas to Germany under the Baltic Sea and bypassing Poland, Ukraine and the Baltic states, which is viewed by those to be bypassed as an unfriendly move. The pipeline will increase the amount of fuel available in Germany by 28%.

E.ON has a total of 27,000 Megawatts of generating capacity when the company’s German and foreign power capacity is totaled.

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