Over the last 10 years, coal has provided on average 33% of the UK’s electricity supply. Coal hit a peak of 40% of electricity supply in 2012 because of high gas prices. However, it rapidly fell back to 30% in 2014 as planned coal power station closures took effect, new wind turbines came online, consumption fell, and gas prices dipped during summer The Department of Energy and Climate Change (DECC) assume that – on forecast prices and policies – coal will phase out to zero by 2026 (see figure 1).
However, when Brent oil price crashed to $48 per barrel at the end of January, forward electricity market prices came within a whisker of DECC’s “Low Price” scenario, which DECC forecast would mean virtually all coal power stations will be phased-out by 2022. The 2014 Capacity Mechanism auction results showed there is substantial capacity margin the UK already, but also that there is substantial capacity ready to be built, including interconnectors and demand management. This gives weight to DECC’s case – that it is possible to fully replace old coal capacity to 2022, without threatening security of supply. **Could the UK really be coal-free by 2022? – 4 major caveats.** First, oil prices have rebounded since their lows (see figure 2). Prices could, of course, drop again. Importantly though, even when oil prices were at $85 at the end of October, forward electricity market prices were still low enough to assume that all coal will close before 2026.
Second, the DECC scenarios all rely on rapid build of new renewables, nuclear, interconnectors, some of which may not happen, delaying coal’s phase out. Third, the impact of the Government’s Capacity Mechanism may be under-estimated by DECC. Already, coal power stations have signed contracts for £173m for 2018 alone. This covers a large part of coal power stations’ fixed costs, and may mean they do not close as readily as imagined. And fourth, the UK Carbon Price Floor, may change. The UK’s carbon tax doubles to £18/tonne this April (in addition to the c.€7/t EU ETS carbon price). However, its trajectory was frozen in last year’s Budget, to maintain at £18/tonne until 2020, and there is political pressure to reduce it again. If the carbon tax were to be removed, the outlook for coal power stations would change dramatically, and a coal phase-out prior to 2025 would be very unlikely. So to think that the UK could be coal-free by 2022 may seem extremely optimistic. But it is not impossible.