London (Platts)--3Mar2009

Around 6,000 MW of opted-out UK coal-fired power capacity may have less
than three years left to run if current rates of production are maintained,
Drax Group chief executive Dorothy Thompson said in a 2008 results conference
call Tuesday.

"The story of 2008 was undoubtedly the Large Combustion Plant Directive,
which created opted-out plants with 20,000 hours of operating life that must
close by 2016," Thompson said. "Some of that opted-out plant has been running
very hard--in January this year it produced 14% of total UK output. If they
continue to run at these rates, quite a lot will close early. We calculate
that 6 GW could come offline by end-2011."

The timing was "probably not coincidental, because that is when the cost
of Phase Three carbon [under the EU's Emissions Trading Scheme] starts kicking
in," Thompson said. "We will no longer have national allocation plans for UK
plants and there will be less incentive to remain in the market."

The recession and resulting fall in electricity demand would delay
effects flowing from a capacity squeeze for two to three years, Thompson said.

"When you adjust for weather, we estimate that this winter demand is down
about 5%-6%. That translated into 2-3 GW. This is partly recession and partly
to do with prices. Wholesale prices have halved since the time of the highest
commodity prices, so in time some of the response may be dampened as commodity
price falls come through."

Previous forecasts for capacity tightness around 2011-2012 "have eased
back a bit, but 11.5 GW of coal and oil plant have to close by 2016, and from
2016 all the opted-in plant will be subject to new NOx regulations [under
proposed EU legislation]," Thompson said. "Some of that plant will not
retrofit to meet the new regulations and will either be forced to close or
accept reduced running hours."

Today's weak CO2 price was due to lower emissions and heavy selling of
allowances by industrials seeking to raise short-term cash, Thompson said.

"There has been debate as to whether Phase 2 will mirror Phase 1, when
prices went to zero. We don't think it will because there is real value for
Phase 2 certificates in Phase 3 [Phase 2 EUAs can be banked into Phase 3] and
all our analysis shows that Phase 2 allocation plans are not sufficient to
cover emissions. So ultimately the carbon price is based on Kyoto credits or
banking [into Phase 3], and Kyoto credits appear to be floored by the Chinese
position of somewhere between Eur8-Eur12/mt CO2."
--Henry Edwardes-Evans, henry_edwardes-evans@platts.com