From the New Power archive: interview with George Grant, Watt Power MD

From the New Power archive: development consent orders have been granted to Hirwuan Power and Progress Power on schedule. Here’s how Watt Power MD George Grant saw the market when he spoke to Janet Wood in July 2014



“We are either brave or foolish or both,” says George Grant. Watt Power’s managing director was speaking to me soon after the company sought development consent orders for two new gas-fired power plants, with two more due to follow in a year.

The UK has a raft of new gas stations that already have planning permission, but where ground has not been broken. What makes Grant think more are needed? He says times have changed, and Watt Power is addressing a different slice of the market.

He explains: ”Between now and 2030 we need somewhere between 25 and 30 GW of new gas-fired capacity.

“If you look at the market and what’s permitted now, there is fairly significant capacity that is contracted, but it is mostly combined cycle units.  Most of that capacity was permitted or started permitting pre-2008, and … the market was a very different place. We were all expecting that gas would be large, high-efficiency CCGTs on baseload and the push for low carbon hadn’t really taken hold to the same degree.

“In that intervening period we have seen a much stronger recognition of low-carbon objectives, and an acknowledgement not just from the UK but from what’s happened in some other markets in Europe that will change the nature of the market pretty significantly.” That means gas is the fuel that will provide the flexibility and security of supply on the system, but “There isn’t a lot of smaller flexible facilities that are currently permitted. We decided some years ago that that was an idea we would focus on and pursued that.  That’s the logic behind our move to bring forward facilities focused on peaking.”

While the country is anticipating a shortage in capacity around 2016/17, Grant forsees that another problem will arise by the turn of the decade, and that is variable plant that can quickly respond to flex up or down as the system requires.

He says, “The key time for the system is when we are seeing the residual coal coming off the system under the Industrial Emissions Directive (IED), around 2020 /2021.  Coal can provide quite a lot of flex and that is disappearing.  Gas will have to take up the slack and do it as an increasing proportion of smaller more flexible units.”

As for the combined cycle projects, “There has been an extensive period where nothing has been committed to construction except Carrington, which is on a tolling deal with the parent company. That was the only way that got financed.  They were ahead of the curve but it’s moved on.”

Grant thinks Watt Power is ahead of its competitors, even though other companies have shifted toward the peaking market. “SSE for instance have changed Keadby from combined cycle to open cycle and others have looked at doing that. But that doesn’t add capacity – it reduces it,” he says. I ask whether consented projects could change their strategy but he believes that if that change was allowed under planning restrictions “it would still take at least 12 months” to alter the permission. “There are other elements that come into play. Geographically, where are you on the system?  If you are further north your connection charges are higher – that is less material if you are running over a higher number of hours and can spread the cost.”

Watt Power’s four plants will operate for no more than 1500 hours a year to meet peaking needs. The investment case for such plants has to be underpinned by the new Capacity Mechanism.

Grant’s company argued for longer-term contracts for new plant under that mechanism and says he is pleased that the government took that advice. But he adds, “The banks tell us it’s a financeable structure, but they all say the proof will be when they take it to the credit committee and the members say ‘yes – here’s the money’”.

New plants can win 15-year contracts under the mechanism – longer than recommended by the European Union, which still has to grant the CM State Aid clearance. Grant says, “it comes down to the auction price. If you are financing over a shorter period of time the auction price will have to be higher so that you can repay your debt over that period of time. “ He says the government may not want to lock itself into a contract that long, but points out, “we have a 35-year nuclear contract probably starting in 2025, so that’s government intervention lasting until 2060 in my books.”

Grant “doesn’t see any other way” than new-build gas plant setting the CM’s clearing price – “it’s the most expensive and most difficult to get financed.” In that case, “the longer the new entrants can finance the project over, the lower the price that everyone in the auction receives and the annual cost to the consumer is lower. If you squeeze that contract you are making it more difficult to finance.”

And he adds that with a contract shorter than 15 years “you make it difficult to access the pension fund-type money that the government is saying they really want. If you come much shorter than 15 years you are just relying on commercial bank debt or that’s a much larger part of the picture, and the annual cost to consumers is going to go up – and one could say the unnecessary windfall to existing generators is going to increase.”

The CM has to work and pass State Aid tests, he says. If it does not, another mechanism will be required, he says, because “ if the structure is insufficient to support new-build then it won’t get built.  If it doesn’t, or a forthcoming government decides to change it, then we are going to have to look at something else. There are all kinds of things that they could do, but the more they muck about with the market the more uncertainty there is and the more difficult it is to finance long term infrastructure projects.”

If there were a delay in granting clearance, Grant does not expect Decc to go ahead with the CM prequalification process – due in August.  That may delay auctions to the first quarter of 2015  but Grant thinks in that timetable delivery in 2018 “may well be possible” because not much new capacity will be required.

That’s not a concern for Watt Power, as Grant says “We were never going to be ready for the 2014 auctions, so even though it was delayed from October to December that doesn’t mean we are going to get there.” The company’s main focus is getting planning consent – anyway a prerequisite for the auction. He says under the new “very structured” planning process, “we know we will get a decision by latest July next year for the lead two projects.”  The second two are tracking about 12 months behind.

Watt Power has a majority investor in Noble, a global commodities business. Grant says, “We expect to bring in other financing. As a minimum that will be from banks, and we will be looking for other potential partners to be coming in alongside us in advance of the auction.

“…we will be looking at what is the most effective way to take these projects forward through the auction. Financing is both equity and debt so if we have equity investors that have a lower cost of capital than Noble then we are going to be very interested to talk to them about coming in alongside us. Clearly we are going to be talking to debt providers about bringing debt into the project, and we are going to be talking to equipment suppliers to do what we can on the capital cost – but we are in a market where there are not very many equipment suppliers left.

“Noble see the Watt Power vehicle as providing them with some physical capacity in a market where they are an active participant in the electricity and gas sectors.  But they recognise that capacity has different value to different participants in the market depending what their position is so they are always going to be open to discussion on that capacity.”

Peaking power is seldom suited to long-term takeoff contracts, because of the uncertainty of the running regime. But Grant says  “We would anticipate selling capacity on a shorter term basis and are certainly engaged in the market now talking to people who might be interested in longer term commitments. Anything longer than a couple of years is something that would contribute to the financing commitment and that’s something we are interested in.

“Any plant that is coming to the capacity auction financing will be based on revenue from CM and any security it can get on revenue from the energy market either from tolling contracts or a power purchase agreement.

“From a revenue perspective even if you are bullish on the energy price and therefore you may be able to take an equity view on it, it is very unlikely that you are going to get any credit for it from the banks, so it’s really not going to feature in any material way in your debt financing.”

Even though the Capacity Mechanism is a welcome intervention in the market for Watt Power, Grant joins many others in complaining that “The energy sector is in a very difficult place because there has been so much intervention.”

He adds: “We all recognise that what we have at the moment is not an optimal structure.”

“We don’t really have a market at the moment. We have inadvertently ended up with a central buyer again. The government is wondering a little bit how we got here, when there was a great fanfare on privatisation of the industry in the early 1990s when it was going to be competition in the market that was going to deliver. Now we are in a position where every single sector of the market has some level of government intervention or support to deliver it. There is no transparent wholesale section of the market in which you can take a view and look to hedge your finance product or an asset against.”

He says it has been a step by step process, until “the government has involvement in pretty much every sector of the generation market and I don’t think that’s really where they intended to go.”  And despite the wish to keep interventions short-term, “we have seen consistently these interventions that are designed to encourage long term new technologies [lasting] for 15-20 years. Once you start having interventions over that period you start to impact the market and the market ceases to function.”

He says that “with the benefit of hindsight” allowing the big six to become integrated has also reduced market effectiveness. “They have ended up with 98% of the supply market in the hands of six players and still a large proportion of the generation market in the hands of those same six players, so there is an element of liquidity that inevitably disappeared from the market.”

He says if the companies were not integrated the Capacity Mechanism might not have been required, if the result was more liquidity. “If you had liquidity further out and you had companies who were prepared to enter into long term contracts, absolutely – many projects have been financed on that basis in recent years.  If you just have liquidity then you need to have confidence that the market is sufficiently transparent and therefore you are prepared to take merchant risk.”

That takes him back to some form of pool as the trading mechanism and he says “It’s interesting that it’s the Labour Party that is thinking of introducing a pool when it was the Labour Party that blew it up in the first place.”

He suggests that at the point it was dismantled, “I think the pool was starting to work as they wanted. It had taken more than ten years because we started with two large players and a government-owned nuclear entity.

“Most of the new capacity that came into the market was new players and new entrants.  Stephen Littlechild forced further divestments from Powergen and National Power and at the end of the decade we were starting to see one or two projects that were being financed with a significant portion of merchant capacity which meant that there was starting to be enough history and confidence in the pool and in wholesale electricity markets.”

With a fuel contract, known capital cost  and confidence the plant could compete over the next 10-15 years, “The banks were prepared to invest on the basis.” That potential has gone, Grant says, and “There is absolutely no appetite in the banks for any merchant risk at the moment.”

Nor does he see that changing: “There is so much uncertainty almost in any direction you care to look. The big six are going to be under competition review for the next two years so they themselves don’t know if they are going to be asked to split or something else. There is no appetite to commit for long term capacity in the market and that’s unlikely to change any time soon – particularly during the competition review.

“We are bringing back the capacity mechanism but there is huge uncertainty over how that is going to play out.  How is everyone going to bid, what’s the price going to clear at? Is everyone going to bid in the auction, or are they going to qualify and opt out? There are still lots of questions.”

He thinks that although the government pays lip service to providing a stable market it still underestimates the effect of changes in policy, market structure and other interventions – and the time it takes to rebuild confidence.

He explains; “The government on all sides of the chamber seems to think that you bring new structure or new forms of generation in, and it’s all going to be marvelous.

“Firstly there is a shakedown period for any new market structure to work.  Then there is confidence building.  It takes years before people who are financing  have confidence – either investors in assets or even those investing in supply businesses, who are basically putting money into people and systems. You really have to see some time for history to be built up.  …Its not a magic wand, where we have a new structure and it’ll all be perfect next year.”

The UK used to be seen as among the most stable regimes, but now “There is no question there is significant regulatory risk in the UK.“ But despite uncertainty Grant says the fundamental requirement for Watt Power’s projects remain in place: ”There is a need for a significant investment in new gas-fired generation in the UK. You can’t dodge that bullet.

“However the regulatory framework evolves, either it will be conducive to independent new entrants funding it and building it or it won’t.  If it doesn’t these assets will still be required on the system. So if we have permitted sites and for whatever reason it doesn’t make sense for us to build them then we will sell them to someone who can.”





Watt Power parent Stag Energy has spent the better part of a decade developing a gas storage project – Gateway, 15 miles offshore of Barrow in Furness. The project reached an impasse when the Department of Energy and Climate Change decided that it would not provide financial support.

Grant says the sector “remains in the doldrums,” despite a winter in 2012/13 when the largest store, Rough, was effectively in “negative” volumes. “If one of the interconnectors had fallen over or LNG had not got to the UK market we would have seen some pretty major interruptions to industry”.

Gateway will use salt caverns for storage, which will allow very rapid injection and withdrawal to help short-term balancing of the system, but is also potentially very large, depending in how many caverns you build, so it could also provide seasonal storage.

Grant says the investment in tricky. “It comes back to the visibility and liquidity in the market, and over that time horizon you just don’t get anything on the summer/winter spreads.  So it’s very difficult for the market to deliver that capacity.  We see enough volatility in the short term or within-year market that means if you have a flexible storage facility you can make reasonable returns.”  But he adds: “we have had several years now of very low volatility and pretty low summer/winter spreads, and those are the key issues that underpin investment in storage. So we haven’t seen any new storage investments committed to construction since 2008.”

He believes most modelling for Decc showed net benefit to consumers in 2020-2030 if there was more gas on the system because it reduced exposure to price volatility. “The government said there was too much uncertainty around that benefit, so it was not warranted to provide support, and we said that was precisely the sort of environment where some sort of framework from government is beneficial to the consumer … so we weren’t quite sure why that decision was taken other than not wanting to intervene in another part of the market.”

Grant says the government “can’t afford to take its eye off the ball on that one. It takes 6-8 years to build a facility, Rough is going to be 50 years old in 2025, Rough is still 75% of the UK’s storage market and if it goes away or is threatened with closure for a major refurbishment – something will need to happen.”

He thinks there will be a change but “not any time soon.”




George Grant has a BSc in Engineering from Durham University, a Masters in Business Administration from Cranfield School of Management and a Diploma in Finance and Accounting from City of London University. Grant was senior vice president at InterGen, where he spent four years as the Asia Pacific Regional Executive based in Hong Kong before becoming regional executive for Europe, Africa and Middle.  He oversaw the creation of a 17,000MW global generation portfolio between 1994 and 2002. Grant founded Watt Power’s parent company Stag Energy in 2002 to focus on asset origination, development and optimisation within the UK gas value chain.