(Adds ScottishPower CEO comment)
By Selina Williams
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- German utility E.ON AG (EOAN.XE) is delaying an investment decision on its controversial planned Kingsnorth coal-fired power plant in the U.K. for up to three years, to 2016, due to a drop in power demand caused by the economic recession.
The decision is a setback for U.K. government plans to lead the world in developing carbon capture and storage, or CCS, technology as E.ON is one of three companies competing for full funding from the government to develop a CCS unit for part of the output from the planned Kingsnorth power station.
Although both the U.K. government and E.ON said the utility had not withdrawn from the competition, it's clear E.ON won't be able to make the 2014 deadline for the project's start-up.
"This is not good news for the government," said David Hunter, energy analyst at consultancy McKinnon and Clarke.
"What this announcement highlights is that the government needs to have a clear energy strategy, which will help attract badly-needed private investment. The race is on to clean up coal-fired generation and the U.K., instead of leading the way, has taken a step backwards with this delay," Hunter said.
However, E.ON said it is still committed to clean coal and would be able to meet a government timeline for a CCS unit of 400 megawatts at the plant by 2020, which could qualify for the government's pledge over the summer to provide some support for up to three more CCS projects in the U.K.
These further three CCS projects could be funded by soon-to-be-selected new financial mechanisms that could include a levy on electricity suppliers or an obligation to supply CCS electricity.
"The U.K. is strong on developing CCS, and we have set out bold proposals to set up a framework to drive the development of this technology," a government spokesperson said. "In addition to the competition, we are planning to fund up to three further demonstration projects and have proposed legislation for the next session of parliament that would underpin this."
Late Wednesday, E.ON said in a statement it was deferring the investment decision on the planned 1.6-gigawatt Kingsnorth plant for up to two to three years from 2013 because of a drop in power demand.
"This (decision) is based on the global recession, which has pushed back the need for new plant in the U.K. to around 2016 because of the reduction in demand for electricity," the statement said.
E.ON, which first applied for planning permission for Kingsnorth in southeast England in 2006, has yet to get final approval for the GBP1.5 billion power plant. The plant has come under fire from environmentalists who say coal plants emit much higher levels of greenhouse gases than other forms of energy.
The U.K. government wants to take a global lead in CCS with a view to exporting the technology to countries, such as China, which are investing heavily in coal power stations.
However, critics of CCS have said that although proven at a very small scale, it hasn't yet been deployed commercially because it is simply too expensive, adding an estimated GBP1 billion to the cost of a new power station.
The government expects next year to come up with a shortlist of two projects and make the award in 2011 of GBP90 million for front-end engineering and design, with the possibility of further funding coming from the new mechanism for clean coal.
Iberdrola SA's (IBE.MC) U.K. subsidiary ScottishPower, in a consortium with Royal Dutch Shell PLC (RDSB.LN) and U.K. gas and electricity network operator National Grid PLC (NGG), is competing against Germany's RWE AG (RWE.XE), Denmark's DONG Energy and Peel Power for the funding for the first project in the U.K.
ScottishPower Chief Executive Nick Horler said the company was seeking clarification from DECC on what E.ON's announcement means for the government CCS competition.
"With other countries hot on our heels if not potentially about to overtake us, we can't fall back into the pack especially at this time of tight international balance sheets and competing priorities," he said in a statement.
-By Selina Williams, Dow Jones Newswires +44 207 842 9262 selina.williams@dowjones.com