Gas Is Looking to Play a New Role in the U.K. Energy

Home , Dash for Gas

August 2012 www.gastopowerjournal.com In this issue Gas is looking to play a new role Lead story - Gas is looking to play a new in the U.K. energy mix role in the U.K. energy The role of gas in Britain’s energy mix is being new defined. While the mix Government envisages a substantial increase in renewables and a rapidly - cover diminishing role for gas, Howard Rogers, Head of the Gas Programme at the Oxford Institute for Energy Studies, predicts that the contribution of gas will not decline rapidly over the next decade and beyond. No ‘golden age of gas’ in Europe – IEA ogers forecasts that although its role of in the than £1,650 million in new power stations in Britain, said - page 2 power generation sector may change, gas is Volker Beckers, CEO, RWE npower. The Pembroke plant vital to ensure security of supply amid rising is due to start commercial operations later this year. Rintermittent wind generation. Carlton Powers’ 1,520GW gas-fired power plant project Carbon Price Floor will The UK is currently experiencing a ‘dash for gas’ at Trafford is moving ahead as well, but it will be built in put gas and coal whereby 11 GW of gas-fired generation capacity will be two stages as investors await the outcome of the EMR. generation on “equal completed by 2016, according to Bloomberg New Energy E.on is understood to have put on hold plans for two plants footing” Finance. This is more than double the 4.9 GW that the being built at Drakelow, due to industrial power demand - page 4 Department of Energy and Climate Change (DECC) which has still not returned to its pre-recession levels. forecasts will be needed in additional capacity by 2020. As to Welsh Powers’ plans for Wyre Power Plant, Alex Gazprom may offer Since May 2010, six new gas-fired power plant projects Lambie, chairman of Welsh Power says that the project is special price for gas have received regulatory approval. still on schedule in terms of deliverability. The scheme used to fire power Given that a typical gas-fired plant requires invest- should be profitable once completed due to the anticipated plants ment of £600m plus and takes roughly 5 years to shortage in power supply when the plant comes online. - page 5 complete; it is natural that investors demand greater regu- In the Eurozone, investment in new gas-fired capacity latory clarity from the Government as to how the still to has become difficult. In Germany, conditions are especially be decided model and pricing structures under the tough, given the political support for renewables and the Review: Capacity Capacity Payment Mechanism will impact on generators’ competitive advantages that nuclear, lignite and coal have payments – a revenues and the financing of new plants. Conflicts over natural gas. Poyry Management Consulting’s Richard panacea to attract within the coalition over the associated cost of the renew- Farfield-Hill warns the situation could deteriorate, if the investment? able subsidies exacerbate the regulatory uncertainty. Berlin government is serious about further expansion of - page 6 its renewable programme under its ‘Energiewende’ policy. Gap in power supply to open in 2015 Low carbon prices together with cheap coal prices While the Government warns that a gap in Britain’s energy have made investment in coal generation more attractive INTERVIEW : Gas to supply is set to open starting from 2015, the industry relative to gas. In many cases coal-fired power plants Power Journal talks sees no immediate need for investment and claims the have been working at full capacity while some operators to Ray Tompkins, operational capacity is sufficient to meet demand. have opted for mothballing or early retiring of their gas- founder and director “An over-supplied market means that, at the moment, fired plants. The clean spark spread is forecast to remain at Economic the market signals for investment in new gas plants are low, as a result of low electricity prices and high gas Consulting Associates not there,” said Kevin McCullough, Chief Operating prices relative to its closest competitor, coal. - page 8 Officer, RWE npower. In the medium term, the prospects for new investment are more favourable, as existing coal Gas – a bridging fuel until new nuclear and nuclear plants retire and wholesale prices continue to comes onstream? Gas turbine increase, he said. Ultimately, it is the uncertainty about As for the future, gas-to-power generation is likely to have at technology investment how the Electricity Market Reform (EMR) will impact on least a few years of good profitability in the UK between 2016 – a buyer’s guide wholesale markets that creates a barrier to investment. and the time when nuclear power comes onstream. During that - page 9 On the supply side, the UK power market is currently time, investors will be able to enjoy the profitability derived dominated by gas-fired power stations, which cover 44.2 from economies of scale arising from a predictable base load percent of power demand, while coal accounts for 29 per- demand. After, or if, nuclear power comes on stream, times Flexible support for cent, nuclear for 17 percent and renewables for less than are going to be much tougher for gas power station opera- renewables with Smart ten percent. Nevertheless, regulatory uncertainties have not tors, as the role of gas switches to that of providing reserve Power Generation stopped all investments. RWE has plans to complete its capacity. Profitability in those years will depend on how - page 10 Pembroke and Wilton projects. “RWE has invested more generous the Government will choose to be to operators. Markets No ‘golden age of gas’ in Europe – IEA Gas To Power Journal The International Energy Agency (IEA) does not anticipate that Europe will have a ‘golden age of gas’, similar to the one in the 2nd Floor, 8 Baltic Street East U.S., where an abundance of cheap shale gas prompts power London EC1Y 0UP plant operators to turn their back on coal in favour of gas-fired United Kingdom generation. www.gastopowerjournal.com hile the power sector is “the sin- 8.9% last year, to reach 520 bcm against 570 bcm +44 (0)20 7253 2700 gle biggest driver for gas de- in 2010. “This demand level is actually 10 bcm Publisher mand" in other OECD countries, lower than the annus horribilis, 2009”, the IEA Stuart Fryer Waccounting for 44% of incremen- said. Naming key determinants for the drop, the tal gas demand, in Europe, the share of gas-to- IEA said that 60% is due to weather, 10% due to Editor power generation is in decline. “The combination weak economic growth impacting on industrial Anja Karl of weak macroeconomics and rapidly growing gas demand and 30 % due to the power sector, Tel: + 44 (0) 7017 3417 renewable energy is detrimental to gas demand, where oil-indexed gas is simply uncompetitive. [email protected] despite the nuclear moratorium in Germany,” IEA analyst, Alexander Antonyuk, who co- UK: Gas use in power sector Advertising authored the ‘Medium-Term Gas Market Report drops 17% Narges Jodeyri 2012’ told Gas to Power Journal in an interview. In the UK, gas demand in 2011 reached its Tel: + 44 (0) 7253 3406 “Among combustible fuels, gas has been lowest point since 1995 with a record drop of [email protected] struggling against coal in most European coun- 16%. “The United Kingdom illustrates per- Subscriptions tries, in many cases resulting in significant fectly what happened in Europe in 2011: resi- Stephan M. Venter losses,” the report finds. In the U.K., the de- dential-commercial gas demand dropped by an Tel: + 44 (0) 7017 3407 cline in combustible fuel generation was en- estimated 8 bcm, the industry used less gas [email protected] tirely attributable to gas, while coal-fired owing to a combination of high gas prices and generation marginally increased. In Spain, a low GDP growth, while gas use in the power Production drop in hydro output by one-third compared to sector declined by around 17%, notably during Vivian Chee the record in 2010 led to a rise in combustible the first half of the year and in the fourth quar- Tel: +44 (0) 20 8995 5540 fuels used for power generation last year. “This ter. In Germany, where gas demand dropped by [email protected] did not help gas-fired generation at all: it 13%, total primary energy demand dropped by dropped while coal-fired generation increased 5% and reached its lowest point since 1991, Events in an impressive manner,” Antonyuk said. even lower than in 2009, according to the IEA. Kamil Hussain Throughout 2011, gas demand in Europe re- “The most dramatic change occurred in the Tel: + 44 (0) 7017 3404 mained below 2010 levels - hit by a triple power generation sector, where production from [email protected] whammy of low economic grow that translated gas-fired plants is displaced by renewable and coal into subdued power demand; high prices of oil- generation,” Antonyuk said in an interview follow- indexed gas notably over the coming two ing the Gas to Power Turkey conference (see box years; and the strong growth of renewables. for separate article on gas demand in Turkey). The IEA foresees a continuous decline in in- The boom of renewable energy sources dustrial gas demand, while residential and (RES) has curtailed the market share of com- commercial demand will stay moderate. bustible fuel plants, whereby gas looses market Overall gas demand in Europe collapsed by share against coal. "The coal to gas competi-

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Printed by: Manson Group, Reynolds House, 8 Porters’ Wood Valley Road Industrial Estate, St Albans, Incremental electricity output by source and region, 2011 compared to 2010 Hertz AL3 6PZ 02 Gas to Power Journal August 2012 Markets

Gas demand by OECD country, 2011 and 2010 (bcm) tion is currently being won by coal," he said 2010 2011* 2010 2011* with reference to a 3 Bcm drop in gas use for Europe 570.4 519.5 Slovakia 6.1 6.2 power generation in 2011. Austria 9.5 9.0 Slovenia 1.1 0.9 Belgium 19.8 16.9 Spain 35.8 33.6 In the absence of higher carbon prices, the Czech Republic 9.3 8.9 Sweden 1.5 1.2 spark spread [profit margin for generating elec- Denmark 5.0 4.2 Switzerland 3.7 3.2 Estonia 0.7 0.6 Turkey 38.1 44.7 tricity from gas] is forecast to remain signifi- Finland 4.7 4.0 United Kingdom 98.9 82.7 cantly lower than the dark spread, [the France 49.1 42.1 Asia Oceania 195.4 211.9 Germany** 97.9 85.3 Australia 33.4 34.8 respective profit margin from coal plants]. Greece 3.9 4.8 Israel*** 5.3 5.0 But Antonyuk stays optimistic in saying that Hungary 12.1 11.3 Japan 109.0 121.3 Iceland 0.0 0.0 Korea 43.2 46.4 spark spreads can and will recover over time. Ireland 5.5 4.9 New Zealand 4.5 4.2 "As soon as carbon prices pick up, the share of Italy 83.1 77.9 Americas 839.9 861.6 Luxembourg 1.4 1.2 Canada 96.8 104.0 gas in the power sector will increase," he fore- Netherlands 54.8 47.9 Chile 5.3 6.2 cast. The trigger for such a rise in carbon price Norway 6.1 5.8 Mexico 64.7 61.4 Poland 17.2 17.2 United States 673.1 690.0 can either originate in an overall reduction of Portugal 5.1 5.2 OECD 1605.7 1593.0 carbon credits in the European Emissions Trad- *2011 data are estimates as of April 2012. Source: IEA ** Due to revisions by the German government, Germany’s data for 2010 and 2011 are estimated based on historical data. ing System (EU-ETS) or from the introduction ***The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such of a carbon floor price. data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Turkey: an island of high electricity demand growth nlike to the rest of Europe, Turkey has Going forward, the IEA projects a slow- vary greatly in different sectors. In the com- been “an island of high energy de- down in Turkey’s electricity demand growth. mercial sector, IEA foresees growth rates in Umand growth”, Antonyuk said, refer- "This dip is mainly due to lower demand power demand to drop from 7.4% in 2000-07 ring to growth rates of just under 6% in growth in energy-intensive industries," he to 4.1% in 2010-17, while rates will drop electricity demand in 2000-2007, compared told 'Gas to Power Journal' at the sidelines of from 5.9% to 4.4% for the industrial and to a mere 2% in OECD Europe. a conference organised by the publication in from 6.2% to 6.1% in the residential sector. "Turkey was one of the countries where Istanbul in June. Power generation capacity in Turkey con- power demand recovered fasted from the re- “The overall increase in electricity de- tinues to expanded, driven by high levels of cession," he said. Demand growth dropped mand in Turkey was sufficient to drive both demand growth: IEA figures show Turkey's only in the crisis year of 2009, but thereafter coal and gas-fired generation upwards, albeit power generation capacity surged by 8% be- it grew very fast in the last two years, at rates with an advantage to coal”, the IEA said. tween 2000 and 2011, – in sharp contrast to a of around 8%. Growth rates of power demand in Turkey 4% decline in the UK over the same period.

Gazprom may offer special price for gas used to fire power plants azprom and E.ON have settled a Europe will not be priced under an oil-linked the doldrums, but the price revision of Russian long-standing price dispute, in- formula as of 2014”. gas import contracts and the introduction of a cluding an "retroactive adaptation Medvedev had disclosed that the prices of carbon floor price in the U.K. could pave the Gof pricing conditions for the price the four contracts with E.ON had been "cor- way to a tepid recovery. review period since Q4 2010", E.ON said, im- rected" (down) by 7 to 9% with no increase in Going forward, the IEA singled out the rate of plying the price of gas procurement will be low- the spot indexation weighting, indicating that economic growth as a key determinant of natural ered in retrospect. High costs of oil-indexed spot indexation will remain at 15% for the gas demand over 2011-17. “Any further reduc- procurement of Russian gas have for long been E.ON/Gazprom contracts. He also indicated tion in economic activity in Europe is expected singled out as the company’s most pressing op- that the average price of gas sold by Gazprom to lower gas consumption, especially in the erational risk. E.ON posted an operating loss of in Europe in 2012 should be $400/1,000cm. power generation sector,” the Paris-based au- around 1 billion euros ($1.26 billion) in the last This is below the $415/1,000cm (-3.6%) level tonomous intergovernmental organization said in three months of 2010 through the end of 2011. reported at the 14 Feb. 2012. the ‘GAS Medium-Term Market Report 2012’. By lowering the price and perpetuating Bros, however, suggests that “Medvedev’s “Gas demand in the power generation sector spot-indexation, Gazprom bows to pressure of numbers are too low”, as gas-to-power demand remains extremely sensitive to anything in- its European customers and acknowledges that in 2011 was down by more than 10 bcm in four volving other fuels and electricity demand in the price of gas needs to drop to make it the countries alone (6 bcm for UK, 2 bcm for Italy, general,” the report reads. A reduction in future preferred fossil fuel. Medvedev said 10 to 15 2 bcm for Spain and less than 1 bcm for Ger- wholesale gas prices, compared to coal and bcm/y of gas has been "vampirised" by coal in many). The bank estimates that fuel switching considering carbon prices, or a lower than ex- Europe. “To compete in power generation ver- out of gas in favour of coal could be as high as pected expansion of renewables or an acceler- sus coal, gas cannot be priced under an oil for- 20 bcm in 2012 for the whole of Europe if de- ated decommissioning of nuclear plants – even mula,” Société Générale analyst Thierry Bros mand and clean spark spreads do not improve. if this is unlikely - could have a positive effect commented. “We believe the majority of gas in Gas demand in Europe is likely to stay in on demand for gas.

Gas to Power Journal August 2012 03 Markets Carbon Price Floor will put gas and coal generation on “equal footing”

Britain is about to go it alone on introducing a price floor for traded carbon emission certificates. Debated as part of the Electricity Market Reform (EMR), the so-called Carbon Price Floor is seen as an adequate instrument to enable gas to catch up with coal generation in terms of profitability.

eutsche Bank forecasts it will lead demand and imports all across Europe. to a near-term adjustment, if not Deutsche Bank consequentially moderated turnaround, in the coal against its projections of European coal imports Dgas competition: "Using our for- for 2015. ward-price assumption for coal, gas-fired generation and coal-fired generation are very SocGen: carbon price mandate nearly on equal footing in the April 2015 will have impact in 2013 timeframe in the UK," Deutsche Bank ana- Investors and energy traders will respond to a lysts Michael Hsueh and Mark C. Lewis fore- mandated carbon floor price. Paolo Coghe, cast in a recent report. analyst at Société Générale expects “price At present, coal remains ahead of gas in the (and margin) dynamics to start changing UK and European power generation stacks, meaningfully in 2013, but to proceed statistics compiled by Deutsche Bank show. somewhat slowly until 2015/16”. The driving force behind this behaviour is the The French investment bank has revised its sustained divergence between coal and gas forecasts for power prices in Britain in 2016- prices, which reduces the utilisation of gas- 18, based on estimates of how the current set fired generation and increases the utilisation of of regulatory undertakings will impact the coal-fired generation. "On our calculations, this U.K. power market. It now forecast prices for economic decision will persist over the entirety Calendar 16 baseload to increase to £60.4 of the forecast period for European power /MWh; and prices to increase to £63.4 /MWh generators based on the forward coal price," for Cal 17 baseload. Hsueh and Lewis said. In the short run - before the carbon price For UK markets, this logic - based on the floor takes effect - the bank sees “coal plants forward curve for coal – only holds truth until dispatched ahead of gas ones even at times of April 2015, Deutsche Bank analysts stressed. low power demand during the summer season, Thereafter, the bank expects that the newly- leaving little time for gas plants to earn a rea- created carbon price floor - as ‘a particular sonable margin”. to the British energy market’ - would effec- This is likely to lead to additional retire- tively raise the cost of using coal as a fuel for ments, beyond the ones already known to the power generation. market. The timing of additional gas power The UK is gearing up to become a front- plant retirements is more uncertain at present, runner on a carbon floor price. Such a move, but its impact should also be felt between however, will have implications for coal 2013 and 2015,” Coghe said.

“On our calculations, this economic decision will persist “over the entirety of the forecast period for European power generators based on the forward coal price” - Michael Hsueh and Mark C. Lewis, Deutsche Bank”

04 Gas to Power Journal August 2012 Policy & Regulation Capacity payments – a panacea to attract investment?

Time is running out to fill the looming gap in Britain’s electricity supply. To attract investment in power generation, the UK Government plans to pay plant operators ‘capacity payments’ in return for making available generation capacity at short notice. A similar scheme is debated in Germany. Gas to Power Journal reviews how the proposed scheme would work and asks power companies if it fits their needs.

he push for capacity markets is based on the belief that energy-only-markets and demand-side-response cannot solve the “There is a missing money problem and debate Tproblem to incentivize new-build capac- about some complex design procedures and ity combined with growing concerns about the “ it is important to get this right.” intermittency of renewables, Neil Bush, head energy economics at the Department of Energy and Climate Change (DECC) told Gas to - Neil Bush, Department of Energy and Climate Change (DECC) Power Journal. ” To gauge how much new capacity will be needed, the British regulator Ofgem will carry out an assessment of security of supply - in- choice to backfill the capacity gap. "Gas is Becker’s view, already strongly encourage cluding forecasts of future peak demand - on cheap, has much less carbon than coal and will companies to balance supply and demand, and an annual basis. Thereafter, the height of the be the largest single source of electricity in the reward companies who offer the necessary ad- actual capacity payment will be set at auction, coming years. And so the energy secretary will ditional balancing and flexibility services to the which will take place around four to five years set out our new gas generation strategy in the system operator. “If we begin subsiding capac- before utilities will have to make capacity autumn,” Chancellor George Osborne said in a ity that is not actually producing when needed available. parliamentary debate on the draft energy bill. for whatever reason, we risk less efficient out- The Capacity Mechanism Scheme is cur- comes and, ultimately, higher bills to con- rently subject to detailed design development Reform makes “slow progress”, sumers,” he warned. regarding the length of the contracts that will regulations are “unclear” – RWE Calling for more regulatory clarity, Beckers be available for new plants. "There’s a lot of npower criticised that high level policy decisions on discussion about a penalty regime [for delays Doubts on the effectiveness of the energy bill key elements of the EMR – in particular the and non-delivery] and the eligibility of power have been raised by the industry: The reform Contracts for Difference (CfD) and capacity plants for capacity payments," Bush said at the “comes too late” and regulations are “unclear”, mechanism – are still outstanding. “This uncer- sidelines of PowerGen2012. is the verdict of some investors: “We have long tainty over detail and timescale is a significant Penalty regimes could be designed to miti- been pushing for greater clarity on the detailed barrier to investment,” he said, estimating that gate the risk of non-delivery of capacity. The design of the EMR proposals, and greater ex- given the current status of discussions, there is structure of the penalties for non-delivery and pediency in the process as a whole,” Volker “concern that a workable scheme within the whether there will be a cap on that liability will Beckers, chief executive of RWE npower said current market framework may be increasingly be of importance in determining the attractive- in a statement to Gas to Power Journal. difficult to design and deliver in the timescale ness for the industry to participate in the capac- The publication of the EMR Policy required”. ity mechanism scheme. Overview document in May was “another step "More details will be announced in late Oc- in the process towards achieving the necessary Capacity gap estimated to tober," Bush announced. The legislation is in- design detail and ultimately implementation,” open in 2015 tended to go into effect in 2013. he said, but RWE npower has been “disap- The timing of the first capacity auction is Asked about the lengthy incubation period pointed with the progress that has been made still open. The industry has raised concern of the new regulation that delays investment in to date”. about the timeframe of introducing the auction. new plants, he said: "There is a missing money Critics say introducing an auctioning mecha- problem and debate about some complex Subsidising capacity may nism by 2020 would be “not early enough”, as design procedures and it is important to get jeopardise balancing markets capacity shortages are feared to occur already this right." “We remain concerned about the uncertainty by 2015. The Government therefore aims to get Natural gas will be a key focus of the Gov- that surrounds the EMR and what this uncer- a detailed auctioning mechanism introduced as ernment’s new energy policy. Comparably tainty will mean for UK investment. We re- early as 2014. short construction times of gas-fired plants, main unconvinced that a case has been made Considering that lead times for getting a combined with their low carbon intensity, for introducing a capacity mechanism,” he fossil power plant off the ground are between could make gas-fired plants the option of stressed. The existing market arrangements, in four and five years on average, critics warn

Gas to Power Journal August 2012 05 Policy & Regulation

that starting a capacity auctioning mechanism in 2014 could be “too late”. A gap in Britain’s power generation capacity is estimated to open “"The uncertainty surrounding the Electricity Market Reform up already starting from 2015. (EMR) has put a complete block on financing” Open cycle gas plant or even gas engines “ are seen as a ‘quick fix’ for this problem. “If they need any capacity to come onstream ear- Alan White, Lloyds Bank Corporate Markets. lier then they can get open cycle plants (OCG) ” in place,” said Stephen Nash, senior consultant, Energy & Utilities, PricewaterhouseCoopers. Britain will lose around a quarter (around solar) and inflexible generation (nuclear), Investment runs dry – the 20 GW) of its existing generation capacity over which requires flexible capacity to counterbal- ‘missing money problem’ the next decade as old or more polluting plants ance unexpected swings in demand Investment into new power generation capacity have to close or are scheduled for retirement. The large-scale expansion of intermittent in the U.K. has almost ground to a halt as utili- Modelling, undertaken on behalf of DECC, renewable capacity and the subsequent ties and banks lack certainty about Britain’s fu- suggests that capacity margins could fall below reduction in run-time hours of fossil capacity ture market design. "The uncertainty five per cent around the end of this decade – pose a different challenge on investors than in surrounding the Electricity Market Reform increasing the likelihood of blackouts. the past: As the utilisation of thermal power (EMR) has put a complete block on financing," To balance this shortfall in supply, invest- plant shifts to flexible, fast-ramp dispatch to said Alan White, head of conventional energy ment of £200 billion ($317 billion) is needed produce peak-load power supply, operators at Lloyds Bank Corporate Markets. over the next 10 to 15 years - more than double require either a significantly higher level "Gas-fired power plants used to be quite the current rate of investment - to build the of peak-load power prices or capacity easy to invest in some years back," White said, equivalent of 20 large power stations and up- payments to cover the capital costs of their pointing to the option of either matching fuel grade the grid, according to DECC estimates. plant. contracts with power off-take agreements, or The White Paper acknowledges that there financing the plant on a merchant basis. Now, Ofgem sees “frightening times” are “challenges of decarbonisation and secu- investors in new gas-fired capacity are wary ahead rity of supply” and calls for a revision of about reduced run-time hours, lower profit The U.K. energy regulator Ofgem has joined current market arrangements: “The current margins and a longer debt repayment period. the choir of warning voices: "Britain is facing market price for electricity is driven by fossil The growing market share of renewables cur- pretty frightening times with regards to spare plant, such as unabated gas-fired Combined tails run-time hours of gas-fired plants and capacity," Alistair Buchanan, Ofgem CEO said, Cycle Gas Turbine (CCGT), with much lower threatens to squeeze them out of the merit forecasting the timing of power plant retire- fixed costs relative to their operational costs in order. ments will have a "dramatic effect" on electric- contrast to, for example, nuclear or offshore "The load factor of gas-fired power plants ity markets and prices. wind,” the document reads. may well be reduced from 90% to 60% over "We are looking into an earlier closure of the plant's life time," White said, pointing at coal plants than we thought," Buchanan said No rush – DECC needs time to dire consequences for the revenue generated with reference to three major coal-fired plants take considerate action from the plant and for debt repayment. up for closure over the next three years. Britain Pressed for time and subject to industry lobby- Banks, confronted with a lack of liquidity currently uses about 40% of its gas imports for ing, some critics warn that DECC is in danger and increased cost of capital, have reduced power generation. of losing sight of the market. “Unresolved pol- their overall lending and are far more selective: Ofgem's earlier projections on spare, icy tensions may lead to a hasty and very large "For the right kind of projects there will still be backup power generation capacity were predi- expansion of intervention in the procurement funding provided the debt-equity ratio works cated with new nuclear plants, one carbon cap- of power generation capacity in response to out," he said. Gas-fired power stations, sup- ture storage (CCS) power plant and more failure of price signals, resulting from the ported by a long-term electricity offtake con- offshore wind projects entering the market. Government’s own interventions,” says Ray tract from a utility, usually have an 80:20 Now that many of these projects are facing de- Tomkins, director at Economic Consulting debt/equity ratio, he said. For less certain proj- lays, Britain is left with a looming gap in Associates. (Read separate interview with Ray ects, meanwhile, the ratio shifts towards 60% power generation capacity. on the following page) debt and 40% equity. Buchanan has accused the Westminster gov- A capacity mechanism of some description ernment of failing to give the power industry is widely seen as the right approach to Gauging the width of the supply clear signals as to whether there will be capac- incentivise new investment for security of gap ity payments introduced to underpin invest- supply. “We have been lucky up to now to Delays in investment may proof detrimental for ment in new low-carbon plants. Profit margins avoid major capacity shortages. Whether the Britain’s security of energy supply. Urging the are little appealing: "In Britain, the spark current proposal will be enough to solve the industry to take action “to keep the lights on”, spread is forecast negative for the next two capacity gap depends on the details of its the UK energy minister Charles Hendry years," he said. design and implementation,” he said. The warned that further hesitation or reluctance to alternative would be a fundamental redesign undertake much-needed investment in new The intermittency challenge of the whole market – neither DECC nor the power generation capacity could threaten Britain’s future electricity system will also con- electricity industry have much appetite for Britain's energy security. tain more intermittent generation (wind and that at the moment.

06 Gas to Power Journal August 2012 Policy & Regulation Untangling the regulation of the capacity market for Britain Gas to Power Journal talks to Ray Tomkins, founder and director at Economic Consulting Associates about how capacity markets should be designed to ensure efficient market operation, who will handle the new regulatory scheme and who will pay for it.

Q: Will the introduction of capacity pay- The price impacts of the two approaches are considering introducing a captured market? ments be the right instrument to incentivise hard to predict without precise proposals for the A: Capacity payments may not increase average the construction of new power plants? Is it implementation of each, though the targeted ap- market prices in the long run, provided the enough to solve the capacity gap? proach has greater risk of going seriously wrong. mechanism is implemented efficiently. Con- A: A capacity mechanism of some description sumer prices, including household prices, will is definitely the right approach to incentivise Q: Could the introduction of a Strategic cover the cost of providing security of supply, new investment for security of supply. Reserve lead to a distortion of prices for however it is provided. This is expected as secu- Peak-load contracts? rity of supply is a service required by consumers Q: Why is this needed and why was it not A: Yes it will. The operation of the strategic re- and involves a cost to deliver higher security. needed in the past? serve will cap peak prices at those times when This necessarily involves a cost to ensure a A: We have been lucky through a combination of they would otherwise rise to very high levels (and higher level of reserve capacity in the system, circumstances in the past (such as the dash-for- thus remove a significant slice of revenue that which inevitably raises total costs of the system. gas, the investment strategy of the vertically inte- would have been earned by ‘independent’ peak The higher the security standard of the sys- grated oligopoly, and more recently the recession power generators). It will fundamentally change tem, the higher the cost. Since the capacity depressing demand) that major blackouts have the risk profile of peak-load contracts. The ad- mechanism is just the tool to deliver it (rather been avoided as private generators have ‘over- ministered operation of this system introduces an than simply leaving it all to the market), what invested’. This cannot be relied on in the future. uncertain element to peak price outcomes which matters is whether the design of the capacity Whether the current proposal will be will make peak-time contracts hard to price. mechanism produces the right level of security enough to solve the capacity gap, especially at at the lowest cost. peak times, depends on the details of its design Q: Do you agree with critics, who say that and implementation. rather than introducing a Strategic Reserve, Q: DECC is discussing introducing a ‘Penalty there needs to be significantly higher price Regime’ for non-delivery of available ca- Q: The White Paper sets out two options for fluctuations to incentivise construction of pacity. Who would reinforce such a scheme capacity payments: 1) a Strategic Reserve, new peak-load plants? and what implications would it have to the comprising centrally-procured capacity A: Yes, this is true at least in theory and under market? which is removed from the energy market properly competitive market conditions. The A: Penalty payments for non-availability and only utilised in certain extreme circum- underlying problem of lack of security of sup- would be incorporated into the contracts for re- stances. 2) a market- wide mechanism ply arises from the ‘missing money’ issue. This serve capacity, in which case NG would man- What implications would the two different is the revenue that would be earned by avail- age their contracts. But it would need to be mechanisms have for traded electricity able private plant at times of high peak demand reinforced by the market operator by stronger markets? when prices would be expected to go very high (penalty) payments for non-availability in the A: The targeted mechanism approach (strategic (for short periods), but is not when the peak market. A penalty regime may help to align the reserve) would potentially be much less intru- price is capped by an administrative action availability and cost of reserve capacity with sive to the current market arrangements as it such as the investment in strategic reserve . the market needs, and should lead to a lower does not require a fundamental change to the The loss of this prospective revenue makes pri- overall cost of providing security. market rules and operation. It could be viewed vate investment in peaking capacity unviable. as an extension to the existing approach to Ray Tomkins set up Economic STOR contracts for some ancillary services. Q: Who will handle the capacity market; Consulting Associates (ECA) However, it introduces an element of arbitrary meaning who is likely to be the Central 15 years ago to provide eco- central control to the part of the market and has Buyer? nomic consulting to compa- the danger of the ‘slippery slope’; the effect on A: This is almost certainly going to be the Na- nies and governments in infrastructure areas, espe- capping peak prices leads to less private invest- tional Grid company. DECC has clearly stated cially energy. Ray has carried out over 200 ment in capacity, requiring more investment by this and given its reasons that NG meets all the consulting projects with ECA, which, apart the strategic reserve, and so on. criteria set out in the White Paper. As DECC is from the UK, has worked on energy econom- The market-wide approach is potentially aiming for the shortest path to a (relatively!) ics consulting assignments in over 40 coun- less distorting to the market but begins to quick fix for the market, it is most unlikely that tries in Europe, Asia, the Middle East and change the character of the market from a net they would change their decision on this. Africa. Ray has advised a number of major pool towards a marginal cost based pool. That companies in Europe on market design and in itself is not necessarily a bad thing, but re- Q: Who would ultimately pay for it? Would other regulatory economics issues, as well as quires much more fundamental change to the capacity payments increase electricity proposing capacity market and auction market rules and mechanisms and will lead to prices for household customers? The White designs in a number of emerging electricity new bidding behaviour by the market players. Paper claims this is not the case. So is DECC markets such as Turkey and Ukraine.

Gas to Power Journal August 2012 07 Technology & Innovation Gas turbine technology investment – a buyer’s guide

UK power station operators are looking for gas turbines/engines to fulfil several roles including, balancing and control of the electricity flow on the grid and, “filling in” for the intermittent power generated from renewable energy sources.

harles Lambi, CEO of Welsh that many new gas-fired power stations will be Power, is currently on the lookout producing base load power at least until well for two 450 MW combined cycle after 2022. Cgas turbines (CCGT) for his new Operators also demand that manufactures scheme at Wyre in Lancashire. Power operators provide ever higher thermal efficiencies. Ris- select gas turbines/engines on four main crite- ing costs efficiency is vital and has significant ria: flexibility, efficiency, proven technology implications for maintenance, operational and lastly, ability to meet the latest emission costs and impacts on the level of carbon emis- standards, he told Gas to Power Journal. sions. Furthermore, EU legislation such as the Lambi sees flexibility as the most important Large Combustion Plant Directive (LCPD) criterion i.e. the ability of the gas turbine/en- and Industrial Emissions Directive (IED) is gine to meet and respond to the needs of the forcing operators to look for low emissions The RB211 utilises Dry Low Emissions (DLE) daily predictable demand curve for power in technology that meets both current and ex- combustion technology the UK market. pected future toughening up of environmental Flexibility is an increasingly important cri- pollution standards. Electric (GE), Alstom, Siemens, Ansoldo Ener- terion for operators as the role of UK gas The market for the supply of generators is gia and Mitsubishi Heavy Industries (MHI). power generation changes from supplying base divided into two sectors, namely, above the CCGT technology is ideal for long term base load energy to providing back-up power, sug- 200 MW plus range which is dominated by load production. gested Howard Rogers at the Oxford Institute CCGT technology and smaller-scale turbine for Energy Studies. Although, given the delays which inclue areo derivative engines and com- “Aero derivative technology is in realising new nuclear power plants in Britain bustion engines (up to 500 MW). Firstly, the quick to build - almost like Lego” after E.ON and RWE pulled out of the Horizon large turbines those in the 200 MW to 400 MW Secondly, aero derivative engines, ranging in Nuclear Power project in March, it is likely range, of which the main providers are General size between 2 MW to 60 MW of power, are ideal for providing power for peaking electricity and rapid start-ups. This market is dominated by companies including Rolls Royce, Pratt and Whitney, GE and Wärtsilä. “Unlike their larger brethren, aero derivative based technology is quick to build - almost like Lego - and can be added to in a series of modular units of typically 4 to 9 MW power,” said Swift Tarbel, area manager Europe for Pratt & Whitney Power Systems. This means that instead of operating one large power plant, operators can switch on units of power generation to match growing demands from the market. The Irish company Bord na Móna has recently installed two Pratt and Whitney’s FT8 SWIFTPAC units to provide peak power to the Irish grid. Each FT8 unit is able to provide 50 megawatts of quick response peaking capacity.

Rolls-Royce aims to extend RB 211-863 to 50 MW Rolls-Royce engineering, a major British player in this market, has recently introduced a new variant of its RB 211 industrial gas turbine called the RB 211-863. It is rated at 44 MW Irish company Bord na Móna has recently installed 2 Pratt and Whitney’s FT8 SWIFTPAC units to provide peak power to the grid. with a wet alone emissions combustion system

08 Gas to Power Journal August 2012 Technology & Innovation

and is able to produce 38 MW in dry low emission configurations. Rolls-Royce said it plans to develop a 50 MW version. The current 44 MW with its low emissions combustion systems is able to operate on an open cycle efficiency of 41.5% with a com- pression ratio of 25.1.1 and will be available towards the end of 2012 whilst the 38 MW versions should be available sometime in 2013, Rolls-Royce said. As with large turbine manufacturers, Rolls-Royce is aiming for flexibility: in this case it claims the ability to reach full power from start-up in 10 min with the stated NOx level of just 25 vppm. Finland’s Wärtsilä gas power plants are designed for optimal production performance in a broad variety of peaking, intermediate and base load applications. The power plants are based on modular 4–19 MW engine units operating on gaseous fuels. They offer high output and high simple cycle efficiency even in the most challenging ambient conditions and loca- Siemens’ new SGT5-8000H turbine set a world record in power plant efficiency in May 2011 at tions. Their power plants offer world-class the E.ON Ulrich Hartmann power plant in Irsching, Germany. It reached a power output of operational flexibility with uniquely fast starts, 578 MW and an efficiency level of 60.75 percent during the test phase. stops and restarts, ensuring perfect control over daily load fluctuations, so are ideal for reserve French manufacturer Alstom has launched net efficiency is likely” to be achievable from and distributed power situations. the new GT 26 CC GT rated at 50 Hz. Alstom Siemens turbines in the 2015 time frame. In the past year several new combined makes much of its sequential combustion Then there is GE, the giant in CCGT cycle gas turbine (CCGT) power plants have technologies, claiming it is the industry’s production. In May 2011, it launched the Flex been launched on the European market. All most innovative platform for low emissions efficiency 50 CC GT plant. The first plant in could be of interest to potential British buyers. and in combined-cycle applications. The Europe will be at Bouchain, at an existing EDF Each claims the latest technology and ability GT26 gas turbine incorporates two technolo- power plant site in northern France, and will to meet current market and environmental con- gies - sequential combustion, a design feature produce 510 MW - enough electricity for 600 trols. All are offering high efficiency ratings of invented by Alstom, and multiple variable 000 French households. It is expected to around 60% during combined cycle operations compressor guide vanes - to optimize the dif- achieve greater than 61 per cent efficiency as well as superior plant operational flexibil- ficult combination of high efficiency plus low (net) at base load. GE plans to spend an initial ity, low emissions over a wide load range and plant turn-down with low emissions. In addi- US$170m in validation of the turbine at its an ability to operate in of a variety of changing tion, the GT26 is capable of net plant efficien- Greenville, SC, US plant and, according to market conditions. cies of close to 60% using already proven gas Paul Browning, CEO of GE Thermal Products, turbine technology. the "technology will be much further devel- MHI turbine inlet reaches record Germany's Siemens has launched its “new oped by the time EDF gets its hands on it in temperature of 1600°C age“ class machine, which is apparently able to Bouchain.” GE rates the CCGT plant’s For example, Japan’s Mitsubishi Heavy Indus- meet an emission limit of 50 ppm NOx and can expected base-load efficiency at “greater than tries (MHI) latest gas turbine, the G series ma- go from hot start to full rated power in 28 61%”and output at 510 MW. Part-load effi- chine is reported to have created a new world minutes. It is the largest machine of its type in ciency values are also said to be encouraging. record temperature for its turbine inlet of production and it recently broke the 60% For example, 60% efficiency at 40% of rated 1600°C. This is 100°C higher than its G series thermal efficiency barrier in the combined load. Reportedly, FlexEfficiency can reach turbines, while claiming a gross thermal effi- cycle operation in an actual commercial power rated output in 1 hour from cold start (28 min ciency of greater than 60%, with a similar NOx plant where independent verifiers recorded a from hot start) and will provide 50 MW/min burn to current models. Whilst the rational is record of 60.75% net thermal efficiency with a ramp rate. clear, in that it allows thermal efficiency im- 570 MW output. As for the future, the world’s manufacturers provement, it nevertheless subjects turbine are betting on increasing flexibility based on components to higher thermal stresses and Siemens gears up to reach incremental improvements to this existing complicates material choices and overall de- 61.5% net efficiency proven technology. For hard-pressed British sign. The G series 60-Hz turbine has a power “We’re getting close to efficiency ceilings, plant operators, struggling to balance rising output of 460 MW in combined-cycle opera- but some possibilities remain,” said Roland swings in power demand and backfill intermit- tion and has been under commercialization for Fischer, chief executive of Siemens Energy’s tent supply from renewables, it seems that aero more than two years. In future years MHI is business unit Fossil Power Generation. Without derivative technology will become an increas- seeking to achieve 62% to 65% efficiency revealing to competitors what steps might be ingly significant part of gas-to-power genera- range in CC operation. taken, Fischer forecast that “more than 61.5% tion in the UK.

Gas to Power Journal August 2012 09 Technology & Innovation Flexible support for renewables with Smart Power Generation

As the EU shifts towards a generation mix that has a much greater share of renewables, there is an increasing need for support from flexible, cost-effective ‘smart’ power generating plants.

he electricity generating landscape of to the impact of EU Directives on emissions. ing to wind and solar variations. The draw- the future will look very different from In the UK alone, around 20% (about 20 GW) back, however, is that wind and solar varia- that of today. As many countries move of existing capacity will close as a direct re- tions do not necessarily average out. Also, if Tto a low carbon future, a significant sult of the directives. every country starts building up its wind and portion of large polluting thermal generation While every effort must be made to make solar capacity, it will be impossible to export will be displaced by clean renewable generat- this transition to a cleaner, greener future, the everything. ing sources. increased dependence on intermittent renew- Energy storage would be an excellent solu- As part of its plan to decarbonise the enable sources such as wind and solar will result tion but apart from pumped hydro, which is lo- ergy sector, the European Union has set a tar- in a much more unpredictable supply-demand cation specific, there are no other technologies get of meeting 20 per cent of its overall situation in the grid. sufficiently developed to provide long storage energy needs from renewable sources by times at utility scale. 2020. According to the EU reference scenario Balancing supply and Demand response is a potential solution for 2030, wind generation in 2020 will reach demand for the highest (price and demand) peaks. It 525 TWh compared to 160 TWh in 2010. This There are a number of possible solutions to cannot, however, handle long terms varia- equals 285 GW of installed wind capacity at a managing the imminent challenge of balancing tions. It is also still very much in the early capacity factor of 21%. Solar generation is supply and demand caused by increased stages of development. expected to grow from just 17 TWh in 2010 to volatility on the supply side. Each has its pros Wind curtailment is another possibility for 62 TWh in 2020. This is equivalent to 70-118 and cons. limiting the extreme impacts of high wind GW of installed solar capacity at a 6-10 % ca- In Europe, national grids are being ex- conditions. The disadvantage of this approach pacity factor. panded and more high voltage interconnectors is that valuable wind energy is wasted. Also, At the same time a number of baseload are being built to export renewable generation it is only possible to regulate the wind down. generating plants will be forced to close due from one region or country to another accord- Clearly there is a need for flexibility to come from the generation side of the equa- tion. Flexible gas fired generation has a role to play here. This has already been recognised to some extent as manufacturers of equipment for large gas fired combined cycle power plants are de- signing plant equipment to operate more flexi- bly. The ability to cycle large CCGT plants has improved in recent times and although start-up times are still not fast enough to provide the type of ‘firming’ capacity needed for renewables, some are able to provide some level of backup by operating at minimum loads instead of shutting down completely. Although this is a step in the right direc- tion, large combined cycle plants are not the best way to provide backup for intermittent wind generation. A CCGT plant operating purely to provide wind backup add costs to the system in terms of fuel and carbon costs, wear and tear, and maintenance costs. It could also lead to lost renewables output, to the extent that part-loading the CCGTs leads to wind curtailment. Finally, part-loading these plants at their Stable Export Level (50-70%) means that there is less capacity available from these plants for flexibility purposes (i.e. Wärtsilä multi-engine concept at Plains End Power Plant: flexibility and high efficiency over only the upper half of the total name-plate complete plant load range capacity can be used).

10 Gas to Power Journal August 2012 Technology & Innovation

With the right incentives, SPG has already demonstrated that it is well placed to fill the flexibility gap.

US experience There is a fast growing market for SPG in the US, where ancillary services such as spinning reserve, frequency regulation and black start capability can all be sold in the market. Wärt- silä currently has about 1700 MW either installed or under construction in the US. About half of this is dedicated to flexible utility generation. Xcel Energy, a utility that operates across eight states already operates more than 3000 MW of wind capacity and is planning to more than double this to 7000 MW by 2020. Such a massive amount of wind has seen the utility Pearsall Power Plant using Wärtsilä engines enables South Texas Electric Cooperative to employ the use of flexible generation plants. respond to changes in the grid when the wind stops blowing Since their start up, the company’s Plains End I (113 MW) and Plains End II (115.6 Smart Power Generation Wärtsilä analysis for Great Britain indicates MW) plants, for example, have proved their Wärtsilä’s Smart Power Generation (SPG) that statistically ‘known’ wind variability could worth – providing peaking or intermediate concept presents an ideal alternative. It offers be significant in 2020 – ranging from around 4 generation as well as system support and flexible despatch, has low generation costs, GW one hour ahead of real-time, to around 12 firming of renewables. high reliability and availability and can be GW three hours ahead. This variability will More recently, the 202 MW Pearsall Power located where it is needed. need to be met by flexible capacity, which is Plant in San Antonio, Texas, enables South As a peaking plant power can be dis- capable of ramping up over these time frames. Texas Electric Cooperative to respond to patched to the grid in just 1 minute from start- These calculations tie-in with those published changes in the grid when the wind stops blow- up, with full power achieved in 5 minutes by National Grid, which estimates that operating. The ability to dispatch these units in incre- from start-up, so it can meet all the ancillary ing reserve requirement will need to increase ments that fit its load allows it to keep the units services type equirements. by between 3 GW and 12 GW within a at peak efficiency rather than at partial load. SPG can operate in multiple modes – as a 4-hour response time, primarily as a result With the right market structure, the system gas engine-based peaking plant or a baseload of intermittency. support and firming of renewables seen in the combined cycle plant. It uses a multi-engine At the same time, plant closures could lead US could also be possible in Europe. In mar- installation concept, which means that any to a fall in existing flexible capacity of about 3 kets such as Germany, Italy, Spain and the UK, number of engines can be run to match the GW over a one-hour response period, and 15 SPG can be a highly beneficial and cost effec- load, thus maintaining high overall plant effi- GW over a 3-hour response period, assuming tive tool in supporting plans for a green, clean ciency. Plants can be configured for an output there are no replacements. This could rise to energy landscape. of 50-500 MW and efficiency in the 48-52 per around 22 GW over a 3-hour response period if cent range is sustained over the load range of coal plant closures are accelerated. Melle Kruisdijk, the plant. As the plant is based on reciprocating While demand-side response, interconnec- Director Market engine technology, unlike gas turbine plants tors and storage could provide between 2 GW Development, there is no power loss at ambient temperatures and about 13 GW of flexibility in 2020, there Wärtsilä as high as 40ºC. will still be an increased need for supply-side Melle Kruisdijk is Another advantage compared to turbines is flexibility to manage wind variability. Market Development that maintenance is driven solely by number of Whilst there are different potential Director at Wärtsilä operating hours as opposed to starts and stops. approaches to these challenging issues, we Power Plants. He is Maintenance planning is also easier since a sin- believe that two principles will be key in responsible for leading market develop- gle engine can be taken offline and serviced delivering an appropriate solution for Europe. ment activities in Europe. After graduat- while the others are in operation. First, a consistent and harmonised approach ing from Delft University, Melle started across countries, as envisaged in the Third his career at Woodward Governor in Market incentives Package, will be important. Second, transpar- 1998. In 2000 he joined ALSTOM Changes are needed in the electricity market, ent and liquid markets for balancing products Power in Baden, Switzerland, where he however, to attract investment in this type of can provide both tools for those needing flexi- started in the Service group. As of 2006 flexible solution. Electricity market arrange- bility (including suppliers, generators and he took on the position of Business Sales ments must appropriately reward flexibility in System Operators), as well as clear price sig- Manager for new turn-key Combined balancing resources so that potential investors nals for those with the potential to offer flexi- Cycle Power Plants in Europe. Melle can realistically and confidently predict the bility from an existing portfolio, or to invest joined Wärtsilä in October 2011. future value of this flexibility. in future new flexibility.

Gas to Power Journal August 2012 11 Gas to Power Europe Capacity, Strategy, Investment and Technology – Powering Europe’s Future Tuesday 25th – Wednesday 26th September, 170 Queen’s Gate, Imperial College London, UK Conference Highlights • The UK Electricity Market Reforms and its impact on investment

• Regulatory landscape Contributions from leading industry organisations and experts including: affecting Europe’s energy markets • Challenges and drivers for large scale gas to power generation Giuseppina Squicciarini Alexander Antonyuk Dr Samuele Furfari Professor Riti Singh • Support schemes: feed-in Ofgem International Energy European Commission Cranfield University tariffs versus capacity Agency payments • Overcoming financing challenges for gas-fired power generation projects Jim Lightfoot Ben Wallace Malene Hein Nybroe Graham Freedman • Identifying the commercial E.ON AG ESBI International EnergiNet DK Wood Mackenzie potential and long term viability of new projects • Gas as a backup fuel for power generation: managing the challenges of intermit- Melle Kruisdijk Swift Tarbell James Cox Ray Tomkins tency in renewable energy Wärtsilä Power Pratt & Whitney Pöyry Energy Consulting Economic Consulting • Determining the benefits of Plants Associates large-scale versus small- scale turbines • Managing operational and maintenance costs for gas turbines

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