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European Gas to Power - squeezing margins

The European gas to power sector is traditionally made up of asset backed utilities and independents power producers operating combined cycle gas turbine (CCGT) and, to lesser extent, open cycle gas turbines (OCGTs). CCGTs are more efficient and have therefore have historically run closer to a baseload running regime with load factors > 50%, with the gas burned often purchased via oil-linked gas contracts. While these assets owners are increasingly trying to restructure their gas contracts and tap into cheaper market gas (at least for the time being), the load factors they are achieving are under extreme pressure from growth in the renewables sector. The explosive growth of wind and more recently photovoltaic solar in Europe is displacing gas in the 'merit order'. Often these forms of energy, solar during the summer and in the daytime and wind during the winter and at night, together with cheaper to run nuclear and coal sources are sufficient to meet demand and gas fired power plant are as a result left underutilized. Instead CCGTs are forced to perform a load smoothing role to compensate for wind patterns or cloud cover and are burdened by poor response rates to support renewables variability.

The situation is of course exacerbated by the global recession. Financing for new CCGTs is based on expected power price proceeds; but if they aren't running, they are not making any money. Indeed the combination of strong renewables output and high gas prices has led to a crisis in Italy's heavily gas-fired generation sector, Statkraft putting a CCGT on cold reserve in Germany and talks of plant mothballing in the UK. The UK's Department for Energy and Climate Change has partly acknowledged the current market issue and called for evidence on the role of gas in the electricity market. Additionally, a capacity payments mechanism has been proposed by the DECC in its draft bill for Electricity Market Reform. Assuming these availability payments don't constitute illegal state aid, they may in the future at least go some way to providing non-operational incomes for gas plant. If not brought into legislation however, and assuming continuing bullish gas prices and renewables growth, CCGT -backed utilities and operators are increasingly forced to innovate around the inherent flexibility or optionality of the plant for those more limited hours that plant are able to run.

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