To build or not to build
The recent deal signed by Centrica to source shale gas from the US from 2018 onwards appears on the face of it an assertive step in establishing a continuing strong role for gas in the UK. This comes on the back of the UK government's Gas Generation Strategy and establishing of an Office for Unconventional Gas and Oil for exploration of shale in the UK itself. But beneath the surface of these developments there remains a great deal of uncertainty on how gas consumption will play out in the coming years, particularly in the power industry that uses gas to generate power.
Much of the uncertainty in the gas to power industry has come from still murky, government legislation on subsidies for renewables and nuclear (Electricity Market Reform or EMR) and payments for power capacity which may still be subject to EU state aid rules. Gas generation in the form of Combined Cycle Gas Turbine (CCGT) plant has to compete with non-fossil burning plant to serve power demand, but with no clarity on the expected market revenue (driven by future power prices), prospective new gas-build projects have been unable to get off the ground. Even with recent warnings from the outgoing OFGEM chief on lack of capacity in the coming years (OFGEM's worst case scenario shows a de-rated capacity margin close to 0% in 2015/16), the market is showing little appetite for gas fired generation with spark spreads at historical lows and some utilities cutting back on existing gas capacity. Despite the government go ahead for new build, no new gas plant is in the pipeline - no financing utility is willing to fund a project for which the developer is unable to provide some certainty as to its future income.
The proposed Electricity Market Reform contains two key elements which will ultimately form the basis of future projected revenues for new CCGT projects, namely capacity payments and contracts for differences (CfD). Preparation of secondary legislation on capacity markets and publication of CfD strike prices will not arrive until this summer, meaning that the precise impact on generation technology types is still undefined. A third element, a carbon tax, has been implemented this month and should have a neutral impact on future gas plant income while the final piece of the jigsaw, EPS, to curb emissions from online fossil fuel plant is not designed to constrain new gas plant.
Faced with this regulatory uncertainty, an asset backed utility will be well advised to commission and implement an initial impact analysis on its portfolio in preparation for the flurry of risks and opportunities resulting from the finalized policies. This drill down analysis can guide a company in its business and IT strategies and understand the weaknesses in its asset base as well as on the supporting application landscape.
Further levels of analysis can build up a more robust view of future growth opportunities and the future risk profile. Utilities and independent power producers wishing to take a step further and interrogate potential exposure scenarios can look at leveraging big data solutions and collaborative data visualisation. Utilisation of pre-built "big data" scenarios for the industry and reusable algorithms can support generation of fast insights from the mass energy data. The insights gained include not only the impact of policy decisions and regulatory outcomes, but also security of supply scenarios and asset rate of return (IRRs). Implemented and operationalized across front to back office, these solutions open up enterprise-wide collaborative analysis and support creation of unique set of EMR pathways that is customised to the utility's own portfolio.
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