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Low UK spark spreads here to stay – EDF trading head

25 Apr 2012 16:12:27 | edem esgm

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Historically low profit margins could plague gas-fired power generators in the UK for the foreseeable future unless electricity generation capacity is sharply reduced, the trading director of energy giant EDF said on Wednesday.

The growth of solar electricity generation in Germany has all but removed the likelihood of heavy power exports from the UK to mainland Europe over the coming summer, Cathy McClay said at EDF Energy's Talk Power conference in central London.

As a result, summer electricity price spikes in the UK - which have previously coincided with heat waves over mainland Europe - may no longer occur. "Those opportunities have gone away, so it looks like low [spark] spreads going forwards," McClay said.

The front-month clean spark spread, which measures the profitability of gas-fired power generation including the cost of carbon allowances, closed on Tuesday at the end of a particularly bearish session at just £2.23/MWh, having shed 10% of its value in a single day.

This was a substantial £12.86/MWh below the equivalent clean dark spread, which measures coal-fired profit margins.

Bleak winter

According to McClay, the picture for gas-fired power generators will remain equally bleak over the winter months.

Transmission system operator (TSO) National Grid predicts average peak electricity supply margins of up to 20GW. This would be more than enough to counter any bullish impact if the UK's 6GW of wind power generation capacity fails to generate.

"Even on a cold day with no wind, the system is looking comfortable, unless there are thermal plant issues," McClay said.

On Tuesday, the Winter '12 clean spark spread was last calculated at just £0.66/MWh, an £18.13/MWh discount to the equivalent emissions-adjusted dark spread product.

The bearish power outlook means there is little chance of a recovery in profits margins for gas-fired power generators, McClay said.

The predictions chimed with National Grid's summer outlook. Last week the TSO said electricity- and gas-supply margins would be comfortable through the summer, with coal-fired plants dominating the electricity generation mix (see EDEM/ESGM 17 April 2012).

The outlook for the wholesale gas market is less certain, McClay said, with robust LNG demand from the Pacific Basin continuing to support prices in the UK.

Across both power and gas markets, the timing of any winter cold spell will be a crucial factor if price spikes are to occur. Should a cold snap occur early in the winter, the drain on gas storage levels will add risk premium to contracts at the back end of the winter, Mcclay said, which would pull equivalent power contracts higher.

However, the low sparks prediction is not good news for EDF Energy, which is bringing its new 1.3GW West Burton combined-cycle gas turbine on line later this year (see EDEM 12 January 2012). "The plant is clearly not going to pay its way for some years to come," EDF Energy sourcing director Martin Lawrence said. JS

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