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UK spark spreads will recover but not until ‘later in decade’ – DECC

02 May 2012 19:55:34 | edem

The UK expects profit margins for gas-fired power generators to recover - but the increase may not be seen until later in the decade, according to a government paper published on Wednesday.

In light of the poor investment climate over the medium term, the Department of Energy and Climate Change (DECC) has pressed on with its public "call for evidence on the role of gas in the electricity market".

The aim is to remedy a potentially large investment gap in DECC's energy mix strategy.

The report draws on growing concern over the viability of renewed gas generation within the UK's energy mix as profit margins for gas plants, known as spark spreads, remain extremely low by historic standards.

On Tuesday the front winter clean spark spread, which takes the cost of carbon into account, was calculated at just £0.91 (€1.12)/MWh by ICIS, while the clean dark spread, which measures coal-fired power production profit margins, stood at £21.54/MWh - a £20.63/MWh difference.

In the paper, DECC said it "anticipates current excess capacity margins will decline later in the decade as a result of the retirement of existing coal and nuclear plants," therefore increasing the wholesale baseload price of generation.

However DECC's assumptions regarding the switch off of nuclear and coal plants are reliant on commodity prices increasing alongside a higher carbon price.

DECC also raised concern over the effect that increased nuclear and wind generation capacity may have on the profit margins of gas-fired power plants, stating that, as new forms of generation come on line, the frequency of gas dispatch will lessen.

Consequently, flexible gas-generated plants will become reliant on a volatile market to secure revenue levels that would warrant renewed investment.

The DECC paper adds fuel to a growing acceptance across the market, including at EDF Energy, which is shortly to commission its 1.3GW West Burton combined-cycle gas turbine, that gas-fired generators are to be plagued by historically low profit margins for some time (see EDEM 25 April 2012). TF

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