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Italian producers, unions warn of crisis for gas-fired electricity plants

26 Jul 2012 18:21:19 | edem

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Up to 15GW of gas-fired electricity capacity in Italy risks being mothballed next year because of negative profit margins, which could put system balancing at risk and result in higher power prices, independent power producers' lobby Energia Concorrente said.

The warning - sounded by Energia Concorrente president Massimo Orlandi in a hearing at the Senate on Wednesday - came shortly after Italian electricity workers' unions CISL FLAEI, FILCTEM-CGIL and UILCEM-UIL jointly wrote to the Italian economic development minister Corrado Passera threatening to halt production at strategic gas-fired plants if measures to tackle the crisis of the sector are not taken (see EDEM 25 July 2012).

Unions said they did not receive any feedback from the ministry following a request for a meeting in June, after which they received confirmation from power producers that some facilities could be shut down until further notice.

"If we don't receive any feedback that you are determined to open a confrontation on the issue, we will be forced to put in place mobilisation initiatives... which could include stopping strategic fuel-fired plants," the unions wrote to Passera.

The ministry had not responded to calls for comment as ICIS went to press.

Low gas-fired profit margins

Italian power prices trade at a marked premium to continental prices, but spark spreads values remain low (see EDEM/ESGM 8 May 2012 and EDEM 11 May 2012).

On one hand, prices for gas supply in Italy remain high, with most still sourced via long-term gas supply contracts of 20 years or more (see ESGM 2 July 2012). On the other hand, excess generation capacity, partly due to a boom in photovoltaic plants, and low economic demand have pressured power prices.

As an example, between 2000-2011, total installed capacity in Italy doubled to 118.4GW. But in 2011, the annual consumption of 313.8TWh was lower than in 2006, according to data from electricity grid operator Terna.

The result of these two factors is a decline in gas-fired generation, which is still the main power source for the country. Last year, gas-fired generation accounted for 47% of total production - a fall of 7% year on year, according to energy regulator AEEG's annual report.

CCGT hours one-third of expected

In a separate document, union FLAEI detailed the outcome of a meeting with Edison - the country's third-largest power producer after incumbent Enel and gas giant Eni - regarding the state of its production facilities.

The union said that next-generation CCGT plants are producing power for no more than 2,000 hours per year, despite the investment plan decision considering 4,000-6,000 hours each year as necessary.

The union said that Edison will carry out an "accurate analysis" to assess the profitability of the 125MW Porto Viro, 135MW Jesi, 182MW Sarmato and probably the 50MW Cologno Monzese plants. These facilities have ramped up production recently, FLAEI said, but only because of an increase in consumption triggered by seasonality.

Edison was not available to comment as ICIS went to press.

Balancing risk

Energia Concorrente represents power producers Sorgenia, EGL, GDF SUEZ, Repower and Tirreno Power, with a combined capacity of around 11GW, and estimated that up to 15GW of CCGT plants were at risk of being taken off line temporarily because of negative spark spreads by 2013 - equivalent to 19 large power plants.

Another consequence, would be a rise in power prices, because less supply would result in a higher degree of offer concentration, according to the group.

Energy regulator AEEG considered that the concentration in the Italian market has decreased in the previous few years, using a specific indicator called Herfindahal-Hirschman index. The market share of incumbent Enel decreased to 26.4% last year, down from 27.8% the year before.

A second problem if capacity goes off line is in balancing the grid. Energia Concorrente warned that the boom in renewable capacity might pose serious risks, as flexible CCGT capacity provides most of the balancing services - in particular, 64% of the secondary reserve and 51% of the tertiary reserve.

The association slammed the idea of grid operator Terna using storage batteries as an alternative to CCGTs for the flexibility of the system (see EDEM 25 July 2012). "With a €1bn investment, the issue of dispatching from renewable sources is only marginally solved," it said. It added that such investment should be tested on a smaller scale first, and suggested that it would be better instead to improve the grid.

Competitive gas supply plea

Energia Concorrente said that the gas market plays a central role to solve the problem.

"Gas markets and gas infrastructures must guarantee competitive supply conditions to CCGTs, taking into account the fact that gas-fired generation is now intermittent and flexible," it said.

The group proposed making gas storage capacity available to power producers, with gas transport tariffs depending on consumption.

Other major proposals include integrating the current capacity payment mechanism with higher payments to the most flexible gas-fired plants. A new capacity payment mechanism is due to begin in 2017 (see EDEM 19 July 2012). SM

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