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New UK combined-cycle natural gas-fired electricity plants face sustained low profit margins

06 Sep 2012 10:51:37 | edem esgm

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Two of the UK's "big six" energy companies face poor profit margins for natural gas-fired electricity generation as they prepare to bring 3.3GW of new gas plant into production.

The commissioning of two combined-cycle gas turbines (CCGTs) - RWE npower's 2GW Pembroke plant and EDF Energy's 1.3GW West Burton B - will coincide with historically low spark spread levels on the market's forward curve.

EDF Energy is unlikely to run West Burton B as baseload generation. Despite being a new and efficient CCGT, it will be placed relatively high up the merit order for dispatch.

A spokesman said the plant will look to sell its output into tighter markets instead. "We expect the plant to operate flexibly in response to market price signals," he said.

The companies envision a spark-spread recovery in time. RWE npower chief operating officer Kevin McCullough said: "As coal plants are retired in the UK, as growth is restored to the economy and as clarity is provided on energy and climate-change policy, we expect profit margins for gas-fired plants to improve."

But the conditions listed by McCullough could take several years to result in a sustained lift along the spark spread curve, according to one analyst. "I see the spark improving in the long term because of things like the large combustion plant directive and the carbon price floor from April 2013," Inenco energy market analyst John Pering said on Wednesday, referring to a closure programme for carbon-intensive coal- and oil-fired power plants. "That's inevitably going to make gas a little more profitable."

Slow recovery

However, the analyst said that no single factor will boost spark spreads in the foreseeable future and that any recovery would be a gradual process that could take until 2020 to fully materialise.

ICIS' Winter '12 and Summer '13 spark spreads were last calculated on Tuesday at £3.36/MWh and £6.48/MWh respectively.

The spark spread curve has traced a downward trajectory for more than two years. Contracts dated from Summer '13 out received a boost when the carbon floor price was announced in spring last year (see EDEM 23 March 2011), but the front-summer product has sunk back since April to languish just above £6.00/MWh (see graph).

The poor margins have seen a rapid shift towards plants operating as open-cycle gas turbines which, although more expensive to run, can ramp up quicker and sell output into the more lucrative peaks market.

The most recent example was ESBI's Corby plant, the capacity of which shifted down from 338MW to 225MW as recently as Tuesday (see EDEM 4 September 2012).

The EDF Energy spokesman said power plants such as West Burton B typically have a 25-year operating life, so the company would be looking beyond poor spark spreads, which he labelled "very short-term market prices".

However, some would disagree with the "very short-term" sentiment - among them EDF Energy sourcing director Martin Lawrence, who said earlier this year of West Burton B: "The plant is clearly not going to pay its way for some years to come" (see EDEM 25 April 2012).

RWE npower's Pembroke plant should complete commissioning within days, while a late-October completion date is expected for EDF Energy's West Burton B unit (see EDEM 9 July 2012). JS

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