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UK electricity curve prices should rise 7% as natural gas displaces coal - analysts

24 Jan 2013 15:54:32 | edem esgm

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A predicted switch to gas-fired generation following coal plant closures in the UK has not fully been priced in to forward electricity and natural gas curves, utilities analysts and traders have told ICIS.

RWE's 2GW Didcot A and Scottish Power's 1.2GW Cockenzie coal plants are the next plants to close under the EU's large combustion plant directive (LCPD). The companies have said they will pull the plants off line before UK imposes a carbon price floor on 1 April.

Several traders have told ICIS they believe a 10-12% rise in gas demand is not out of the question, as combined-cycle gas turbines (CCGTs) raise their running hours to make up for the missing baseload generation.

The closure decisions were taken months ago, but Credit Suisse research released earlier this month argued that the market has not fully factored in the bullish impact of greater CCGT use in both power and gas prices.

Credit Suisse's forecasts for wholesale power prices from Winter 2013 to Winter 2015 are between 4-7% higher than today's forward prices. The discrepancy rears largest in 2015.

The analysis also predicts a £1.25/MWh (€1.58/MWh) uptick in clean spark spreads, a measure of gas-fired generator profitability.

Two traders told ICIS that a rough £1.00/MWh increase in the clean spark was feasible, from the Winter '13 spread onward, indicating that power price rises will outpace those of gas despite the increasing CCGT demand. Winter '13 sparks was trading around £3.37/MWh on Wednesday.

A lower point of entry into the power generation stack is good news for CCGTs, until now largely been priced out of the market by coal generators enjoying stronger clean dark spreads.

Gas demand

The change comes at an awkward time for the UK government, which is grappling with a new electricity policy and is being accused by some within the renewables industry of favouring a "dash for gas" at the expense of low-carbon generation (see EDEM 5 December 2012).

One utilities analyst, who asked not to be named, said the expected increase in gas consumption by CCGTs posed security of supply issues for the UK. "To meet this extra demand, the UK is going to need a further 100 more LNG shipments or a high single-digit increase in natural gas imports [from mainland Europe]," he said.

Credit Suisse also expects CCGT plant usage, measured by load factors, to improve over the course of the year. Its analysis put CCGT 2012 load factors at 25%, increasing to 37% by 2013.

Another UK power trader said he expected coal to take gas's place as marginal fuel in the merit order earlier than the widely anticipated 2017-2018 window. As well as the 3.2GW of coal plant slated to close by the end of March, E.ON's 2GW Kingsnorth plant closed at the end of 2012, and SSE's 1GW Ferrybridge units 1 and 2 are expected to close in the first quarter of 2014.

Peak hours

CCGTs are also expected to take up the slack in peak hours, with the confirmed closure of 2.5GW of oil-fired plants owned by RWE.

The Peterborough and Corby plants lost up to one-third of their capacity when they switched to the more flexible open -cycle gas turbine (OCGT) generation, prompted by lower spark spreads. But one analyst said he doubted the plants were in the money as OCGTs and could close during 2013.

The Barking Power CCGT plant could also start running as an OCGT, reducing its capacity by 600MW, the analyst added.

"We're losing all the oil reserve plant that the UK has fallen back on when supply is stretched or gas [prices increase sharply]," he said.

Meanwhile, high dark spreads have enticed coal plants to increase their running hours, meaning planned coal plant closures could come sooner than the market expects.

Power market participants are now talking about scarcity pricing, or price spikes in times where reserve capacity margins fall sharply.

Ofgem warned last October that the UK's electricity supply could be insufficient to meet demand, and margins could fall below 4% in 2015 from 15% today (see EDEM 5 October 2012). KB

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