CCGT incentive for Summer ’15 to offer UK gas and power price support

Published on the ICIS Dashboard at 08:00

Declining gas prices and the rising cost of coal-fired generation dictated by the UK’s rising carbon tax will increase the proportion of gas-generated power next summer according to sources.

This could in turn lead to a floor on UK natural gas prices as demand from the power sector soaks up excess gas.

And a floor on NBP natural gas contracts could stem losses on power contracts for delivery over Summer ’15, with UK power curve dynamics strongly influenced by movements on the NBP market.

Summer spark spread

The recent slump in forward gas prices has helped to sustain the Summer ’15 Baseload dirty spark spread – the profit margin available to CCGT plant – above £12.00/MWh since the start of December.

On Wednesday, the price reached a new high of £12.22/MWh for plants of 49.13% efficiency.

“It’s the best spark on the curve at this point so you’d expect to see some (CCGT) running”, one trader said. “It’s looking a lot healthier compared with last summer.”

At the same stage in 2013, the Summer ’14 dirty spark spread was assessed at just £4.83/MWh.

Some of the difference in value can be attributed to the rise in the cost of outright power from April 2015, caused by an increase in the UK’s carbon price support (CPS) to £18.08/tCO2 imposed on fossil-fuelled generation.

However, the Summer ‘15 Baseload clean spark spread including the CPS also reached a new high on Wednesday, to £3.47/MWh. This still compares favourably with a loss-making minus £0.20/MWh for the Summer ‘14 clean spark spread including CPS a year earlier.

However, the Summer ‘15 clean spark spread including the CPS also reached a new high on Wednesday, at £3.47/MWh. This compares favourably with a loss-making minus £0.20/MWh for the Summer ‘14 clean spark spread including CPS a year earlier.

Despite the comparatively unfavourable forward spark values for summer 2014, traders pointed to conditions in July this year, when gas plants used the largest amount of gas for any month for three years as a case in point.

ICIS data also shows that power generated from the gas-fired sector during last summer reached its highest level since May 2012 on any one day, with 386,364MWh of electricity generated from gas stations on 8 July.

“It seems like we are moving back into a more seasonal pattern, where CCGT runs in the summer and coal runs in the winter, when gas is needed elsewhere”, said one analyst at a London-based trading house.

“If the warm winter continues, we could see yet another summer with reduced demand for storage injections. In that case, CCGTs are one of the few options to pick up the slack,” he said.

NBP prices

A glut of LNG shipments combined with weak summer demand to weigh on NBP contracts, with Day-ahead prices averaging 37p/th in the period.

Subsequently, demand from power plants increased to nearly 1.6 billion cubic meters.

While demand for injections will not become apparent until after the winter period, many in the market are predicting a period of strong LNG supplies in 2015.

Prices in the key Asian markets have fallen to near parity with prices at the NBP, a factor that many consider will cap NBP prices at around the 60p/th mark, as any excursion above that level would see an increase in LNG supply.

But beyond potentially favourable NBP market trends, CCGT operators are set to benefit from other market instruments that could see gas-plant load factors increase this summer from last.

The April 2015, rise in the CPS will deal a heavier blow to the profit margins of greater polluting coal-fired generators and allow the so-called ‘switching’ price at which gas-fired generation becomes more price competitive to remain higher.

“The switching price will be higher next summer with the new carbon floor,” said one trader from an energy procurement company. “Gas won’t have to fall as much (as last summer)”, he added.

Baseload vs Peakload

Furthermore, a gradual erosion of the spread between baseload and peakload value on the Summer ’15 power contract could entice CCGT operators to run their plants more consistently at baseload.

This would draw more gas from the system than would typically occur when gas plants operate on peakload profiles.

The baseload-to-peakload ratio for Summer ’15 stood at 1.07 at the end of Wednesday’s ICIS assessments, representing the most marginal spread of contracts across the curve.

“If [gas-fired generation] does come on, it has to come on for baseload,” said one trader. The dealer referred to the current ratio as ‘very low’, although ‘not particularly surprising given the greater solar influence.’

An increase in the UK’s embedded solar capacity over the last 12 months has helped to narrow the spread between summer peak and baseload prices, with the higher load factors on solar plant during peak summer hours providing the grid with more zero-marginal cost generation.

“There is less incentive to hammer (CCGTs) during peaks, as to run it up and down will have maintenance costs associated with it also,” said Nick Campbell, an energy analyst from Inspired Energy.

NBP and power price impact

Sources believe that gas consumption from the CCGT sector could provide one of the few supporting factors for the NBP Summer ’15 contract, and in turn the equivalent power contract, as the contracts near delivery.

Demand from the power sector can often provide a floor for NBP prices, which is triggered when gas prices fall to the point when it becomes more competitive to run gas-fired plant rather than coal. This can boost demand, which can subsequently increase prices. Henry Evans and Albert Evans