UK CCGT profit margins fall late in Q3 on forward market

July will be the most profitable month for gas-fired power generation in the UK in the second half of summer, according to latest ICIS calculations.

But coal will become more profitable relative to gas as the quarter goes on, the data shows.

The figures, clean spark and clean dark spreads with carbon price support (CPS), include the cost of carbon under the European emissions trading system and the UK’s unilateral carbon price support, a tax on fossil-fuelled power generators.

Earlier this month the price dynamics implied that gas-fired power stations would be more profitable throughout Q3 (see ESGM 15 May 2015). On 1 May the clean spark spread with CPS for Q3 ‘15 outweighed the equivalent dark spread. This was generally driven by coal price increases relative to gas and power (see EDEM 29 April 2015).

But over the last two weeks general oversupply in the coal market has returned to cause a bearish trend that has increased profit margins for coal plants on the forward curve. This has meant coal-fired plants look set to retain their position as the more profitable and the likely source of baseload power for the UK during the rest of summer.

However the premium held by dark spreads has lessened significantly compared to where it stood in early April (see graph), to the degree that individual plant efficiencies will come into play, with more efficient gas plants looking at stronger economics than less efficient coal plants.

Fuel switching

This been happening in recent sessions, according to UK power market traders.

“Fuel switching is happening at the moment,” one UK power trader said. He mentioned that there were at least four coal plants that were running at low power output and ramping up to meet increases in demand.

According to National Grid data, power generation from coal increased from 6.9GW at 05:00 to over 8GW at 08:00 on Thursday when demand increased. This shows that over 1GW of coal plant was not running for baseload power generation.

Any increase in the European carbon price would have a big impact on the dynamics, making it less profitable for the more emissions-heavy coal fired power plants.

ICIS calculations show the carbon price would have to reach €7.75/tCO2e to make gas more profitable than coal in July, and €8.69/tCO2e to do the same for August.

CCGTs

As things stand gas looks set to make up more of the UK’s fuel mix in July than during the rest of the summer. The price margin that combined-cycle gas turbines (CCGTs) will make decreases towards the end of the summer, the figures show. In July ‘15 the clean spark with CPS stood at £3.20/MWh compared to £2.94/MWh for September ‘15.

With current prices the least profitable month this summer will be August, during which CCGTs will make £2.86/MWh for baseload power generation.

The difference between the clean dark spread and the clean spark spread increases from July to September, indicating that gas fired plants will be less likely to provide baseload power for the UK towards the end of Q3. This is because less efficient coal plants are likely to be more profitable than more efficient gas plants when the difference between the spreads is bigger, hence taking up more of the total generation mix.

July is likely to see the biggest demand for gas from the power sector in the coming months, as some gas plants could continue to provide baseload power generation. abigail.beall@icis.com