CCGTs now key source of natural gas demand support in Britain

Increasing profitability of natural gas fired power plants in Britain has seen the units become a key source of support for demand at the NBP hub.

Combined-cycle gas turbine (CCGT) plants are systematically becoming the dominant source of power generation in Britain, on the back of cheap gas prices and the UK’s unilateral carbon price support (CPS), and traders say this trend will extend further.

There has been a steep decline in the price of gas in 2015 as crude oil prices have fallen while both Norwegian gas and LNG supply have been strong.

Wholesale coal prices have also fallen, although not to the same extent as gas, relatively speaking.

This has pushed the UK clean spark spread with CPS for November ’15 above the corresponding clean dark spread in recent days (see ESGM 20 October 2015).

This has increased the prospect of more gas fired generation in Britain as plants become more profitable than their coal-burning counterparts.

The figure is a measure of profitability for CCGTs including the cost of emissions and the UK’s CPS, an additional £18.08/tCO2e top-up levy, while the dark figure applies to coal-fired plants.

The CPS was a key driver of gas-fired generation in the summer as it restricted competing coal plants’ ability to generate profitably against cleaner burning CCGTs.

However, as Britain moves deeper into winter, coal typically becomes a more prominent source of power generation, because of domestic gas-fuelled heating demand from UK households.

Therefore the trend of CCGT being dominant appears to be confined to summer, at least for now.

Marginal demand

LNG supply is expected to show significant growth over the next few years, with substantial increases in liquefaction capacity globally, particularly in Australia and the US.

Overall demand growth, however, appears to be weak amid concerns over Chinese industrialisation and growing Japanese nuclear generation which is replacing gas in the power production mix.

Unless global demand growth picks up, the global gas market will be in a structural phase of oversupply lasting a number of years.

This will put increasing pressure on the NBP due to Britain’s role as a residual market for LNG. And the NBP’s deep liquidity makes it an easy place for LNG sellers to offload volumes.

“US LNG, low oil prices and more LNG produced closer to Asia will weigh on prices, especially the NBP given its ability to pick up the LNG slack,” Nick Campbell, analyst at Inspired Energy said.

The Summer ’16 spark spread was £4.10/MWh, a 1.24p/th premium over the equivalent dark spread on 22 October, ICIS calculations showed.

However, the Winter ’16 spark and dark spreads show coal to be more profitable. Only a sustained bearish run on the NBP while coal and carbon prices stay the same could change this.

The pricing on the curve indicates that gas will continue be a source of marginal demand, especially in the summer.

“It’s going to a case of ‘gas first’ in the summer,” a trader at large utility said. “We have already seen the step change [fuel switching] this year.”

However, the increasing build-out of renewable power generation capacity in Britain may eventually challenge gas’s dominance. “We will see high gas burn when it’s cloudy or calm, but substantially less when its sunny or windy,” the utility trader said. “It’s going to be peaky.” thomas.rodgers@icis.com