Europe: Getting fired up for a gas generation revival?

An expected increase in LNG production globally, more competitive prices and an overhaul of energy policies across the EU could see the return of gas-fired generation to the continent. In this three part series ICIS reporters review the gas-fired capacities that are to be commissioned across the EU in the next five years and analyse the factors that are likely to drive that revival.

The first part analyses the capacities that are to come online and the evolution of spark and dark spreads driving the comeback.

Rising CCGT capacity

Gas-fired power generation looks set to make a comeback across Europe as state subsidies, improving spark spreads and the retirement of older coal-fired plans could force a turning-point in government policies across the continent.

Twelve European countries are expecting to build new gas-fired generation between now and 2020, representing just over 28.5GW of capacity at various stages of development, according to data collated by ICIS. This amounts to 25.6% of the planned installed capacity that could come online in the identified countries over the next five years.

In Britain alone, a total of 15GW of gas-fired capacity could be rolled out, subject to planning permission and investment decisions between now and the end of the decade. This represents 20% of capacity that could be commissioned over the same period.

Other countries such as France, Germany and Italy could well build a combined 6.5GW of gas-fired capacity, although the three countries have already cancelled a combined 11.1GW over the last five years.

Meanwhile, Turkey expects to bring online just over 6GW of gas-fired capacity in 2016 and 2017 alone, representing more than half of the planned capacity that is due to come online in the country over the next two years.

Difficult times

Over the last five years gas-fired generation across Europe has been the casualty of falling economic demand following the 2008 recession and often slapdash energy policies that sought to respond to short-term challenges rather than provide long-term visions.

This has led to a bubble in renewable capacity that has been not only expensive to subsidise, putting a strain on public coffers, but also to shrinking margins caused by sharp falls in spot electricity prices.

On several occasions, spot prices turned into deeply negative territory as supply outstripped demand, as is the case in Germany where renewable capacity now exceeds 30% of its total installed capacity.

On the other hand, coal increased its share thanks to low international prices and government interventions to prop up domestic production, as was the case in Spain and Germany.

As a result, the impact on gas-fired capacity could not have been more obvious.

In Germany the share of gas-fired generation in the total mix dropped from 14% in 2010 to 9%. In Spain the falls were even more dramatic, plunging form 32% in 2008 to 9% in 2014. In Italy its weight dropped from 48% in 2011 to 34% in 2014 and in the UK the fall was equally spectacular from 40% in 2011 to 25% in 2013.

However, there are now indications that gas-fired generation could make a comeback, underpinned by several factors.

Spark and dark spreads

Firstly, spark spreads, a measure of profit for gas-fired plants, indicate more attractive margins.

In the UK, clean spark spreads with carbon price support (CPS) included, for plants with a non-rounded efficiency of 49.13%, have been on a steady upward trend. For example, the Winter ’16 product has seen incremental gains from an average £2.22/MWh (€2.81/MWh) when the product was first calculated in October ’14, to £6.57/MWh on 13 May.

Comparatively, clean dark spreads with CPS for UK plants with an efficiency of 35% have been on a steady decline. Winter ’16 was first calculated by ICIS at £12.42/MWh in October 2014, falling 36% to £4.42/MWh on 13 May.

The turnaround in UK clean spark and dark spreads was largely helped by falling gas prices.

Nevertheless, the knowledge that as much as 7GW of coal-fired capacity had been retired and that another 13GW would be switched off by 2025 as the UK replaces ageing capacity, has also been factored into the spark spread.

Falling gas prices have been a key factor helping to push up the profitability of spark spreads.

Until two years ago the price of pipeline gas purchased under long-term oil-indexed contracts was often prohibitively expensive. This meant some plants either had to be mothballed or cancelled entirely.

Around 14GW of gas-fired capacity was mothballed in France, Germany, Italy, Spain, Turkey and the UK, and just over 13GW of gas-fired projects were cancelled in Austria, France, Germany and Italy over the last five years.

However, as crude prices have dropped by nearly 60% since 2014, gas-prices indexed to oil have been dragged lower, making the fuel more attractive.

For example, the BAFA price, the average price of gas imported at Germany’s borders, which include oil-indexed prices, dropped by half between 2008-2015, falling from just over €30.00/MWh to €15.00/MWh.

This also fed through to hub prices where Calendar Year ’16 on the Dutch TTF hub, which acts as a reference for numerous European markets, fell from €25.48/MWh when first assessed by ICIS in January 2012, to €14.83/MWh at the end of December 2015. energyinfo@icis.com