ICIS Long-Term Power: Greek market reform proposal outlines lignite phase-out and capacity market from 2024

Author: Roy Manuell

2021/08/23

This story has originally been published for ICIS Long-Term Power Analytics subscribers on 12 August.

Our ICIS Long-Term Power Analytics customers have access to extensive modelling of different options and proposals. Our long-term price forecast now extends out to 2050.  If you have not yet subscribed to our products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).

Proposed Greek market reform plans outline a move to a capacity market in 2024 as well as a possible early phase-out of lignite capacity in the same year with the final remaining plant converted to a 1GW CCGT.

While many details are yet to be confirmed, we expect that a capacity market would significantly boost the prospects that a 3.3GW pipeline of proposed gas plants will obtain a grid connection - four plants are currently waiting to make an investment decision - as well as existing assets continue to operate.

Given the expected market tightness in Greece following the lignite phase-out in the early-to-mid 2020s and prior to strong renewable growth, the market reform proposals heavily point to an emphasis on gas to secure Greek supply in this period.

The market reform plan - key points

  • Greece plans to introduce a capacity remuneration mechanism (CRM) from the end of 2023 to incentivise investments in new gas-fired capacity and storage
    • In the interim, the country is planning to invite lignite plants to be part of a strategic reserve between 2021-2023
  • Utility PPC may fast track the closure of the new 660MW Ptolemaida V lignite plant due online in 2023 with a possible conversion to a 1GW CCGT by 2025
    • According to previous plans the under-construction lignite plant will close in 2028 after just five years of operation
    • Under the market reform plans, Greece would phase out lignite four years early
  • More broadly, PPC has asked to close lignite capacity prematurely due to significantly weaker economic conditions for generation
    • The threat of losing so much baseload capacity even earlier has prompted the strategic reserve proposal to ensure security of supply pre-2023
    • All currently installed lignite capacity is due to close by 2023 under current PPC proposed plans outlined earlier this year
  • There is currently only one confirmed private gas-fired project - the 825MW CCGT at by Mytilineos Group at Agios Nikolaos - which is expected to start commercial operation at the at the start of 2023
    • Four other CCGT projects totalling 3.3GW are relatively far down the permit and licensing process but none of them have reached firm investment decision
  • Some small hydro expansion is also planned with an additional 29MW in 2025 and 160MW in 2027
  • The proposals also outlined suggested reforms to the structure of the futures, day-ahead and intra-day markets to boost liquidity and competition, as well as a restructuring to accommodate for both the CRM and an expected increase in PPAs
    • These included lifting of the 20% cap on physical contracts
    • A revision of the balancing market in relation to the energy-only market
    • The launch of regional intra-day auctions
  • Another key feature of the reform plans was the participation of Demand Side Response (DSR) and storage systems in the wholesale market as well as incentivising their participation in a future CRM
    • This includes their introduction to the balancing market from 2022
  • Various interconnectors were confirmed including one external with Bulgaria from 2023 and many internal to connect the many Greek islands
  • We will wait for a conformation of these plans prior to a major adjustment to any of our assumptions
    • That said, we will make some amendments to our gas capacity and power plant database at the end of September based on some new details in the proposals and recent clarity from investor releases

Analysis

Lignite phase-out

  • State utility PPC had planned to start closing existing lignite plants from 2021 with all currently-installed assets to leave the grid by the end of 2023
    • This has been driven by a steady deterioration in the profitability of lignite-fired generation due to bullish carbon prices, as well as easing gas markets in 2019 and 2020, that has led to a continental fuel switch to gas
    • In 2014, lignite plants covered 50% of Greek generation. This share has shrunk to 11% in 2020 and is expected to drop to 8% in 2021 due to extremely high carbon costs pushing lignite out of the merit order, according to data by grid operator IPTO

Our Base Case forecasts anticipate a sharp reduction from 11% in 2021 to less than 2% in 2024 due to both capacity closures and bullish carbon price expectations

  • Modelling commissioned for the market reform proposal demonstrated the heavy losses inflicted on lignite generation in the period November 2020 to April 2021 - (see Table 12 in the proposal document)
      • At the same time, the Greek TSO IPTO has stated that Greece will face a significant capacity shortfall if lignite plants were to retire before the new plants are built
      • This is the reasoning for transferring outgoing lignite capacity to a reserve - and a similar process has been the case in Germany over the past few years
      • In the German case this translates into an annual payment per MW as well as prices per kWh generated on top of this
      • Transferring loss-making assets into a reserve can be costly but also reflects the gravity of the perceived low security of supply

  • We applied de-rating factors to our current Base Case Greek capacity assumptions based on those used in the UK capacity market to illustrate the shortfall relative to 2021 levels
    • Overall, due to hydropower and gas expansion and most lignite units closing in 2023 and 2024, Greece sees an increase in de-rated capacity in 2022 and therefore its supply is not as tight as anticipated
    • However, the calculations demonstrate that in the 2024 to 2026 period in particular, supply stands to be significantly tighter than in 2021
    • We do not currently assume that all the new CCGT plants are brought online

  • One form of flexibility that we see Greece utilising at present, however, is from Bulgaria via imports as the new cable between the two countries comes online in 2023 with imports jumping in particular in 2025 and 2026
    • Overall, the high level of imports between 2024 and 2030 underlines Greek supply tightness in the period following the lignite closures

Capacity market

  • As mentioned above, while the weakness of lignite profitability has driven the desire to retire assets but then create a reserve to ensure security of supply, the weakness of gas-fired profitability has equally underlined the drive to opt for a capacity market thereafter
  • This has been a trend seen across Europe with France, Italy, Ireland and Spain adopting a move to a CRM with many following an earlier UK model
    • In most cases, this has been to ensure that existing CCGTs are incentivised to remain in operation as markets move from coal to gas in the 2020s with some looking for gas capacity expansion on top of this as an option
    • Another benefit is that a CRM also offers a potential additional revenue stream for newer emerging technologies such as batteries as is suggested in the Greek reform proposal
  • In the case of Greece, as suggested by the draft, gas-fired capacity made a loss on a MWh basis in the period November 2020 to April 2021 taking all total costs into account including CAPEX
    • Looking at our own capture price forecasts in relation to the draft’s stated cost per MWh, we do not envisage gas capture prices in Greece reaching anywhere near the level required to meet all costs over the next decade
    • The cost per MWh stated in the draft that only includes OPEX and fuel costs also remains very close to, or at parity with, our capture price forecast
    • One caveat to add to this is that the draft’s profitability modelling only provided data over a period that saw substantial fluctuations in gas and carbon prices and are not a truly fair comparison to our forecasts
    • The results nevertheless calls into question the profitability over the next decade of both a new and existing CCGT in Greece without a capacity market in place to provide additional support

Gas expansion

  • The move to fully replace lignite with gas via a CRM incentive therefore underlines the Greek ambition to replace coal with gas on a relatively fast timeline given its previous reliance on lignite
    • Of the future CCGT projects mentioned in the proposals that are additional to the aforementioned 825MW Mytilineos asset - four CCGTs totalling 3.3GW - all are above 650MW and many have now had licences approved but are waiting to make a final investment decision
    • Furthermore, several of the planned plants have also successfully applied to increase their prospective capacities to above 800MW from around 600MW
    • This suggests the increasing momentum in Greece behind CCGT capacity growth
    • Assuming the proposals are confirmed and a CRM structure is decided upon, it is likely that the investment decision to build these future CCGT will be fast-tracked and Greece can therefore expect strong gas capacity expansion in the mid-2020s
    • This is the period when we expect de-rated supply to be at its tightest

Next steps

  • The new capacity adequacy report by the Greek TSO, which is close to completion, will be submitted and then the European Commission will issue an assessment of the Market Reform Plan
  • The Greek Energy Regulator RAE stated that it was optimistic of broad EU acceptance for the proposal describing it as “comprehensive”

Market impact

  • Bearish in the event of more than 4GW gas capacity expansion in the 2023-2025 period plus the proposed conversion of the new lignite plant in 2025
    • This will ease Greek supply tightness and import reliance in the 2020s
  • We will produce some modelling over the coming weeks to measure the impact of a potential 2024 lignite phase-out and the subsequent full gas build