Italian CCGTs call for capacity payments as spark spreads fall

03 January 2014 11:05 Source:ICIS

Companies operating natural gas-fired plants in Italy are still waiting for policymakers to agree on payments to keep plants online for the next five years, as ICIS data shows their margins halving over the year.

According to ICIS data, the Italian front month clean spark spreads decreased by about 50% from January to December to outturn at €5.31/MWh on 31 December.

Companies like Germany’s E.ON and Italy’s Sorgenia are now said to eye selling assets or restructuring debt.

Falling power consumption and high renewable output – even as solar subsidies were scaled down – squeezed profits in the gas-fired generation sector.

Companies have already reduced load factors at gas-fired power plants over the past years and are now hoping for additional capacity payments to keep them online until a planned capacity market starts in 2018 ( see EDEM 27 November 2013 ).

A decision on top-up capacity payments is currently resting with the Italian authority for energy (AEEG), having been approved by both the senate and the chamber of deputies.

The chamber of deputies published a law – the legge stabilita – on 23 December, giving the AEEG 90 days to implement a transitory capacity payment process which would not affect final consumers.

Spark spreads’ bearish drivers

Clean spark spreads represent the financial margin between the price of electricity and the cost of buying gas and emissions allowances to generate this electricity.

With more renewable power from wind and solar-powered installations coming online and getting priority dispatch to the grid, these margins have fallen while wholesale prices become more volatile, as supply depends on weather conditions.

According to Italian energy service operator GME, Italian electricity baseload day-ahead prices lost €12.33/MWh on average between 2012 and 2013 which cut into profits for power plants.

The cost of the gas needed to fuel the plants fell less sharply and was not enough to stop the erosion of the spark spreads. PSV Day-ahead prices lost about €1.00/MWh on average between 2012 and 2013, to €28.80/MWh.

CCGTs are important in Italy as they keep the power system balanced in late afternoon. But with the renewable production volatility, CCGTs are forced to switch on and off more often, which hits their profitability. Gas-fired plants become profitable after at least three hours of production on average, according to industry body Assoelettrica.

“The problem is that there are some [new] gas-fired power plants which have not started to work or they are working at 1,200-2,000 hours a year,” said the spokesman from Assoelettrica on Thursday.

Capacity market

When a capacity market is introduced in 2018, companies will be able to auction off back-up capacity.

This will replace the current capacity payment system, where power plant operators are paid a flat rate which is not high enough to keep them in the money for the same amount of time as before the renewable boom.

The implementation of a capacity market mechanism could widen the peak hours range for production from fossil-fuelled plants, a senior trader told ICIS.

But even if CCGTs can run for more hours when the capacity market starts, it is not clear yet if this is going to have a bullish effect on spark spreads.

The source said that before the renewable energy boom in 2007, gas-fired power plants were able to make money by generating electricity during peak hours from 6:00-22:00 local time.

Power stations have now started to generate electricity at a reduced peak hour range, from 8:00-20:00pm local time, when they are not running at a loss.

The trader said the CCGTs used to work 5,000-6,000 hours out of a total of 8,760 hours during the year.

“With the introduction of the capacity market mechanism, I am expecting that they will come back to the old regime and work 14-16 hours, instead of the current 12 hours,” he said. Lucie Roux

By Lucie Roux