(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Feb 13 Coal could join gas in making
losses in Germany's struggling power market, as a continuing
renewable energy boom and slumping power demand force utilities
to rethink their strategy.
Wind and solar power have seen massive capacity growth
driven by priority grid access plus 20-year
Soaring renewables capacity has collided with falling power
demand to crush fossil fuel margins.
That will lead to faster closure of old conventional
capacity, especially gas and hard coal, and a halt to new fossil
fuel investment with risks for baseload back-up when renewables
All is certainly not lost for fossil fuel generation,
especially given its trump card of flexibility, but utilities
must re-consider a strategy which until recently largely
comprised optimising fossil fuel assets in traded markets.
LOW SPARK SPREADS
The clean gas spread illustrates how optimising conventional
assets does not work on its own.
The spread measures the short-run profit margin from
operating gas plants after allowing for the cost of fuel and
carbon emissions permits.
The clean gas spread is presently deep in the red, given low
power demand and flat or rising gas prices, at around minus 15
euros per megawatt hour, as calculated using wholesale market
prices for year-ahead British gas and German power. (Chart 1)
Utilities record less catastrophic levels, presumably
because they can secure gas at more favourable prices.
Germany's biggest utility E.ON distinguishes
between a "classic" and "dispatched" spark spread.
The higher, dispatched spark spread reflects the fact that
the company does not run its combined cycle gas turbine (CCGT)
plants when spreads are negative.
The lower, classic spread was also consistently positive
throughout 2012, the company reports, although both measures
fell sharply through the year. (Chart 2)
E.ON assumed positive clean spark spreads of 2 euros per
megawatt hour through 2013, in its "Capital Market Day"
presentation two weeks ago.
Meanwhile RWE reported year-ahead, clean spark
spreads in 2012 of an average minus 1.64 euros in Germany and
plus 3.44 euros in Britain, in its markets presentation last
month, "Value in uncertain times". (Chart 3)
Chart 1: link.reuters.com/nuc75t
Chart 2: (page 50) goo.gl/IOpm1
Chart 3: (page 22) goo.gl/26s6Y
Chart 4: (page 59) goo.gl/IOpm1
Chart 5: link.reuters.com/hud44t
Coal's clean dark spread has fared better because of falling
coal prices, after lower demand in the United States due to
shale gas competition and restrained growth elsewhere including
China as a result of the weak global economy.
RWE last month reported average year-ahead clean dark
spreads last year of 9.99 euros per megawatt hour in Germany and
22.14 euros in Britain.
However, a sensitivity analysis showed that theoretical
spreads could turn negative under entirely plausible scenarios
for various wholesale, year-ahead power, coal and carbon prices,
Reuters reported on Wednesday.
Utilities remain relatively upbeat, for now.
E.ON assumed a positive clean dark spread of 10 euros per
megawatt hour through 2013 as of two weeks ago. (Chart 4)
Utilities have various strategies for coping with low or
negative spreads in conventional power generation, from
optimising of existing fossil fuel assets to decommissioning,
divestment and re-investment in renewables.
Regarding existing gas assets, one example of an adaptation
strategy is to switch CCGT units into open cycle gas turbine
(OCGT) mode, as E.ON reports it has done to reduce fixed costs.
OCGT units can run at lower loads, rather than shut down for
example when wind generation ramps up, and provide potentially
lucrative grid balancing services.
CCGT plants recycle waste heat from a gas turbine in a heat
recovery steam generator, producing steam to drive the turbine,
increasing efficiency of generation.
The steam cycle lowers the operational flexibility of a CCGT
unit, however, as described by researchers at University College
Dublin in a 2010 paper, "Multi-mode Operation of Combined Cycle
Gas Turbines with Increasing Wind Penetration".
"The steam cycle contains many thick-walled components,
necessary to withstand extreme temperatures and pressures. To
avoid differential thermal expansion across these components and
the subsequent risk of cracking, these components must be heated
slowly resulting in slower start-up times and ramp rates for the
CCGT plants also have large minimum loads.
The start-up time of OCGT plants is 10-20 minutes, compared
with 30-60 minutes for CCGT, one to 10 hours for coal and two
hours to two days for nuclear, according to the Nuclear Energy
Agency. (Chart 5)
CCGT plants which incorporate a "bypass stack" can by-pass
the steam cycle and switch to an OCGT mode.
Another strategy if you cannot beat renewables is to invest
E.ON said two weeks ago it would redirect its entire
discretionary capital expenditure, excluding maintenance of
existing assets, into renewables, distributed energy and
non-European markets as of 2015.
Similarly, RWE's growth areas as outlined last month were:
central-eastern and south-eastern Europe; upstream gas and oil;
and renewables, the biggest at 60 percent of the ear-marked 6
billion euros investment from 2012-2014.
And at Vattenfall, wind power would account for
the largest share of growth investments from 2013-2017, at 56
percent of the total, the Swedish, state-owned energy group
reported in its year-end report for 2012.
Wind accounted for just 2.4 percent of its electricity
generation in the fourth quarter last year.
While investing in renewables, conventional utilities are
not so slow to point out the huge value of the flexibility of
fossil fuel assets.
On a cold, still day last February, when wind and solar
power were unavailable and power demand high, Germany had less
than 2 GW spare capacity, out of installed capacity of 150 GW,
according to RWE, whose generation portfolio is dominated by
coal and gas.
For sure, governments will have to tilt the balance back
towards conventional power to ensure backup remains available.
(Reporting by Gerard Wynn)