Gas-fired power plants feel the price pinch from low energy prices

by Search Gate staff. Published Tue 05 May 2016 10:27, Last updated: 2016-05-05
Gas power plants under pressure in tough economic climate
Gas power plants under pressure in tough economic climate

Britain’s gas-fired power plants are beginning to feel the squeeze of low profit margins as analysis revealed the nation’s first quarter fuel mix was powered by record levels of output from wind farms.

According to the latest GB Electricity Market Summary by energy data analyst EnAppSys, wind output reached 4.6GW in the first three months of 2016 – a quarterly record – outstripping the 4.4GW posted in Q1 2014.

Meanwhile, levels of nuclear generation (7.8GW) were up almost 30% on the previous quarter, which was characterised by lower-than-expected output due in part to long-term outages at the Heysham 1 and Hartlepool plants.

The first quarter of this year also saw high levels of coal-fired generation (13.3GW), which ensured there was sufficient power to meet demand. Generally, though, demand remained relatively low and there was plenty of spare capacity in the GB power system – which in turn placed downward pressure on prices.

Throughout the quarter prices averaged around £40/MWh, a level which left some gas-fired plants running on very tight margins.

The EnAppSys study showed that coal was the dominant source of power in the first three months of the year, accounting for 33% of Britain’s fuel mix. CCGT plants provided a further 23%, nuclear plants 20% and wind farms 12%; with interconnectors (5%), biomass (4%) and other fuels (3%), including hydro and solar, making up the final 12%.

Paul Verrill, Director of EnAppSys, said: “Record levels of wind generation highlight the importance of this form of power to the overall GB power system. Inevitably there were times when wind output dipped and in these periods the gas-fired fleet benefited, seeing higher levels of generation. However, wind output was generally more consistent than in previous quarters, especially during the first two months of this year.

“Coal was once again the major contributor to the GB power mix, as it was during the first quarter of 2014. With the doubling of the carbon price support in the next financial year the coal fleet may be under greater pressure in the future, but in the first three months of this year coal prices were sufficiently low enough to allow coal plants to generate power whenever they were available.

Verrill said that although output from CCGT plants fell by 9.4% on the previous quarter, this form of generation filled the gap when wind generation dipped. He also said the steep rise in nuclear generation was a one-off occurrence rather than the start of a longer-term trend.

He continued: “The sharp rise in nuclear generation was not that surprising given the outages that occurred at the back end of last year. This led to lower-than-expected nuclear output in Q4 2014 but some of these plants have now come back on stream.

“Generally the first three months of this year were characterised by no major price peaks, which would have disappointed operators hoping for higher prices to boost income at plants running on tight margins. There were brief periods in the quarter when prices rose temporarily but the average market price of £40/MWh is likely to force some plants out of the market and discourage others from entering it.

“Across the quarter a high-efficiency CCGT plant might have had carbon and fuel costs amounting to £35-37/MWh with worse economics for less efficient CCGT plants (up to £50/MWh for plants on the margins of the market).

“At these prices even the best CCGT plants can only hope to make tight margins, with a challenge ahead for large CCGT new-build plants to demonstrate an attractive return even with capacity payments on the horizon.”

“The general drive to move thermal generation from the higher emitting coal stations to newer gas fired stations is going to need significant growth in carbon costs and static or falling gas prices.”

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