Fuel for Thought – Jul 29th

29 Jul, 2011

Who is going to pay for new German gas plant ? Politicians, gas producers and the press have been quite vocal recently about the positive future for gas fired plant in Germany. But German forward spark spreads are negative and remain under threat from firmer gas prices, high levels of renewable output and cheap imports. The value of gas flexibility is likely to increase with a tightening capacity margin and increase in the level of intermittent generation, but it is tough for an investor to build a business case around a low load factor CCGT plant. Unless there is a substantial shift in the relative cost of gas vs. coal or policy intervention to support gas, it is hard to see how large volumes of new gas plant will be built.

A new LNG route to Europe: The opening of the GATE LNG terminal in Rotterdam provides a new route for gas into the European hubs. But the terminal is likely to have a limited impact on forward market dynamics given the level of price convergence between NBP and TTF. GATE is also unlikely to see a high utilisation rate in the current environment. A steep Asian LNG premium currently favours a flow of LNG from the Middle East to Asia and UK NBP offers superior market liquidity to TTF.

Investor reaction to Electricity Market Reform: The reaction of renewable investors to the recent UK policy announcement on market reform does not bode well for the UK power market. Investors face a lack of clarity as to the level of support they will receive under the new FIT/CfD support mechanism. They also face a review of the existing Renewable Obligation before the new FIT/CfD scheme is implemented. But if you think renewable investors have a tough road ahead spare a thought for investors in thermal plant who will need to rely on an increasingly distorted market price signal and an as yet undefined capacity mechanism.

A new generation of flexible CHP: There is a lot to learn from the Nordic countries when it comes to distributed CHP generation and district heating. CHP can drive substantial energy efficiency improvements and utilises a reliable conventional technology which can run on multiple fuel sources including renewable fuels such as waste and biomass. In addition new CHP plant can provide much needed system flexibility to balance intermittency from wind and solar output. In other European countries distributed CHP technology does not receive the policy support its potential deserves.

Picture of the week:

A conceptual impression of the ‘Wind Dam’ intended to generate electricity in Lake Lagoda Russia. The concept is the brainchild of London based architect Laurie Chetwood who says that a giant sail could be used to generate up to 120MW of power. There have been some sceptical responses from engineers and a limited analysis of project economics but credit must go to Mr Chetwood for his imagination.