Power Generation

Conventional

Power generated from fossil fuels still makes up the majority of electricity supplied to European consumers, and this is likely to be the case for some time to come.  Driven by the relative capital costs, environment legislation such as the Large Combustion Plant Directive (LCPD) and Industrial Emission Directive (IED), and to an extent the EU Emissions Trading Scheme (enhanced in some member states through additional carbon taxes), there is a general trend towards replacing existing coal-fired stations with new gas-fired ones.  The growth of renewables is also placing pressure on less-efficient fossil units.

Developers and investors in gas-fired generation are facing a paradox where the mid to longer term requirement for new gas-fired generation is clear, but price signals are currently insufficient to justify new investment.

The combination of a capacity overhang related to a big recessionary fall in demand in recent years, and low coal prices have led to low spark spreads and a dramatic fall in output, especially for less efficient older gas plant.  Although spark spreads are expected to recover as demand picks up again, and plant closes under the LCPD and IED, the continuing uncertainty regarding the impact of renewables on prices and load factors is making potential investors cautious.

This conundrum has led some national governments, including in France, Germany and the UK, to propose capacity mechanisms to provide greater certainty in returns for fossil-fuelled generators.

Baringa advises sellers and buyers of CCGTs, as well as investors in new plant, on future potential earnings and market risks. Using our leading edge market and asset models, we analyse in detail the different revenue streams available to gas-fired generators in wholesale, capacity and ancillary services markets and assess the risk implications of different contracting strategies from merchant operation to tolling style arrangements. Post-commissioning or acquisition, we advise clients on operating models, performance improvement plant optimisation and risk measurement. We have also recently undertaken performance benchmarking for a major European utility.

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