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    Power Generation: Out of Gas

Summary

In many European countries even the most efficient power generation station is going to lose money, according to Dan Harris, Principal at The Brattle Group, who says this is leading to the closure of existing plants, and a general reluctance to invest in new gas-fired power stations.

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Power Generation: Out of Gas

“We have a lot of gas around, it’s relatively cheap, so it would seem like a happy time for gas fired power generation,” said Dan Harris, Principal at The Brattle Group, who spoke at the Unconventional Gas & Oil Summit in Warsaw, Poland.

But according to Mr. Harris, that was not actually the case at the moment.

“Any forecast of demand for gas will depend critically on what happens in the power sector,” he explained, “how much gas we think the power generation is going to use, especially in Europe.”

He noted that there was much variation in the gas scenarios about how many gas-fired power stations would be built. What, then, was the link between unconventional gas prices and demand for gas, especially for the power sector?

One question Mr. Harris posed was: “Can US LNG serve Europe? “In many ways it is already doing that.”

He cited a forecast from the EIA showing that this year the US was importing about 30 bcm less; this had had a big effect on markets and a lot of that had gone to Europe and Asia, according to him.

“I think we all know about the decoupling of gas and oil prices, for a number of reasons but mainly due to the current surplus of gas that we see in the market. We also see a decoupling of EU and US prices – for a long time, these prices were linked. With the introduction of large volumes of shale gas, we see those prices entirely decoupling,” he explained, showing that Asian prices were at the top of his graph.

His slide showed the “spark spreads” – essentially the operating profit per megawatt hour for power stations in various EU markets. He said, “So this is really the money needed to repay your capital investment in the power plant. You need to be in this range to get your money back on a power station.”

A red line showed the most efficient power stations, a blue one the first generation of combined cycle gas turbine (CCGT) plants. “Most power stations are somewhere in the middle.”

He said that it was only in the UK that one could justify investments in new CCGTs.

“In Germany even the most efficient power generation station is going to lose money – so it’s not even covering its operating costs, which is a remarkable state of affairs. It’s a similar situation in Belgium, and in the Netherlands, where you’re just about breaking even, but nowhere near where you’d need to be to get your money back.”

He reported that this had led to the closure of existing plants, and a general reluctance to invest in new gas-fired power stations. “There’s a general sense that coal is really the way forward, at least in the short term,” commented Harris.

He showed that renewables growth had pushed new CCGTs to the margin, and that the economic crisis had also shifted things.

“Could unconventional gas help?” Harris asked. “What would it take to reverse the situation? Roughly speaking, we would need a gas price of about $7.5/MMBtu to be

competitive with the least efficient coal plants, and about $5/MMBtu to displace a modern coal-fired plant.

“So what this really means is, if unconventional gas could push prices down in the EU to the sort of levels that we’re seeing in the US, we’d see the coal and CCGTs swapping places in that supply curve,” he explained.

If the price of gas were to decrease 20-45%, according to him, EU gas supplies would need to increase by 10-25%, which he contended was feasible if upside EU shale potential was realized.

Harris explained: “The key thing is that with the power sector, the demand curve isn’t linear. You get to a certain point and there will be a significant increase in demand as we swap coal for gas.”

Low carbon prices had benefited coal plants, and hurt CCGTs, he said. Furthermore, there were initiatives to try and support the carbon price, a gradual recovery in electricity demand, and coal plant retirements.

“There are some initiatives to try and support the carbon price, because there is a recognition that the ETS scheme is failing in its current form. To be honest, I think it’s unlikely that those measures are going to get us to EUR 50 per ton in the near future,” said Mr. Harris, who said he believed a recovery in natural gas demand would happen gradually as the Eurozone recovered, but that would not have the same dramatic effect on demand as a swap in favor of natural gas.

He offered a word about renewable energy subsidies: “I think gas could replace a lot of coal if gas price got to the right level. I think the question is if we did have it at price it is in the US, how realistic is it to expect existing renewables subsidies to continue, especially against the backdrop of the euro crisis, continuing to compete with China and India.

“The opportunity cost of these policies will increase if people see a second-best but cheaper policy available, which is to shift to natural gas. I think that would be good news for the gas industry, could be disastrous for climate policy, but it’s my view that I’m a bit gloomy that these policies can be continued in the face of very low gas prices.”

He concluded that while things were a bit gloomy for the power generation sector at the moment, gas demand was not a smooth function. “There’s a tipping point and increases of supply from shale gas could get us to that tipping point. Lower prices could create a surge in demand from gas-fired power, which I think would also have negative consequences for renewable energy and that would create more demand for natural gas.”