Spanish gas: outlook upbeat [NGW Magazine]
Gas-fired power generation in Spain plunged by 18% year-on-year in 2020 to 69 TWh, according to data accompanying a recent report developed jointly by Ember and Agora Energiewende. Despite this decline, there are reasons to be optimistic about the outlook for gas demand in Spain, both in the short and medium term.
2020 was a very volatile year in energy and it is worth noting that coal-fired generation in Spain declined even more than gas. It almost halved year-on-year to just 6 TWh. Coal – or imported hard coal which is used in Spain – had a share of just 2% in 2020 while gas had a share of 26%.
It is also worth noting that 2019 was an exceptional year for gas-fired power generation in Spain; electricity generated by gas increased by 45% year-on-year to 84 TWh owing to robust prices for European Union (EU) carbon allowances under the EU’s Emissions Trading Scheme (ETS) and relatively cheap gas versus coal.
EU carbon prices have begun the year on a strong note, trading in a range of €30-35/metric ton (mt), which is doing little to help the dire economics of Spain’s coal plants. Spain closed seven of its 15 coal plants in June last year and could close most of the remaining plants by 2022. Portugal might also close its last two coal plants by next year.
Officially, the Spanish government targets a full coal phase out by 2030 the latest – with 7 GW gradually going offline between now and then – and a phase-out of nuclear power by 2035 with almost 60% of the total capacity – which is around 7 GW – retiring by 2030.
The government ostensibly wants the country’s fleet of CCGTs to stay online. They total 26 GW of installed capacity, and many of these plants were built in the first decade of the 2000s. However, the country’s 10-year energy and climate plan submitted to the EC shows that a number of gas-fired combined heat and power plants are expected to retire. To this end, plant operators including Naturgy have called for a renewal plan in order to keep the 5 GW fleet of cogeneration facilities on the grid. Cogeneration plants provide over 20% of thermal energy consumed by industrial consumers in Spain.
Capacity market under consideration
However, CCGTs could also come under pressure to retire if the rapid expansion of renewables continues to put downward pressure on wholesale power prices. To this end, the Spanish government is considering introducing capacity payments through auctions in a bid to avoid plant closures. Such capacity markets are already up and running in the UK, France and Poland. The Spanish ministry for the environment, Miteco, launched a public consultation on capacity markets last autumn. If implemented – and approved by the European Commission – plant operators could be able to bid for contracts that would provide a fixed revenue stream, possibly for up to 15 years as seen in other countries.
There are nevertheless reasons to be optimistic about gas demand also in the short term. Total gas consumption in Spain grew by over 3% in December compared with the same month last year, according to the gas transmission system operator, Enagas. The increase was led by cold weather and a recovery in industrial demand, the latter signalling that the economy is beginning to emerge from the worst effects of Covid-19. Conventional demand – which includes households, enterprises and industry and represents around three quarters of the total – is around 94% compared with pre-pandemic figures, according to Enagas.
Unsurprisingly, Spanish utilities’ earnings performance in the retail segment of gas supply to commercial enterprises took a beating in 2020. But demand in this sector should recover in line with GDP growth, according to research by BBVA as Spain’s economy gets back on track.
And that appears to mirror what Italian Eni seems to be thinking. Its retail arm had entered the Iberian retail market for gas and power through its acquisition of regional supplier Aldro Energía for an undisclosed sum. Aldro Energía, based in Torrelavega, in the northern Spanish region of Cantabria, provides energy to 250,000 customers mainly in Spain and Portugal, focusing on small and medium-sized enterprises segment. Eni is already active in the Spanish midstream and wholesale market with its 50% co-ownership of Union Fenosa Gas, together with Naturgy. The company sold around 3bn m³ in 2019, mainly to wholesale customers, industrials and power plants.
LNG to play key role
On the supply side, Spain has plenty of options as it boasts six LNG terminals and two pipelines – Maghreb and Medgaz pipelines – from Algeria. In the third quarter of 2020, Spain was the biggest LNG importer in the EU with 6.2bn m³, ahead of France (3.5bn m³) and Italy (3.1bn m³), according to a report published by the EC. Spain’s LNG imports were still 16% lower than the same quarter the previous year. Spain’s total net imports in the quarter was 9bn m³. Portugal imported 1.5bn m³ of LNG in the quarter, down 15%. Spain, which is virtually cut off from European pipeline gas markets, received cargoes from seven different suppliers in the quarter, among them Nigeria, US, Trinidad & Tobago and Algeria.
In September 2020 the import price in Spain for piped gas via the Medgaz pipeline fell to €15/MWh, the lowest since October 2016, reflecting lower crude prices albeit with a time lag, according to the EC. That was around €3/MWh higher than the Spanish LNG import price, but the premium was down from €15/MWh measured in Q2 2020. Meanwhile, the import price for Algerian piped gas via the TransMed pipeline was closer to €10/MWh in the month, reflecting a larger share of hub pricing compared with oil indexed import contracts.
Nevertheless, power generation from wind and solar will play an increasing role in Spain in the years to come with CCGTs probably filling the role as the price-setting technology in the wholesale market.
Wind and solar combined had a 29% market share in the Spanish power generation mix in 2020, according to the report by Ember and Agora Energiewende, up from 26% the year before and 23% in 2018. At certain times, renewables in Spain – which includes hydro power – have accounted for over 80% of the mix, requiring huge flexibility from the CCGTs. Spain targets over 70% of electricity to be produced by renewables by 2030. But on cold days and days with little wind, CCGTs will ramp up to fill in the supply gaps, especially when reservoir levels are also low.
As for Portugal, gas had a 18% share in the power generation mix in 2020, down from 27% the year before. The share of coal fell from 12% in 2019 to 6 % in 2020. The country is aiming for at least 80% renewables in its electricity mix by 2030, but with the absence of nuclear and soon also coal it will rely on gas to keep the lights switched on in the coming years.