Utility Week

UTILITY Week 31st October 2014

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Page 27 of 31

28 | 31st OctOber - 6th NOvember 2014 | UtILItY WeeK Markets & Trading National Grid's winter outlook report forecast the market- based economics of relative fuel costs and generating efficien- cies, shown in the graph, based on the current price of gas and power for delivery this winter. The modelling also includes the cost for carbon through the EU carbon market and the UK's carbon tax. National Grid said the rising price of gas through the winter was in line with stakeholders' expectations, with 70 per cent of respondents to its survey anticipating an upward trend in prices. This week Market prices to boost coal generation National Grid says coal will be favoured over gas as preferred source of fuel for power generation Forward energy prices for this winter show that coal is expected to be favoured over gas as the preferred source of fuel for power generation, according to National Grid. Aer a summer of dominant gas-fired power generation within the UK's generation mix, National Grid said in its winter outlook report that the rising cost of gas and falling coal prices mean that coal-fired power will reclaim its posi- tion as the UK's most profitable generation type. Gas became profitable relative to coal for the first time in years over the summer as a typical summer lull in gas prices was given further weight by a glut of storage stocks aer an unusually mild winter, sending wholesale prices to multi-year lows. National Grid said that although coal prices fell by 8 per cent for the period October 2013 to September 2014, gas prices plummeted by 20 per cent – causing many generators to opt for cheaper gas-fired power within their portfolios. "In addition there were some outages to coal and nuclear power stations through the summer months, which may have influenced the increase in the gas used for power generation," National Grid said. But as gas prices recover with support from colder weather and stronger demand for gas heating, the trend is set to reverse. "For gas and coal to be equitable, the gas price for winter 2014/15 needs to fall by approximately 20p/therm [from the current forward prices] to around 40p/th, alternatively there needs to be a further increase in the coal price by about $50/tonne," it added. JA eLectrIcItY Davey reduces first capacity auction The UK's capacity market has been scaled back by 2.2GW less than two months before the first auction, to ensure "value for money" for consumers. Energy secretary Ed Davey told auction facilitator National Grid of the 4 per cent cut in a letter dated 13 October and pub- lished on Monday, confirming a new target capacity for the auc- tion of 48.6GW to be delivered in four years' time. "I would like to confirm that I have adjusted each of the demand curve parameters by 2,200MW. This means that the first four-year ahead auction to be held this year for delivery in 2018/19 the target capacity is now 48,600MW," Davey said in the letter to National Grid. Davey said the shi was in line with the recommendation made by the transmission sys- tem operator in a report sent to the energy minister on 6 October. "To ensure value for money for the consumer, we have reduced the amount of volume being procured in the auction to reflect this [report]," a statement from the Department of Energy and Climate Change (Decc) said. "This change means we keep the lights on at the best value for money for bill payers," a Decc spokesperson added. A National Grid spokeswoman declined to comment on the report findings, saying policy decisions are made by government alone. Gas UK to rely on LNG if Russia cuts supplies The UK will rely on deliveries of liquefied natural gas (LNG) this winter to meet demand in the event of Russian gas supply cuts to Europe, said National Grid. In its winter outlook report, the grid operator said the UK's gas supply is "well in excess" of normal demand conditions, but if Russian deliveries to Europe were to be constrained by ten- sions with neighbouring Ukraine, more LNG would be needed. Stress testing results show that in average winter conditions, UK gas demand under both low and high levels of disruption can be met as normal, with much of the replacement gas coming from LNG imports. But these would need to more than double from 50 million cubic metres (mcm) per day to 120mcm/day if Russian gas was forced to flow at lower levels through alternative routes due to political tensions with key gas-transit state Ukraine. Securing LNG cargoes on the global market during peak winter demand periods would greatly increase wholesale market costs as the UK would need to offer a price at a premium to Asian or South American markets to divert shipments from those regions. Top of the heap: coal to regain its position The economics of gas generaTion Gas (p/th) 120 110 100 90 80 70 60 50 40 30 Nov-Mar 15 Coal ($/tonne) Carbon (€/tonne): 18.1 Prices as of 01 10 14 Gas burn favoured October Coal/gas burn favoured Coal burn favoured 50 70 90 110 130 150 Gas favoured Uncertain Coal favoured Price indication Gas range (40-55%)

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