Utility Week

Utility Week 28th November 2014

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UTILITY WEEK | 28Th NovEmbEr - 4Th DEcEmbEr 2014 | 23 Finance & Investment T he current power market design applied in most European countries, which remunerates con- ventional plants for the electricity they sell, is becoming increasingly inadequate. Based on the rising contribution of renewable generation, wholesale power prices, generation spreads and the capacity utilisation of conventional power plants have been under considerable pressure in recent years. This has significantly reduced the operating profitability of conventional power stations and curtailed new thermal generation build in Europe. As a result, the outlook for reserve margin adequacy post-2020 has deteriorated considerably in many European markets. Not only are new conven- tional generation plants not being built, but because of low wholesale power prices and utilisation, existing thermal stations are being closed or mothballed. Renewables do not represent stable and secure baseload generation capacity – there- fore power systems are increasingly under stress as on windless and dark days, security of supply is threatened. Based on the shortfalls of the current power market design, the UK government has decided to institute a significant change opting for the introduction of capa- city payments. In such a capacity market, domestic power plants receive payments for guaranteeing reliable supply during times of peak electricity demand in win- ter. Capacity payments essentially compensate a power plant for contributing towards security of supply. A good analogy is how a fire service is remunerated; it is not paid for the amount of fires it deals with, but simply for the fact that it is there when needed. The decision of the UK (third largest EU power mar- ket) to introduce capacity payments for domestic power plants from winter 2018/19, with the first auction taking place on 16 December 2014, marks a major development for the European utility sector. This significant change in power market design, which introduces a second major revenue stream for UK power plants next to the sale of electricity, will be studied closely by other European countries. This applies particularly to Germany (largest EU power market) and France (second largest), which are both looking at introducing capacity payments in power given their similar security of supply concerns. Peter Crampton, utility and renewable energy research analyst, Macquarie "The decision of the UK to introduce capacity payments for domestic power plants marks a major development for the European utility sector." Investor view Peter Crampton for managing waste are clearly inadequate, it says. Furthermore, it cites real difficulties in reconciling European public opinion to the benefits of nuclear new-build as well as securing funding for it. Moving on to consider the prospects for traditional generation technologies, the IEA concluded that, despite its environmental shortcomings and the high level of subsidies it receives, there is still a major role for coal in supplying power, notably in China and India. However, it argues that material pro- gress is needed in developing carbon capture and storage technology if substantial new coal-fired plant investment is to become a reality. Addressing the cost of energy generated by all these different technologies, the IEA sets out that – apart from in the US, where low shale prices have recently cut energy bills – energy costs are likely to rise. It specif- ically identified China and India as countries where substantial increases in energy bills should be expected. Finally, despite the many efforts to limit carbon emissions, global warming is, accord- ing to the IEA, still over the 2C carbon diox- ide goal. In seeking to meet this target, recent developments on long-term carbon emission reductions involving the US and China are undoubtedly positive. Eventually, it may even lead to a truly global environment commitment to bring about material – and durable – cuts in car- bon dioxide emissions at the UN climate con- ference in Paris in a year's time. Nigel Hawkins, director, Nigel Hawkins Associates Argentina 1 0.7 Brazil 2 1.4 Canada 0 6.2 Ukraine 14 2 Russia 25 9.1 Japan 44 2.8 Korea 22 6.6 China 17 32 India 5.8 4.3 S. Africa 1.9 0 Germany 13 0 France 66 1.7 UK 11 0 Kazakhstan Sri Lanka Kenya Venezuela Peru Chile Uruguay Indonesia Malaysia Philippines Vietnam Thailand Mongolia New Zealand Australia Armenia Turkey Algeria Libya Morocco Egypt Niger Sudan Nigeria Ghana Namibia Congo Uganda Senegal Source: IEA data from the World Energy Outlook 2014 © OECD/IEA 2014, IEA Publishing; modi- fied by Faversham House. Licence: http://www. iea.org/t&c/termsandconditions On windless and dark days, security of supply is threatened

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