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20 | 1ST - 7TH MAY 2015 | UTILITY WEEK Finance & Investment Analysis N orth Sea oil production has been on a downward trend since the 1980s, so the impact on the UK economy of the recent oil price fall has been less marked than it would have been a generation ago. Speculation remains, however, around the impact of tumbling gas prices, especially on the prospects for investment in UK com- bined cycle gas turbine (CCGT) generation. The position of gas generation in the UK has changed markedly since the privatisa- tion of electricity supply in the late 1980s and its future prospects are inextricably linked to the complex evolution of the gen- eration landscape in the years since. At privatisation, the government con- cluded that electricity generation – unlike electricity distribution – should be a compet- itive business. If capacity margins ran low, it said, the market would respond by investing heavily. It turned out rather differently. It had been hoped that major industrial companies, such as ICI, Rolls-Royce, Shell and BP, would be leading investors. While ICI was controversially taken over by Hol- land's AkzoNobel, neither Rolls-Royce nor any oil company became serious UK electric- ity generation players. Furthermore, the 12 privatised regional electricity companies, which had once been the key drivers, and investors, in independent power projects (IPPs, see box) were absorbed by larger, less focused organisations. Within a decade, the IPP momentum had ground to a virtual halt, at least outside the heavily subsidised renewables sector. Instead, most baseload generation invest- ment in recent years has been undertaken by the six integrated energy companies (four of them are overseas-owned and have heavy domestic investment programmes). Moreover, Centrica aside, the remaining five have high levels of net debt as genera- tion revenues remain under real pressure. Current plant margins are extremely low – on some measurements at little more than 2 per cent. And while subsidy-fuelled wind power investment has been undertaken in recent years, wind output contributes rela- tively little to baseload demand. This situation has persuaded the govern- ment to re-commit to nuclear new-build, which stalled aer planning approval was secured to build the UK's first Pressurised Water Reactor (PWR) at Sizewell in the 1980s. It was finally commissioned in 1995. Last year, the government offered the infa- mous – and inflation-proof – £92.50 per MW contract for difference (CfD) to EDF if it built a 3,200MW nuclear plant at Hinkley Point C. The pivotal investment decision is expected from EDF within the next few months. In the meantime, international oil prices have been plummeting, with Brent Crude falling from over $110 per barrel last sum- mer to below $60. This downward trend has major global economic implications. North Sea oil production has been on a downward trend since the 1980s, so the impact on the UK economy of the oil price fall has been less marked than it would have been a generation ago. Importantly for the UK power sector, international gas prices have also tumbled in the wake of the plung- ing oil price. But will the pronounced fall in gas prices give rise to a second dash for gas? The answer is probably no – there is no guarantee that gas prices will remain low for any lengthy period of time. They could well spike, for whatever reason, next winter. Nonetheless, gas input costs account for up to 70 per cent of total CCGT operating costs, so lower gas prices should have a mate- rial impact on the level of financial returns. The key issue is whether lower prices will be sustained for several years, and whether they are reflected in long-term gas supply contracts. Lower gas prices may theoretically make new CCGT investment more attractive, but there are many hurdles to be overcome before substantial investment takes place. Aer all, Centrica reported a 2013 loss of £133 million on its gas-fired plant, a dire fig- ure that was almost replicated in its recently announced results for 2014. Furthermore, Centrica has announced the closure of two gas-fired plants at Brigg and Killingholme. The latter was put up for sale last year, but presumably failed to reach its reserve price. Also, coal prices have fallen steeply over the past year, making UK coal-fired plant, fuelled by imported coal, very competitive. But given the sensitive carbon dioxide emission issue, it seems improbable that any major plant project in the UK will be given the go-ahead until viable carbon capture and storage (CCS) is developed. Despite the widespread support for CCS among politi- cians and officials, progress in developing the technology has been painfully slow. There has been substantial subsidy- driven investment in renewable generation, especially in the wind sector, despite increas- ing environmental opposition and the high cost of offshore wind power. Two particular projects merit comment, although both await the final investment go-ahead and confirma- tion of the requisite funding. In the Shetland Islands, SSE is leading the Viking consortium, which plans to build up to 457MW of onshore wind capacity. And off the Yorkshire coast, the first stage of the Dogger Bank project, known as Creyke Beck, has completed most of its pre-construction requirements. Up to 2,400MW of offshore wind capacity may be built at Dogger Bank. Low gas prices and CCGTs Gas prices have fallen sharply, led by the collapse in the price of oil, but does this alter the economics of gas generation, and will it mean a second dash for gas? Nigel Hawkins crunches the numbers. What happened to IPPs? The big generation story in the 1990s was the dash for gas, which fuelled the realisation of Independent Power Projects (IPPs). Quite simply, virtually every new major power plant was fuelled by cheap gas, which became an indispensable fuel for baseload capacity. Hence, Combined Cycle Gas Turbine (CCGT) plants, which offered far greater efficiency than their predecessors, competed primarily against embedded large coal-fired plants, such as Drax, and the nuclear indus- try's Advanced Gas-Cooled Reactors. For the 12 regional electricity companies, (Recs) which were privatised in 1990, genera- tion investment had two specific attractions. First, such investment, which was generally backed by a favourable long-term off-take agreement, meant less dependence on the two big generators, National Power and Powergen.