insight DECEMBER 2012 HENRY EDWARDES-EVANS

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1 HENRY EDWARDES-EVANS Editor, Power in Europe HALFWAY THROUGH EUROPE S LOST DECADE With Europe s economic woes constraining investment in new central power plant construction, some say a perilous situation is developing Traditional thermal that is coal, gas and nuclear power plant development in West Europe is midway through what is becoming known in utility circles as the lost decade, with talk of investment confined to speculation as to when additions might be needed. Central-west Europe is not going to need any new central plant until , according to German majors E.ON and RWE. The UK is exempted from this outlook because of looming coal and nuclear plant closures, but economic and regulatory uncertainties are restricting construction starts in the UK as much as anywhere else. As RWE s chief executive Peter Terium said in August, mounting state intervention in the energy sector, shrinking power plant margins and fierce competition in electricity and gas supply are the challenges we are facing. With German peak demand last year logged at 54.5 GW versus 77 GW of conventional power station capacity connected to the HV grid, Europe s power supermarket, as one trader refers to Germany, has a large surplus of central plant despite last year s nuclear closures. It is this near-30% capacity margin, plus renewables, plus import/ export capacity, that in great part helped continental Europe ride out February 2012 s big freeze. Given the current overcapacity it is no surprise that E.ON and RWE have put central plant development to one side, choosing to focus on renewables, cost cutting and growth markets elsewhere. Will others follow? A number of gas plant projects have come to light recently, with many sketched in for 2016/17 completion. In Germany, proponents include EnBW, Vattenfall, Stadtwerke Ulm and Trianel. For EnBW, potential projects at Stuttgart, Karlsruhe and Lubmin are dependent on clinching long-term gas supply under attractive conditions. Others are replacing ageing units that supply heat and power to local networks. The trend is towards local municipal utilities taking control of their destinies and serving local needs instead of relying on the likes of E.ON and RWE. 64

2 Meanwhile, German renewables growth continues to astonish. Green generation met 25% of gross electricity consumption in Germany for the first half of Combined renewables output increased by 20% or 11.5 TWh to 67.9 TWh in the first half of 2012 versus H Renewable energy output growth more than compensated for the TWh or 18% drop in German nuclear output to TWh for the period. The latest data from the federal network agency BNA shows 543 MW peak of solar photovoltaic capacity added in July, taking the year s additions to 4,916 MWp and Germany s total solar power capacity to 29.7 GWp. German wind capacity meanwhile had grown by over 1 GW in the first half of 2012, taking the country s total to over 30 GW. The boom in solar alone is turning established wholesale power price patterns upside-down. With over 30 GW of solar and wind capacity available for periods mid-september, the German day-ahead peak price settled below that for baseload. This was an extreme example, but midday peaks are being flattened across Europe, calling into question large investments in several pumped storage hydro projects in Switzerland and Austria. Gas plant freeze While central plant development is effectively frozen, a number of sizeable new power stations are nearing completion or have recently entered operation. These were planned and financed in more optimistic times, and face a tough initiation before capacity margins tighten, wholesale prices rise and capacity markets provide some support. Courtesy: E.ON Meanwhile there are the write-downs and impairment losses attributed to out-of-the-money gas-fired power stations across west Europe. Austria s Verbund is one utility to have been caught out, with gas-fired assets at home and in France weighing heavily on its balance sheet. In July it took a 52 million ($66 million) impairment on its just-opened Mellach combined cycle gas turbine plant, following a 110 million write-down on the project in October These losses were related to the power station s 15-year, 750 million cu m/year oil-indexed gas supply contract and low wholesale prices, it said. In France, Verbund s equity interests in two CCGT plants, Poweo Pont-sur- Sambre Production SAS and Poweo Toul Production SAS, were reduced to zero in 2011 by losses or impairment charges. Furthermore, Pont-sur-Sambre DECEMBER 2012 insight 65

3 WEST EUROPE: IN CONSTRUCTION OR PERMITTED CCGT was placed under a safeguard procedure in March 2012 in relation to its gas supply agreement with ENI. Under French law a solvent company exposed to insurmountable difficulties can act under judicial supervision to improve its economic position. Verbund has been allowed to cancel its Pont-sur- Sambre gas contract and access cheaper spot gas, significantly improving the profitability of the power plant. Meanwhile it presses on with construction at Toul (413 MW), which is scheduled to be put into operation at the end of In Italy, meanwhile, Sorgenia (CIR, Verbund) s 800 MW Aprilia CCGT went into operation in the second quarter of the year. With thermal capacity of 4,500 MW, Sorgenia s goals are complete. Unfortunately the near-term effect of this build-out has been a steep decline into loss for H due to vanishing spark spreads. Italy has had its own renewables boom focused on solar PV, which has chased CCGTs out of the midday peak market. To counter the deep recession in Italy and the difficulties in the national Status Type GW Number Approved CCGT Construction CCGT Approved Coal Construction Coal Approved Offshore Wind Construction Offshore Wind Approved Other Construction Other Other includes onshore wind where covered Source: Platts Powervision energy market, Sorgenia was renegotiating its gas contracts, planning to cut operating costs and was studying the sale of non-strategic businesses, it said June 30. Another utility with swathes of gas plant entering a moribund market is Nuon (Vattenfall) in the Netherlands. Its new Hemweg 9 power plant in Amsterdam was connected to the Dutch grid in May Diemen 34, a combined heat and power plant, came on line in September this year. And its 1.3 GW Magnum CCGT in Eemshaven is to start supplying electricity in late All this at a time of record imports of cheap hydro and lignite power into the Netherlands because of the rising cost of national gas-fired power. From March to June this year, power production from gas fell to its lowest level since 2001, the Dutch Central Statistics Bureau said August 22. Finally there are the costs and claims relating to T24 steel boilers going in to various new coal plants such as GDF Suez Wilhemshaven, Vattenfall s Moorburg and E.ON s Maasvlakte power stations. In August GDF Suez took a 90 million impairment on replacement of defective boiler parts at Wilhemshaven, with operation set back by about a year. Assailed by problems, at least one can say that the hangover of central plant new-build is reducing in size. At the start of the year, Platts Powervision data showed around 30 GW of gasand coal/lignite-fired plant in construction across West Europe. Today that figure is down to 24 GW. Approved capacity meanwhile has not 66

4 moved: 36 GW for CCGTs, and just 1.5 GW for coal. UK first to thaw? The UK could be the first market to revive for gas plant, given scheduled closures of ageing coal and nuclear units. There is the prospect of a gas strategy from the government as well as a new capacity market, seen as vital by independent generators if their projects are to have any hope of competing with those planned by the Big Six utilities. The government is due to consult on the detailed design of a capacity market in 2013, having decided to implement a market-wide mechanism based on ensuring a required volume of capacity. The market is to involve estimates of the total volume of reliable capacity required a number of years ahead, contracting for the required volume from providers through a central auction process and placing incentives on providers of capacity to ensure they are available when needed. Ministers are to decide when to run the first auction process based on future estimates of security of supply from the System Operator National Grid and possibly other technical experts, including regulator Ofgem. One developer in favor of the proposed mechanism is InterGen. It already owns and operates 2.5 GW of gas-fired plant in the UK and has consent for a further 1.8 GW of carbon capture ready gas capacity that it wants to have online around Without a capacity mechanism, however, InterGen s existing gas assets will ALL PROJECTS IN DEVELOPMENT OR COMMISSIONED/SHELVED (MW) Began operations Under Approved Applied Planned Cancelled since Jan 12 Construction since Jan 12 Austria Belgium Cyprus Denmark Finland France Germany Greece Iceland Ireland Italy Luxembourg Malta Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom Includes onshore wind where covered Source: Platts Powervision struggle to be economic and our new UK plants will in all likelihood be unable to obtain finance to support their construction, it has said. The view that existing wholesale markets can no longer support gas-fired generation is gaining traction across Europe. Strategic reserve or capacity market support is being discussed in the UK, France and Germany as renewables grow and the role of gas is relegated to that of backup. It is unlikely, however, that governments will opt for remuneration models generous enough to prompt large CCGT build. Effective models will seek lowest-cost solutions, with demand side management, market coupling and small quick response gas units DECEMBER 2012 insight 67

5 meeting most needs. CCGT build will revive only when/if demand recovers, nuclear plants go offline and generation margins genuinely tighten. The Craken awakes Slowly, expensively, offshore wind is emerging from North Sea waters to add to the oversupply. Completion of the 500 MW Greater Gabbard offshore wind farm in September cemented the UK s lead in this market. The three Slowly, expensively, offshore wind is emerging from North Sea waters to add to the oversupply. largest offshore wind farms in the world Greater Gabbard, Walney and Thanet are all in UK waters, soon to be overtaken by London Array (630 MW) and Gwynt y Mor (576 MW). Meanwhile all 88 turbines at the 317 MW Sheringham Shoal wind farm in the Greater Wash had been installed by mid-september, most delivering power. Total UK wind capacity is nearing 7 GW, with nearly 2 GW of this offshore. Industry association RenewableUK estimates output from this total fleet at TWh/year, assuming a long term capacity factor for onshore wind of 26.35% and for offshore wind of 29.65%. UK wind output reached a fresh all-time record on September 11 of 3.36 GW, reducing gas-fired power generation to its lowest ever level for a mid-afternoon weekday. At its height that day, National Grid data showed wind contributing 9% of the UK s total generation mix, while gas-fired power generation slumped to around 6.9 GW after 3:00 pm, or just over 20% of the total energy mix. Platts Powervision analysis shows that CCGT generation levels for midafternoon weekday hours have not been lower since it began compiling generation data in In Germany meanwhile the first big offshore wind projects are moving through the construction phase (Borkum West 2, Bard Offshore, Meerwind), but TenneT s well-publicized equity problems are delaying some 10 offshore grid links, putting pressure on Germany s 9.5 GW 2020 target for the technology. RWE says it has experienced massive delays to the planned 2013 startup of its 295 MW Nordsee Ost project due to TenneT s investment squeeze. The German government has moved to relieve the bottleneck by proposing a new law reducing the risk to offshore investors of delayed grid connection. This involves an offshore risk levy to be paid by households, commercial and small industrial consumers, even when a transmission system operator has been negligent in its connection obligations. Such interventions prompt sighs and raised eyebrows from traditional utility types. They rarely criticise the trajectory of European power policy, indeed their companies are scrambling to catch up with renewable energy trailblazers like Iberdrola, but they remain deeply concerned at the impact on consumers of the cost of the revolution, and convinced that a dangerous void in central plant development is opening up while European economies lay dormant. 68