Europe Thermal Power Market -Current Status and Major Trends

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1 Europe Thermal Market -Current Status and Major Trends Europe Thermal Market -Current Status and Major Trends 1 Table of Contents 1 Table of Contents List of Tables List of Figures 1 2 Introduction.. 3 Europe Market Overview Mix Clear Shift toward Low Carbon Emitting Sources 2 4 Europe Thermal Market Current Status and Trends Thermal Installed Capacity Trend Capacity Additions in Gas-based to Dominate Region s Fuel Mix Shutdown or Decommissioning of Coaland Oil-based in Europe Complete Phase-out of Coal-based Thermal as Back-up and Reserve Capacity Thermal to Play Key Role in Complementing Variable Renewable and Ensuring Supply Security Decreasing Gas Prices and Current Supply Situation in Europe Improving Operational Performance of Thermal Generation 9 5 Europe Thermal Market Future Outlook 10 6 Contact Us 7 Disclaimer List of Tables Table 1: Market, Europe, Renewable Energy Targets, Table 2: Thermal Market, Europe, Phase-out Target Year by Country for Coal-based List of Figures Figure 1: Market, Europe, Cumulative Installed Capacity by Fuel Type (%), Figure 2: Market, Europe, Cumulative Installed Thermal Capacity by Fuel Type (GW), Figure 3: Thermal Market, Europe, Installed Capacity and Generation Share by Fuel Type (%), Figure 4: Thermal Market, Europe, Wholesale Gas Prices ( /kwh) and Gas-based Electricity Generation (TWh), Figure 5: Thermal Market, Europe, Cumulative Installed Capacity by Fuel Type (GW),

2 Europe Thermal Market -Current Status and Major Trends 2 Introduction The European Union (EU) has embarked on a plan to reduce greenhouse gas (GHG) emissions, as part of which it has worked out time-bound strategies ranging from short-term (up to 2020) to mediumterm (up to 2030) to long-term (up to 2050). The strategy to reduce emissions hinges to a great extent on embracing renewable energy sources to power the industrial as well as residential sectors. Within the power sector, wind and solar power companies have made great strides in increasing installed capacity share in the total mix. On the other hand, thermal power plants, which up to now have been dependent on coal, which is cheaper compared to other fossil fuel sources, are faced with the challenge to change their fuel mix. Although the share of wind and solar power in the overall power mix is increasing, the fact remains that these are intermittent sources of power. Thus, thermal power will be needed to manage this intermittency and provide stability to the grid, all the more so because of the fact that many countries in Western Europe are wary of depending on nuclear power in which case thermal power remains the only viable alternative. Europe is therefore, and justifiably, going in for a balanced approach. Coal usage is definitely going to decrease, both for electricity generation as well as for district heating, while gas as well as biomass usage is going to increase in the future. However, coal usage will not decrease drastically unless carbon prices increase, which would ideally be the condition to induce the shift from coal to gas. 3 Europe Market Overview 3.1 Mix Clear Shift toward Low Carbon Emitting Sources Europe s power sector has been shifting toward lower carbon emitting sources. A look at its power generation fuel mix since 2000 shows that lower carbon emitting sources such as renewables, hydropower, and nuclear power, which constituted 42% of its cumulative installed capacity in 2000, increased to 52% in The contribution of renewables in particular increased from 2% in 2000 to 21% in In terms of annual generation, the contribution of lower carbon emitting energy sources increased from 45% to 52% during the same period with the contribution of renewables in particular increasing from 1% to 13%. Gas-based thermal power generation is effective as a back-up, but is fraught with geopolitical implications as most of the gas supply to Europe originates in Russia. An alternative may be biomass co-firing since fuel supply in this case can be sourced domestically in Europe. However, too great a dependence on biomass can engender land use change that may again have climate change implications. 2

3 Europe Thermal Market -Current Status and Major Trends The following figure shows the capacity mix of the European power market from 2000 to Figure 1: Market, Europe, Cumulative Installed Capacity by Fuel Type (%), Cumulative installed capacity by fuel type (%) Hydropower Nuclear Renewables Gas Coal Oil Source: GlobalData, Database [Accessed on: November 25, 2016] Capacity mix for coal and oil based power reduced from 34% in The table below lists GHG emission reduction and renewable targets in Europe. Table 1: Market, Europe, Renewable Energy Targets, Trial Description Source: GlobalData Targets A reduction in GHG levels against 1990 levels by 20% Renewable sources to constitute 20% of the total energy mix Energy efficiency to be improved by 20% A reduction in GHG levels against 1990 levels by 40% Renewable sources to constitute 27% of the total energy mix Energy efficiency to be improved by 27% A reduction in GHG levels against 1990 levels by 60% A reduction in GHG levels against 1990 levels by 80 95% Europe s progress toward a low carbon economy is mainly driven by renewable energy targets and policy support measures. The European region is the pioneer in providing incentives such as feed-in tariffs, capital subsidies, tax credits, and the net metering system. Europe had set various targets in order to reduce its carbon emissions and increase the share of renewable energy. 4 Europe Thermal Market Current Status and Trends 4.1 Thermal Installed Capacity Trend Capacity Additions in Gas-based to Dominate Region s Fuel Mix Cumulative installed capacity for thermal power in Europe increased from 616 Gigawatts (GW) in 2000 to 719 GW in Installed capacity from coal- and oil-based thermal power declined during , whereas installed capacity additions for gasbased power increased. It is important to note that the European power sector s coal share declined due to a larger addition in gas-based capacity rather than a drastic decrease in coal-based capacity. Coal-based capacity in Europe stood at 255 GW in 2016, as 3

4 Europe Thermal Market -Current Status and Major Trends against 276 GW in Gas-based capacity on the other hand grew from 261 GW in 2000 to 418 GW in 2016, a nearly twofold increase. Most Western European countries are promoting gas as a cleaner alternative to coal. Nuclear power is facing opposition in many countries; furthermore, nuclear units cannot be operated for meeting peak load requirements. Thus, only gas-based generation will serve the purpose of filling the demand supply gap in countries which are focusing on utilizing renewable energy sources for clean electricity generation. The following figure shows the change in the share in total thermal capacity and generation by fuel type from 2000 to Figure 2: Market, Europe, Cumulative Installed Thermal Capacity by Fuel Type (GW), Cumulative installed thermal capacity (GW) Coal Oil Gas Source: GlobalData, Database [Accessed on: November 25, 2016] Compared to 2000 or 2008, the share of gas-based generation in 2016 was lower than its share in capacity. This was due to lower carbon prices that kept the marginal cost of generation from new gasbased plants higher than older coal-based plants. A higher carbon price would cause the marginal cost 46 of coal-based generation to rise making the shift to gas easier. For instance, in the UK, the government policy of raising the carbon price floor annually has helped in this shift from coal to gas. Figure 3: Thermal Market, Europe, Installed Capacity and Generation Share by Fuel Type (%), Cumulative 42.3 installed capacity share for thermal 50.7 power by fuel type (%) Coal Oil Gas Coal Oil Gas Source: GlobalData, Database [Accessed on: November 25, 2016] 4.2 Shutdown or Decommissioning of Coal- and Oil-based in Europe Thermal power generation 50.9 share by fuel type (%) Europe, with the objective of increasing the share of renewable and reducing carbon emissions, began decommissioning of its aging coal-based power plants. Some countries such as Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, Romania, Slovenia, Spain, and the UK have been decommissioning coal-based power or have plans to decommission coal-based capacity in the future. The German government decided to shut down coal-based power plants in order to reach its ambitious emission reduction targets by The UK has set out plans for closure of coal-fired power in a phased manner by Denmark plans to reduce its coal-based capacity to less than 1,000 MW by Finland decommissioned more than 50% of its coal capacity during The 4

5 Europe Thermal Market -Current Status and Major Trends country s coal-based capacity declined from over 3.7 GW in 2000 to around 1.5 GW in It decommissioned around 900 MW of both coal- and oil-based power in 2015 alone. Similarly, France decommissioned over two-thirds of its coal capacity in the past 15 years. The country s coal capacity stood at around 2.4 GW in French energy group EDF plans to shut down its entire fleet of oilfired power plants by 2018, corresponding to a capacity of 5.2 GW. Similarly, in 2014, the Dutch government confirmed the shutdown of 2.7 GW of coal-based power plants by Complete Phase-out of Coal-based Coal-fired power plants are the biggest emitters of CO2 and account for over 30% of the carbon emissions in the world. Various climate change conferences have been discussing long-term strategies and targets have been put in place. COP21, held in November 2015, ended with 195 countries agreeing to a long-term goal of limiting the increase in global average temperature to well below 2 C above pre-industrial levels and to aim to limit the increase to 1.5 C. There was no certain timeline set regarding the phase-out of fossil fuels. The agreement though found difficulty in being ratified by the European Parliament as some members such as Poland rely heavily on coal for power generation. However, in October 2016, the parliament approved the EU s ratification of the Paris agreement. The discussions right now are on how to distribute the share of responsibility among different members toward achieving the EU s own targets for In order to limit global warming to 2 C it is essential for European countries to reduce CO2 emissions from coal-based power. Europe has a large fleet of coal-fired power. By the end of 2016, over 450 coal-based thermal power plants were in operation in Europe with a cumulative capacity of over 255 GW. Of the 40 countries which were part of the scope of this research in Europe, only seven were free from coalbased power in 2015: Albania, Cyprus, Estonia, Latvia, Lithuania, Luxembourg, and Malta. In 2015, coal-fired power plants produced 18.7% of the total CO2 emissions in EU (European Union) 29, a slight decline from 19.4% in Several countries in Europe, in order to reduce their CO2 emissions from coal-fired power, announced the complete phase-out of power generated using this fuel. Belgium became the first country in Europe in over 17 years to completely phase out coal-based thermal power. The country shut down its last operating coal-based plant, Langerlo, in March With the closure of this plant the country had ended an era of coal-based power which once contributed 27% (2014) of its generation mix. It became the eighth country overall to completely close coal-based power generation in Europe. 5

6 Europe Thermal Market -Current Status and Major Trends The table below provides a list of countries in the EU with plans for complete coal phase-out. Table 2: Thermal Market, Europe, Phaseout Target Year by Country for Coalbased Country Target year Portugal 2020 France 2023 Austria 2025 UK 2025 Finland 2030 Netherlands 2030 Germany 2050 Source: GlobalData 4.4 Thermal as Back-up and Reserve Capacity As European nations move toward low carbon emitting power generating sources, a majority of these, being renewable, generate intermittent power and require back-up. In the past five years, there has been a contraction in the reserve margins the difference between peak demand and guaranteed supply due to emission reduction programs, targets to decommission or phase out coal, and closure of nuclear power plants due to stringent safety norms. New gas-fired power plants and other conventional fuel-based power plants are not commercially attractive due to high output from renewable sources, thereby putting downward pressure on the market price. For instance, in Germany, RWE, an electricity generation and power trading company, had to mothball even its most efficient gas-fired power plant due to high renewable power production and related low market prices. Turkey, Sweden, and the UK are some of the countries in Europe where the reserve margin contracted. Reserve margins in Turkey have decreased from 39.8% in 2013 to around 22% in Similarly, margin capacity in Sweden had decreased from over 1,500 MW to around 1,000 MW in It is expected that the margin capacity in Sweden will be at the levels of 750 MW in The National Grid in the UK is enlisting the support of standby generators and large consumers to keep demand inside supply limits. Reserve margin during winter 2016 in the UK was 1.2%, the lowest since , and down from 16.8% in Large customers were paid up to 2400/MWh (Megawatt hour) to switch off during low wind period, highlighting the requirement that more flexible reserve capacity is needed as reserve margins have contracted in the recent past. Germany is planning to decommission coal-fired power projects in a planned manner to ensure that reserve capacity is maintained. The country, as part of its electricity market design Act, revealed details of lignite-based power plant reserve. The Act includes an 11-day call-up period during which reserve lignite units should be up and running in case of emergency. producers such as RWE, Mibrag, and Vattenfall will be paid a total of $1.73 billion ( 1.61 billion) for placing eight lignite-based power generating units on standby for four years before final closure. The reserve capacity is expected to cost $247.5m ( 230m) per year for the period the capacity is maintained and, according to the draft, operators will be paid a compensation based on the market price minus short-term variable generation cost. 6

7 Europe Thermal Market -Current Status and Major Trends 4.5 Thermal to Play Key Role in Complementing Variable Renewable and Ensuring Supply Security Thermal power plays a crucial part in maintaining system stability. Transmission network infrastructure is mainly at risk during sudden and unexpected loss of generation or network fault. Thermal power plants provide vital system services such as inertial response and fast frequency power recovery which stabilize transmission networks. With injection of more and more intermittent renewable power into the grid in many European countries, stability of the electricity infrastructure will remain key. The installed renewable power capacity in Europe increased from 101 GW in 2008 to 309 GW in 2016 at a CAGR of 15%. Wind and solar are the key renewable sources of power in the region. Wind power accounted for 51.9% of the cumulative renewable power capacity in Europe in 2016, while solar photovoltaic (PV) had a share of 36%. generation from solar and wind power plants is not possible around the clock. A major share of electricity from these sources is produced in the day during sunny and windy hours. On the contrary, the need for baseload power supplied through thermal, nuclear, and hydropower plants which can adjust their electricity output based on demand is not expected to decrease drastically. Initiatives such as smart grids, demand response, and storage will play a greater role to ensure balance between power demand and supply. However, such initiatives will not be sufficient to replace thermal power generation as a provider of stable electric capacity. Furthermore, an increase in renewable capacity means that the volatility of electricity demand would need to be met through sources other than wind and solar. Thermal power will play a crucial role in adapting to this requirement and bridging the gap. The relevant new capabilities for thermal power include: quick start-up and shutdowns, viability at lower generation, higher ramping rates, and more frequent changes in generation. In Germany, the lignite-based power generating units (discussed in Section 3.4 above) were given an 11-day start-up period. These plants, which are in reserve, need to be operational in 10 days, with 11 hours to reach a minimum load and another 13 hours to reach the net nominal capacity. Once the call-up period for electricity is over, the power plant can continue to operate until it exhausts all lignite in the belt conveyor system, boiler, and fuel bunkers or for a maximum period of 72 hours, whichever is earlier. Similarly, in Denmark, where there is large supply of renewable power, a lot of attention is paid to making coal-fired power plants flexible. Denmark has transformed its coal power plants which were originally designed as baseload units into most flexible power plants. The thermal plants in the country are adaptable to both increases and decreases in demand. They can steeply ramp up and ramp down power generation when a supply demand gap arises due to fluctuations in renewable power generation. Over the years, Denmark has reduced the need for must-run thermal capacity. The system operator for the transmission network in Denmark has adopted a strategy of incorporating 7

8 Europe Thermal Market -Current Status and Major Trends system stability properties into the grid when it is economically advisable. Several European countries are also increasingly promoting the use of gas-based power generation to ensure supply security. Europe is promoting the use of gas-fired power as part of its strategy to reduce the carbon footprint in the region. Gas-fired power can step up and step down in short timelines and is the best option to support variable renewable power. 4.6 Decreasing Gas Prices and Current Supply Situation in Europe Gas-based power generation is a key part of Europe s strategy to achieve lower GHG emissions. So, it is important to understand the effects of gas supply security issues as well as gas prices on gasbased generation. The EU s net imports of natural gas in 2015 are estimated at around 11.6 million Terajoules (TJ) in gross calorific value (GCV) terms. This was around 70% of its total consumption in the same year. Germany is the largest importer of natural gas both in Europe and in the world. The country accounted for around 24% of the net imports in the EU in Russia and Norway are the major natural gas suppliers to the EU. Other countries which supply natural gas include Algeria, Qatar, Nigeria, Azerbaijan, Libya, Trinidad and Tobago, and Peru. The US has emerged as a new exporter of liquefied natural gas (LNG) to Europe. It is expected that the US LNG supplies will reduce LNG prices in Europe by 25% in the next two years. from 2016 driven by the support from power sector. Figure 4 shows the sensitivity of gas-based generation to gas prices. Figure 4: Thermal Market, Europe, Wholesale Gas Prices ( /kwh) and Gasbased Electricity Generation (TWh), Wholesale gas prices ( /kwh) , , ,259 Source: GlobalData; Eurostat, 2016c ,195 1,170 1,191 1, Gas-based generation Wholesale gas prices 1,000 Gas prices continued to decrease in 2016 and hit rock-bottom. Utility companies in Europe benefited the most with declining prices for gas. In the UK, gas prices fell by 37% in just as Cheniere Energy began its LNG exports to Europe. As natural gas prices are falling, coal-fired thermal projects are being converted to natural gas for economic reasons rather than environmental reasons. Against this backdrop, many countries such as Germany, the UK, Spain, France, Poland, Belgium, and Greece are adding new gas-based thermal capacities as well as increasing generation of gasbased thermal power in the region. 1,600 1,400 1, Annual gas-based electricity generation (TWh) The fall in natural gas prices will increase its consumption in Europe by around 0.3% annually 8

9 Europe Thermal Market -Current Status and Major Trends 4.7 Improving Operational Performance of Thermal Generation In order to adapt to the changing rules of power economics, it is important for thermal power plants to improve operational efficiency, be flexible, be competitive, and provide new services. Advances in technology for thermal power will help the units run more efficiently and can substantially reduce carbon emissions and pollutants, similar to the development of combined heat and power (CHP). CHP is the most attractive option for many countries attempting to enhance the efficiency of their energy supplies. CHP plays an important role especially in areas with sufficient demand for industrial steam or district heating and cooling. Investment in CHP systems across utilities, as well as industrial sectors, is likely to lead to cost-effective efficiency gains. Biomassor biogas-fired thermal power plants can add more reliable renewable energy to the power mix. Cofiring of coal-based power plants, that is using biomass feedstock along with coal, has been found to be effective in increasing plant efficiency and reducing carbon emissions. In the UK, the Drax coalfired power plant converted a few of its six units to co-firing with biomass. The exercise is estimated to have led to a reduction of 2 million tons of CO2 per year. The conversion project at Drax also included a scheme to upgrade three of its six turbines. Involving an outlay of 700m ($951.3m), the project led to a 40% increase in efficiency of the power plant. As another instance of increasing output and performance, GE s Services has announced that it will modernize a 210 MW steam turbine of TE Plomin Plant in Croatia by July GE s retrofit will help the only coal-based active power plant in Croatia improve the plant s heat rate, increase its power output, lower its operational and maintenance costs, and extend the operating life of the turbine. After the retrofit, the plant s output will increase, and the efficiency will be improved by up to 3.6% by reducing specific heat consumption. Carbon sequestration/carbon capture and storage (CCS) technology will also be effective and can become increasingly CO2 emission-free. CCS is a proven technology and has been used in industrial processes for several decades, especially for enhanced oil and gas recovery. In the power sector, CCS technology can be deployed for both coal-fired and gas-fired plants. The process involves the separation of CO2 produced by the processing of natural gas or coal, and then the transportation and storage of this CO2. The EU recognized CCS as a key technology for the reduction of global carbon emissions and, in 2011, it mandated that all European member states institute the legal and regulatory framework required for the implementation and development of CCS technology. The EU also established the New Entrant Reserves 300 (NER300) program, through which funds were provided for flagship CCS programs. Other funds, such as the European economic stimulus spending, could provide additional funds for CCS projects. The UK and the Netherlands are the leading countries in the EU in terms of CCS research and demonstration projects. France, Italy, Romania, Poland, and Spain are some of the key countries taking an active interest in the development of CCS projects. Projects from these 9

10 Europe Thermal Market -Current Status and Major Trends countries have received funds from the NER300 program. Germany has also taken an interest in the development of CCS, although, due to the delayed implementation of regulations in the country, a number of planned CCS projects have been put on hold. In one of the earliest attempts at CCS in Europe, in the eastern German town of Spremberg, a 30 MW pilot coal-based power plant of Swedish company Vattenfall experimented with clean coal technology in Also known as the Schwarze Pumpe pilot plant, the clean coal technology used consisted of burning lignite in nitrogen-free air resulting in the generation of waste stream of carbon dioxide and water vapor, three-fourths of which is recycled to the boiler in a process known as oxyfuel. At Stadtwerke Kiel s power plant (Germany), another innovative measure has been adopted, which the company claims will lead to 70% less CO2 emissions. The existing coal-based power plant there will be replaced by a gas-based combined-cycle power plant. However, the innovation lies in the fact that the power plant will not employ a single large gas turbine (190 MW), but a series of small gas turbines, enabling the company to respond to shifts in electricity demand within minutes. This strategy will also help to overcome another challenge, that of a utility having to continue to run its generators to generate heat for public heating purposes, even when electricity demand is low. This is where the emissions will fall. The company plans to trap the heat from all its turbines (while they are running) in a giant 60 m high water tank, which can be used for public heating. Thus, it will not need to run all its generators when demand is low and still be able to address public heating needs. Such innovations in the future can go a long way toward lowering emissions from fossil fuel-based power plants that will help in increasing their market share. 5 Europe Thermal Market Future Outlook Against the backdrop of changing power market dynamics and trends discussed in the sections above, the thermal power market in Europe will continue to grow in future years. Cumulative installed capacity for thermal power will increase from GW in 2016 to GW in Capacity additions in gas-fired power will lead the capacity increase in thermal power in the region. Gas-based thermal capacity is expected to rise from 418 GW in 2016 to 517 GW in 2030, while that of coal is expected to increase from 255 GW to 270 GW during the same period. Figure 5: Thermal Market, Europe, Cumulative Installed Capacity by Fuel Type (GW), Cumulative installed thermal capacity by fuel type (GW) Coal Oil Gas Source: GlobalData, Database [Accessed on: December 8, 2016]

11 Europe Thermal Market -Current Status and Major Trends 6 Contact Us If you have any queries about this report or would like further information, please contact us: North America: Europe: Asia-Pacific: info@globaldata.com 7 Disclaimer The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions, and recommendations that GlobalData delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such GlobalData can accept no liability whatsoever for actions taken based on any information that may subsequently prove to be incorrect. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher, GlobalData. 11