Coal’s Reign Ebbing in U.K. May Delay New Plants, Baringa Says

Aug 13, 2014 3:13 am ET

Aug. 13 (Bloomberg) -- Natural gas’s return as a profitable competitor for coal in U.K. power generation may cause utilities to hesitate in their choice of fuel and delay investment in new plants, according to energy consultants Baringa Partners LLP.

The profit difference between burning coal instead of gas has shrunk to the smallest since 2011, a situation that may hinder plant investment for the next three years, said Ilesh Patel, a partner at Baringa, whose clients include EON SE and Electricite de France SA. Investment in new stations has already slowed, with only one U.K. gas generator under construction since 2009, according to Bloomberg New Energy Finance.

“We expect a really tight competition between gas and coal at a margin where neither is earning super profits,” Patel said in a July 29 phone interview from London. “It won’t drive any investment behavior because the balance could flip-flop very quickly.”

The amount of spare capacity in Britain is already set to drop below 2 percent, the smallest margin in western Europe, as pollution rules force some coal plants to shut and previously unprofitable gas generators are mothballed, according to the nation’s energy regulator. Capacity is shrinking just as the U.K. economy recovers to pre-financial-crisis levels, while its dependency on energy imports is the highest in 39 years.

This year’s 40 percent plunge in U.K. next-month gas prices has driven the difference in profit between burning coal and gas for power to as little as 20 pence ($0.34) on July 11, according to data compiled by Bloomberg. That compares with a one-year average of 14.90 pounds. The spread was 2.49 pounds yesterday.

Utilization Rate

The narrowing gap has lifted electricity generation from gas over coal for the first time in three years, with gas-fueled power more than double that of coal at one point on Aug. 12, National Grid Plc data showed. The utilization rate for U.K. gas plants climbed to 33 percent in June compared with a low of 17 percent in August last year, according to Baringa.

The U.K. got about 36 percent of its power from coal-fed plants in 2013, down from 39 percent in the previous year, while gas generation was stable at 27 percent, according to the U.K. Department for Energy and Climate Change.

U.K. coal-fired power generation is set to slump 84 percent by 2023 as all but three plants burning the fuel are forecast to close under European Union environmental rules, according to National Grid. That’s in addition to the 8.2 gigawatts already shut under the EU’s Large Combustion Plant Directive, which seeks to close the most-polluting stations. One gigawatt can supply about 2 million European homes.

Since 2011, less-profitable gas has been used mainly to supply peak power, cutting generator earnings and prompting U.K. utilities to shutter 2.3 gigawatts of gas-fired generation in the past two years, according to New Energy Finance.

Investment Halt

Investment in new generating capacity has ground to a halt in the U.K., Centrica Plc, the country’s biggest energy supplier, said in March. Britain’s only new gas generator under construction is DF Energy and Alstom SA’s 800-megawatt Carrington gas plant in Manchester.

The spark spread, a measure of gas-fed power plant profitability, widened to 3.21 pounds a megawatt-hour yesterday from a loss of 2.18 pounds a year earlier, broker data show. The so-called dark spread for coal profitability has plunged 78 percent this year to 5.88 pounds a megawatt hour.

The U.K. government wants 20 gigawatts of new gas plants built by 2030. National Grid is introducing a so-called capacity mechanism to encourage power stations to stay connected and to stimulate new-build generators. The first capacity auction is scheduled for Dec. 9.

“I struggle to see a case for a large number of brand new plants unless we see the auction clearing price in the capacity market being high and spark spreads improving substantially,” Patel said.

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--With assistance from Alessandro Vitelli in London.