Gas power plant operators are in the red

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21 May 2013, Gas

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For its upcoming report, "Why Investors and Operators of Gas Power Plants Face a Crisis" Datamonitor sat down with a wide range of industry professionals, academics, and consultants. There was a general view that the relative price of coal and gas is crucial in the fossil fuels' fight for market share and profitability in a contracting market. European gas prices in the summer of 2012 were more than three times the American gas price.

Gas generation is further handicapped by the relative inflexibility of the long-term oil indexed gas supply contracts that many of Europe's utilities have signed. Renewables have also increased their share in a contracting market, favored by the EU's climate policies, heavy subsidies, and priority access to the grid at peak and profitable times. Finally, the collapse in Europe's carbon price and the failure of policy makers to reform the EU Emissions Trading System has further added to the challenges that gas power stations face.

Reflecting the collapse in demand, the continued incursion of renewables, cheap coal, low carbon prices, and relatively high gas prices, gas power operators have found that their cost of production is often higher than the available wholesale price of power. Slumping power prices make natural gas at European gas prices unprofitable. It is therefore not surprising to hear the news that many French, Dutch, Spanish, Italian, and Czech gas power stations are operating in the red, with the mothballing and even closing of some plants also occurring.

The challenges facing gas power operators are not confined to the utilities sector alone. Policy makers and regulators both at national and European level are sensitive to allowing too great a loss of existing gas generation power capacity. Any significant reduction will affect Europe's policy objectives to maintain stability and security from a diverse energy mix, provide sufficient generation capacity to meet any upturn of demand, and allow the European Commission to build a truly integrated energy market.

There is debate at both national and European level taking place about what should be done, with ideas ranging from possible energy market reforms to the provision of incentives to ensure existing gas power generating capacity and to facilitate and protect the future of new gas power schemes. However, both operators and investors have grown concerned about the lack of clarity in current energy policy. It is clear that there are several proposals being actively debated, including capacity guarantee mechanisms where gas power generators are paid to keep standby fossil fuel plants online even when they are not used to providing a level playing field for fossil fuel generation. However, solutions to the unprofitability crisis faced by Europe's gas power sector are far from agreed.

Datamonitor's upcoming report "Why Investors and Operators of Gas Power Plants Face a Crisis" presents the prospects for gas power in Europe from the perspective of key industry sources. / / @DatamonitorEN

Source: MarketLine

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