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CCGTs On Death Row

December 1, 2020

By Paul Homewood

 

Timera have a fairly technical piece on the viability of CCGT plants in the UK:

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UK CCGT asset owners have had a tough few years, with the impact of falling wholesale margins compounded by low capacity prices. However CCGT value drivers have started to turn around in 2020, with a recovery in forward clean spark spreads and a sharp rise in capacity prices.

There is a growing queue of UK CCGTs flagged for sale in 2021. At the front of the queue are the Calon assets (Severn, Sutton Bridge & Baglan Bay) and EDF’s West Burton B, but several other plants are likely to follow. Some of these CCGTs are key flexibility providers and have at least 10-15 years of remaining economic lifetime. Others are on death row.

Diamonds or dogs, there is a notable absence of interested buyers. That suggests CCGTs may sell at record low prices and a small fraction of new build cost. But are low prices enough to build a high return contrarian investment case?

In this article, we examine the outlook for the UK’s existing CCGT fleet and outline why, at the right price, UK CCGTs can deliver significant value.

Full story here.

 

The article covers the problems we are all familiar with – competition from subsidised renewables, intermittent operation, rising carbon prices and the inevitable decline in market share.

However, as Timera also point out, we will still need significant volumes of gas generation well into the 2030s:

Despite the barriers to new build CCGTs, gas generation will be needed well into the 2030s, providing significant volumes of energy and flexibility to the UK grid. Storage and peaking assets will provide increasing balancing flexibility across the 2020s, but CCGTs will dominate the UK’s response to more sustained periods of low renewable output and higher winter demand.

But this is the key section:

The other key factor is acquisition price.  This is illustrated e.g. by Centrica’s successful purchase of cheap CCGTs during the post Enron fallout in the early 2000s.

Over the past 5 years, UK CCGTs have been transacting in a 100 to 200 £/kW price range, with more recent transactions occurring towards the bottom end of the range. Rising decarbonisation risks and declining interest in CCGT sales processes, may see the next wave of CCGT transactions fall into the £50-100/kW range. This compares to CCGT new build costs in the 450-550 £/kW range.

Asset prices at these levels open up significant value opportunities. It is possible to build sensible base case scenarios with payback periods as short as 3 years. Beyond that an investor owns substantial optionality and value upside.

 

Just absorb that. The economic case of CCGT operation is so poor that existing plants are only worth £50-100/KW in the asset sale market.

In contrast, new builds cost £450-550/KW. Quite clearly there is little prospect of any investor financing a new plant, unless the returns from the Capacity Market auction are much greater than present.

Yet, as Timera also point out, many existing CCGTs are already on death row, and are unlikely to survive into the 2030s.

None of this has anything to do with the efficiency of CCGTs. It is a situation entirely created by public policy, which has interfered with the normal operation of a well established energy market.

25 Comments
  1. GeoffB permalink
    December 1, 2020 10:28 am

    Supply and Demand, the basic law of economics, works really well, an equilibrium price will result, EXCEPT when subsidies and price caps are introduced, the market gets distorted and does not reach an equilibrium, that is what we have in electricity supply.

  2. jack broughton permalink
    December 1, 2020 10:29 am

    The article is more about the economics of operating / owning CCGTs. However, there is a real technical issue with the existing stock of CCGTs: the operating mode has greatly shortened their economic lives. CCGTs were designed for cycling operation, but the cycling envisaged longer periods on-line rather than sporadic star-stops. They are showing many signs of fatigue (that is metallurgical cyclical fatigue). Their remaining life is very compromised.

    Replacement needs to be carefully considered. The CCGT needs a sensible operating period of several hours to approach its design efficiency – the steam plant has to heat-up and takes several hours to reach design point.

    For low operating periods aero-derived gas turbines would be far better. They are far more efficient in open cycle mode and can be used in Combined Cycle mode. Even better, these are now the only large gas turbines made in the UK, so could create UK work rather than providing German, French and American work – as most renewables projects do.

    • Ray Sanders permalink
      December 2, 2020 12:18 pm

      During the 1984 miner’s strike I was working as a subbie at Littlebrook D. The oil fired plant was being run in “destruction” mode with the Rolls Royce Olympus OCGTs (variants of Concorde engines) running almost continuously as well. The noise was epic!

  3. December 1, 2020 11:15 am

    This is the result of stupid politicians combining energy and climate change into one department and letting climate bureaucrats instead of power engineers make the decisions.

    • Ariane permalink
      December 1, 2020 5:07 pm

      It has always been about energy control, just disguised as a save the planet issue.

  4. JimW permalink
    December 1, 2020 11:54 am

    Its been the economics of the mad house since before 2000. Since Blair and the departure of Littlechild from OFFER ( as was). Although it was a battle against EU directives on emissions from the early 90s and of course the demise of coal before that.
    It makes you nostalgic about the Bulk Supply Tariff and LRMC/SRMC pricing.

  5. Dan permalink
    December 1, 2020 11:59 am

    It really is a crazy situation when newish units with expected lifetimes of another 30-50 years, and black start capabilities, are being threatened by intermittent supplies who have a far shorter lifetime.

  6. John Peter permalink
    December 1, 2020 1:10 pm

    Dan & Thinking Scientist seem to be hitting the nail head on. If the country cannot produce a ‘black start’ what then as on current developments such an event will eventually occur. Can you section off the grid and regionally start up?

    • Ray Sanders permalink
      December 2, 2020 11:49 am

      “Can you section off the grid and regionally start up?” yes that is exactly how it is done. In theory you could restart the grid with just one black start unit but it would be a slow process.
      (Dinorwig is restricted to only using 50% of its storage capacity specifically so that in extreme it could restart a totally collapsed grid.)
      You start one area up as an “island” and then use that to start up (in synchronicity) adjoining areas. In reality several separate islands are started up and then synchronised to each other.
      This is the latest bidding details to supply this service.
      https://www.nationalgrideso.com/black-start#:~:text=During%20a%20black%20start%20event,a%20stable%20'power%20island‘.

  7. Gamecock permalink
    December 1, 2020 2:14 pm

    You keep using the term “black start,” but I don’t think you know what it means.

    • dave permalink
      December 1, 2020 7:51 pm

      “…”black start”…what it means…[?]”

      It means starting from the situation:

      “I’m f***ed, you’re f***ed, we’re all f***ed!!!”

  8. Thjomas Carr permalink
    December 1, 2020 5:25 pm

    See XC Weather for wind forecast for the next week or so and the cloud cover predictions. Thank goodness for gas which is supplying 51% power for the Grid ( using about 45GW) as I type this. Even coal has come to the rescue of the party.

  9. AZ1971 permalink
    December 1, 2020 6:56 pm

    Let the UK freeze. Let it swelter in summer when the grid fails to supply sufficient demand. At some point a slap in the face to these green activists is what’s required to bring them to their senses.

    When you’re sitting on boundless energy and instead actively choose to opt for insufficient and intermittent sources of “fuel” to save the planet from us humans, you deserve to get slapped down hard for the magnitude of such self-righteous hubris.

  10. December 1, 2020 7:21 pm

    Germany’s Irsching gas power station is forced to stay open despite making heavy losses.

    Due to the growth of Renewable energy in Germany which often covers daytime peak demand with solar power, the owners claim that they lose several million € a year.
    https://en.wikipedia.org/wiki/Irsching_Power_Station

    • Graeme No.3 permalink
      December 1, 2020 8:19 pm

      My memory is that 2 quite new (2 years old or less) CCGT plants in Germany were shut down and dismantled for export to other countries (Turkey was one) about 2 years ago.

      Speaking from South Australia I suggest that the future for the UK is diesel! Dual fuel types (start up on diesel until hot and switch to natural gas). More rugged than OCGTs so less maintenance and about the same running cost and emissions. Either that or go back to whale oil.

      • jack broughton permalink
        December 2, 2020 9:45 am

        The debate about use of gas turbines or piston engines is an old one. Piston engines certainly win below 3 MWe, so are ideal for small local generators especially domestic, offices and land-fill sites. Their maintenance costs are similar to or higher than gas turbines. They are badly suited to Combined cycle operation as their exhaust temperature is about 350 C while gas turbines exhaust at about 500 C. Gas turbines have been the basis of the UK power station black-start facility and probably still are.

  11. It doesn't add up... permalink
    December 1, 2020 8:37 pm

    National grid have had a busy day today – releasing their “costings” of their net zero scenarios:

    https://www.nationalgrideso.com/news/analysing-costs-our-future-energy-scenarios?utm_campaign=future%20of%20energy&utm_medium=twitter&utm_source=social

    and their ten year statement:

    https://www.nationalgrideso.com/news/electricity-ten-year-statement-etys

    With a large amount of wind generation based in the north of the country and the demand being based in the south of the country, these changes are leading to high north-to-south transmission flows across Scotland. The number of interconnectors that are predicted to connect towards the South East of England also create potential overloads on the network and a key focus is to make sure that we can meet these needs. As a result of the future transmission needs we have identified in this document, the Transmission Owners (TO) alongside the Electricity System Operator (ESO) have provided development options for the Network Options Assessment (NOA) process. These options range from large asset builds through to smart grid management systems and new commercial products.

    Alternatively: it’s going to be expensive.

    Perhaps the most revealing document is this one:

    https://www.nationalgrideso.com/document/177781/download

    which gives the recorded responses of industry players to the FES approach. It’s couched in careful language, but it seems clear that some companies have hired green zealots while others still have some realists on board. Some of the criticisms are quite telling.

    A first look at the costings suggest they are baloney

    The final Net Present Value cost for each of the scenarios are;
    Leading the Way £2,821bn
    Steady Progression £2,927bn
    System Transformation £3,019bn
    Consumer Transformation £3,020bn

    These total net present value (NPV) figures do not represent the overall
    cost of net zero, but rather the total capital, operating and fuel costs within
    the energy sector until 2050.

    So add in all the other costs and taxes consumers have to bear to make it all possible. Well, if it is possible – see the industry comments.

    • GeoffB permalink
      December 1, 2020 10:33 pm

      All to meet the climate change act……we must get this repealed.

    • jack broughton permalink
      December 2, 2020 10:00 am

      Congratulations IDAU, you have a lot more patience than me. I find these reports to be almost unreadable, in that the real information is lost among irrelevant pretty-looking graphical presentation and everything is cross-referenced so you go round in circles. Suspect that this is deliberate policy to make it look democratic. The trouble is that this is the basis for high level decisions: blind leading the blind?

  12. DozyDave permalink
    December 2, 2020 6:32 am

    Now then Paul, remember what they taught you at school.

    In anything that you write, the first time you use an acronym you put the phrase to which it refers immediately afterward. (in brackets).

    Regular readers of your column may know what a CCGT is, but unintelligent occasional readers like me don’t.

  13. A C Osborn permalink
    December 2, 2020 9:35 am

    I suggest the way to reverse this course is for all the CCGTs to have maintenance issues at the same time.
    ie turn them off during the next high pressure, the country will then see the complete stupidity of relying on renewables.
    When the lights go out, the computers all stop, all the traffic lights an cameras stop, the public can’t charge their mobile phones perhaps they will appreciate Gas fired stations a bit more.
    The owners have been wymping out and allowed the complete take over of their industry by the government.

    • jack broughton permalink
      December 2, 2020 10:05 am

      The plan seems to be that when power cuts occur, the wealthy will start their diesel generators, the poor will be in the dark. Hospitals etc already have this facility, fortunately. This is the norm in the developing world, where the diesels allow the wealthy to continue their lifestyles with little disturbance.

  14. James Broadhurst permalink
    December 2, 2020 11:55 am

    Timera published research on SSE’s Keadby 2 CCGT station in 2018 which at face value goes against what they write here. The station is not due to be finished until 2022. SSE need a capacity price above £20/KWH, 250% greater than it was in 2018, for it to be viable. Being a shareholder in SSE I know they’re not stupid.

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