Gas Generation in an uncertain world
The future of large scale gas generation is much talked about from an electricity perspective. Will the capacity market deliver investment in such plant? Can returns be made at lower load factors? Do gas plant have a long term future or are they just a bridge to other providers of back up for intermittent renewables? Can ancillary services contracts boost income?
Aside from this there are uncertainties on the gas side too, not so much in the supply of gas for generation which seems comfortable for the time being but in respect of network capacity and charging. This all adds to a challenging investment climate.
Firstly capacity - so that plant can offtake gas for generation. Historically gas generating plant used to book their daily requirement on an enduring basis, but in recent years with tight margins many sites have opted for daily bookings or ‘off-peak’ capacity to reduce fixed costs. The latter may not be available on peak gas demand days and can be interrupted. Daily booking for the next day can be made up to ‘baseline’ levels. Baselines were typically set at firm daily capacity levels, but where capacity is unsold it faces the risk of substitution – this is where the uncertainty comes in.
New plant can book capacity through the Planning and Advanced Reservation of Capacity Agreement (PARCA) (nothing to do with Thunderbirds) process. An application is made to National Grid, then it considers whether capacity may be substituted from locations where there is unsold baseline capacity, or if investment is needed. Notices are issued and if the company signs on the dotted line the substitution is enacted and baseline values amended accordingly. Most recently National Grid issued a notice for the potential substitution of capacity from 13 offtake points to meet the capacity requirements of Trafford Power station. Even more recently there have been two PARCA applications in North East Yorkshire and Lincolnshire which could lead to more substitution of capacity; at least it is good to see some PARCA activity.
Secondly charging – particularly transmission charging, there are dual uncertainties here whilst the EU Tariff code is not yet finalised and Ofgem’s transmission charging review. The former requires a single charging methodology to be used for domestic and interconnection points but provides more detailed rules for charging at interconnection points. It emphasises that transmission revenue should largely be recovered from capacity charges – GB currently has sizeable commodity charges. Ofgem’s charging review mainly focusses on entry charging and seeks to reduce the discounts for short term capacity products and introduce floating capacity charges in place of commodity charges for revenue recovery. Many details remain unclear including whether domestic entry points will end up with the same products and charging as interconnection points and if these principles will be extended to exit arrangements.
So for gas generation, there are uncertainties over securing capacity and then keeping it unless the full firm price is paid but that price is also uncertain.