By Paul Homewood
Timera have a fairly technical piece on the viability of CCGT plants in the UK:
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.
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December 1, 2020 at 04:15AM
Iowa Climate Science Education 