UK power traders to eye coal market for peakload pricing

The superior profitability of gas-fired power generation over coal in the UK has left coal-fired generators relying on pricier peaks and smaller within-day contracts to make money, a trend that is changing the dynamics of the UK wholesale electricity market, sources have said.

Declining gas prices on the country’s NBP market and higher taxes and charges on the importation of coal have turned gas-fired generation into a more consistently profitable form of generation than coal this winter.

While switching for coal-to-gas has been commonplace over the last few summers, this winter has brought about a notable shift from coal to gas burn – not at all typical for the time of year.

Since 1 November 2015, CCGT plants have met on average 29.3% of the UK’s electricity demand, trumping coal’s share of 19.6%.

The change indicates that coal generators are increasingly looking away from the baseload period as a profit opportunity to peaks and even smaller within day blocks.

This should alter the dynamics moving the wholesale power market, with the NBP market offering direction to baseload contracts and the global coal market directing trade on the peaks, experts say.

The UK’s carbon price support – a tax against industrial emitters of carbon – and a weaker pound against the dollar and euro that has increased coal import costs is forcing older coal plant to search for other profit avenues in the wholesale market, Inspired Energy risk manager Nick Campbell said.

Value

“As a result this has left coal generators searching for higher value and therefore moving from baseload and peak sales to look at particular half hourly periods or blocks,” Campbell said.

Another source agreed. “Certainly if they are forward hedging plant then they’ll be looking to predominantly sell peaks or parts thereof,” the source at a commodities trading house said.

Whereas traders have traditionally regarded the direction of the NBP market as a clear signal to the power curve, gas market movements relative to coal and movements in spark and dark spreads will be crucial to determining the value of outright power contracts.

“You’re looking at the price of the marginal fuel required to meet demand and then estimating what margin that type of plant owner will require to run it,” the trading house source said. “Peaks will be pricing off coal, with the rest off gas,” he added.

Another utility trader said the effect of coal driving the market was already in evidence. “It is doing so already,” he said. “But coal is also very weak,” he added.

Clean overtakes dark spreads

Clean spark spreads including carbon price support – the notional UK profit margin for gas-fired generation including the cost of carbon permits – have overtaken their clean-dark counterparts for forward delivery in recent months (see EDEM 30 November 2015).

Since 18 December, the clean dark spread for Summer ’16 delivery has been negative, reaching a low of -1.30/MWh on 4 January based on ICIS end-of-day calculations. This coincided with the clean spark rising to £4.13/MWh.

Coal flexibility concerns

Coal plants built 30, 40, even 50 years ago to operate explicitly on a baseload profile have previously been regarded as too inflexible to meet changes in system demand on short-term profiles. However, this is changing according to sources.

“Drop back a few years and it certainly wasn’t the norm, especially for older coal plants, to two-shift as it was harder to get the turbines to move faster and also seen as damaging to the equipment,” Campbell said.

“But necessity is the mother of all invention and with baseload and peak prices plunging despite permit costs increasing, coal generators have had to adapt or die, therefore finding ways to deal with the perceived risk.”

The trading house source agreed. “In practice they try and keep the plant hot, so they might not drop the output to zero, but they can certainly reduce it [or] increase it,” he said.

However, some commercial constraints could prevent coal generators from unwinding baseload positions and selling into the peakload and within-day blocks, he said.

“Sometimes we see coal plant run when spot prices suggest it shouldn’t,” he said. “The reason is most likely that it is was forward hedged profitably at some point in the past, and the owner simply can’t easily unwind or prefers to run.

“By not unwinding they are missing out on extra profits but it’s not a straightforward process because the physical nature of coal makes it difficult,” he added.

NBP remains important

Forward NBP prices will remain of interest to the power market as the impact of internationally traded LNG cargoes on the NBP becomes clearer, lead trader at LG Energy Group Serge Mazodila said.

The enhanced flexibility of gas plant compared to older and less-efficient coal would ensure some combined-cycle gas turbines serve at the margins at both baseload and peakload times. henry.evans@icis.com