Cheapest gas in months lures UK utilities away from coal

By RACHEL MORISON and ISIS ALMEIDA
Bloomberg

Natural gas will probably start to replace coal in UK power generation as oil’s decline helped damp prices to their lowest since August.

Wholesale costs are close to levels where generators will increase output from gas-fired plants at the expense of coal, according to Energy Aspects. The transition will be led by five facilities owned by utilities from RWE to Centrica that produce enough power to supply about 11 million households, Yarm, England-based Enappsys said.

Jefferies Group last week cut its 2015 UK gas forecast by 26% after the drop in oil costs, while HSBC estimates that prices will this year average 14% below 2014. Cleaner-burning gas usually declines in summer, when demand for heating is lower, making it more attractive for power generation.

“It’s the first time we have been close to the switching range this time of year since 2010 and if prices keep falling, producing power from gas will become cheaper than from coal,” said Wayne Bryan, an analyst at Alfa Energy Group in London. “Lower gas prices will help cut electricity costs for consumers and have a positive influence on the UK’s mandate of reducing carbon emissions.”

Front-month gas in the UK, Europe’s biggest market, fell in six of the past seven weeks and touched 44 pence/therm ($6.65/MMBtu) today on ICE Futures Europe in London, its lowest price since Aug. 28.

Costs will average 37.79 pence in 2015, said Jason Gammel, an analyst at Jefferies in London. That would be the lowest mean since 2009 on ICE.

The average price will be 44 pence/therm in 2015, HSBC said in a Jan. 15 report. The share of gas in power generation increases at 45 pence, according to Energy Aspects, a London-based consultant.

Gas Slump

While coal has been more profitable in power for most of the past three years, average peak gas use for electricity rose 8.8% this winter from a year earlier, National Grid data show. Gas prices have slumped 21% since the heating season started Oct. 1.

“It all depends on the weather,” said Moses Rahnama, an analyst at Energy Aspects. “If it gets warmer, and supplies remain strong, it’s likely that we will see more gas plants as early as in the next two weeks.”

Electricite de France and Intergen may also start operating gas plants around the clock instead of just at peak times, according to Enappsys’s analysis. The five facilities have 5,430 megawatts of capacity, according to the companies.

‘Very Difficult’

“Given the significant recent changes in global commodity prices, it is very difficult to comment on the future running operations of our gas-fired power plants,” said Kelly Brown, an RWE spokeswoman in Worcester, England. Centrica and EDF didn’t comment specifically on their plants, while Intergen wasn’t available to comment.

Cold weather may prevent fuel switching from happening in winter. UK temperatures are forecast at 2 degrees Celsius (3.6 Fahrenheit) below normal on Jan. 24 before warming toward the average, MetraWeather said.

The relative profit of coal plants over gas shrunk to 20 pence (30 cents) a megawatt-hour last August, the smallest premium since 2011, according to data compiled by Bloomberg. The gap for next month was 8.48 pounds today.

“Gas is still marginal and coal king,” said James Brabben, an analyst at Cornwall Energy Associates. Fuel switching won’t happen before June, he said.

The UK’s carbon floor, a tax on emissions, will double in April, boosting generation costs and favoring some more efficient gas plants over older coal units, said Andy Houston, a principal consultant at energy adviser Poeyry Oyj in London.

RWE’s Little Barford, one of the five plants Enappsys says could operate around the clock, generated for 37% fewer hours in 2014 than in 2010, when it operated as baseload, Brown said. The other plants are Centrica’s Langage, Intergen’s Spalding, RWE’s Staythorpe and EDF’s West Burton B.

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