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Gas faces potential new-build challenge in Europe

Earlier this summer you could have been forgiven for thinking that the solution to achieving a future of low-carbon power generation and security of electricity supply had been found.

Giving us a free rein on how much renewable energy resources, such as offshore/onshore wind and solar, we integrate into our grid systems by simply balancing any grid fluctuations caused by the intermittent nature of renewables with high efficiency, operationally flexible combined-cycle gas turbine (CCGT) plants. And I hold up my hand and say that in my June editorial I am guilty as anyone of propagating this notion.

There has been a lot of talk, particularly in recent months following the disaster at Japan’s Fukushima nuclear complex, of an imminent ‘dash for gas’ similar to the ones seen in the UK and US back in the 1980s and 1990s, and according to the Credit Suisse, gas fired power plants will comprise around 25 per cent of new global generation capacity additions in the next five years, boosting gas turbine orders by 50 per cent to 63 GW.

“European power futures prices are currently too low to justify building new gas fired power plants”

Arguably, this trend can already be seen. Within the last few weeks alone E.ON Russia officially commissioned two new CCGT units with a combined capacity of 800 MW at its Surgutskaya GRES-2 power station, work has started on the turnkey erection of the Knapsack II CCGT power plant near Cologne, Germany, and Siemens is teaming up with Power Machines OJSC to establish a gas turbine joint venture to serve the Russian and CIS market.

Also importantly for the gas fired power industry there have been several key technical milestones reached, not least Siemens with its SCT5-8000H gas turbine and GE’s FlexEfficiency 50 plant concept comfortably breaking the elusive 60 per cent efficiency barrier in combined-cycle, and Mitsubishi Heavy Industries reporting the world’s highest turbine inlet temperature of 1600à‚°C, with its J Series gas turbine.

Clearly gas fired power generation plays and will continue to play an extremely important role in Europe’s energy landscape. However, as so often happens in life, there is a ‘fly in the ointment’, which may well put pay to the large-scale construction of gas fired power plants, at least in the short-term.

Put simply, the European power futures prices are currently too low to justify building new gas fired power plants. This is the concern of RWE’s strategy chief Leonard Birnbaum, speaking at the energy industry lobbyist BDEW’s recent annual congress in Berlin, Germany.

“You would need €75″80 ($106″113)/MWh, and given the price [of year-ahead delivery] is now below €60/MWh, it is evident you cannot build plants.”

Clearly this could heavily impact on Germany’s future energy plans, as its turns it back on nuclear and shuts down all of its existing nuclear power base by 2022. It is estimated that this will create the need for 8″17 GW of new capacity additions, which had been expected to be primarily gas fired plants, over the next decade.

It also has European implications, and the concerns voiced by Birnbaum have been echoed by market observers such as French bank Societe Generale SA and Deutsche Bank, which say new gas capacity has little chance without prices rising to support it.

There is a positive note to end on, because as we move towards a greater contribution of renewables in our electricity generation mix, as required by the EU’s 2020 target, the expectation is that electricity prices for consumers will have to rise and rise significantly to pay for this investment in renewable resources such as offshore wind. So gas is still likely to have its day.

Kind regards,
Dr Heather Johnstone,
Chief Editor

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