|GE’s Jenbacher J208 engine
The 1990s witnessed rapid gas engine sales growth across all sectors in the UK, before abruptly halting at the turn of the millennium. It was only in 2009 that the UK gas engine market propped itself up again following this dry spell (see Figure 1). This resurgence was driven primarily by improving spark spreads – the relative difference between gas and electricity prices – for natural gas systems, and a new supportive policy framework for biogas installations.
|Figure 1: Historic annual installed capacity of gas engines in the UK
Source: Delta-Energy & Environment, 2014
Figure 1 also shows that the deployment of gas engines in the 400 kWe-2 MWe size range has increased to about 40 MWe installed capacity additions per year, and as a result this size class now makes up half the annual market for gas engines in the 400+ kWe size band.
What is triggering this shift towards smaller systems? Firstly, as a general rule, we are witnessing more favourable spark spreads for this size range and as electricity prices continue to rise, small systems which were previously prohibitively expensive have become more economically viable. System specifiers are also turning to gas engine CHP solutions in order to meet new-build energy efficiency targets within commercial and public buildings. New policies like the feed-in tariff (FiT) and export tariff, introduced in 2010 to incentivise sub-5 MWe renewables-based electricity generation, have also improved conditions for biogas engines. In addition, a market preference for flexible generation capability, facilitated by using a multi-unit, modular approach, has become more pronounced lately.
Already a top 20 market
As part of Delta-ee’s Distributed Power Service – a new global research service which reports on current market trends and future sales opportunities for distributed power systems – we are publishing a series of reports on the world’s leading gas engine markets. The UK analysis is the first of the series, with Germany, the US, Japan, Russia, India, China, Brazil and Turkey following. All gas engines used within stationary power and combined heat and power (CHP) applications (with capacities ranging from 400 kWe to over 10 MWe) are included within the scope.
But why focus on the UK? Globally, Germany is the leading market for gas engines – around 600 MWe of new capacity is currently installed per year (for systems sized 400 kWe and above). The UK’s 80 MWe of new capacity additions per year hardly seem like much in comparison. But it is not only the second most active gas engine market in the EU, but also one of the world’s leading markets. And while it is already a maturing market, we believe there is room for further growth.
The market tomorrow
We see strong growth prospects for gas engines leading up to 2020. In our country report, we assess exactly where the greatest potential lies, segmenting our sales forecast by gas engine size bands (400 kWe-1 MWe, 1-2 MWe, 2-5 MWe, 5-10 MWe, and 10 MWe+ capacity) and by fuel type (natural gas, biogas, and others).
Significantly, we expect that the shift towards the smaller engine size class will strengthen; our economic analyses of the viability and payback impacts of energy price dynamics and incentives indicate more buoyant markets for smaller scale projects.
For systems ranging from 400 kWe to 2 MWe, we expect sales in the magnitude of 60-70 MWe per year by 2020 (see Figure 2). From today’s 40 MWe additions per year, this is around an 8% annualised growth rate. A gradual recovery from the economic downturn is also likely to improve investor confidence in the second half of the decade, with a stronger emergence of district heating and a growing engine replacement market expected towards 2020.
|Figure 2: Forecasted annual installed capacity of small-scale gas engines in the UK Source: Delta-Energy & Environment, 2014|
The future outlook for UK spark spreads will be driven in large part by the closure of old fossil-fueled power plants and by the sharply increased uptake of intermittent, inflexible renewable generating capacity. As coal plants come offline in the second half of the decade, it is possible that less efficient gas plants that have recently been mothballed could come back online. This will put upward pressure on electricity prices.
With the introduction of the UK’s Electricity Market Reform (EMR), new Contracts for Difference (CfDs) are being introduced to provide guaranteed revenue for low-carbon generators as well as a capacity market, necessary to support investment in peak generation and demand response. These mechanisms will put a further burden on grid electricity prices in the form of ‘non-commodity’ costs.
In summary, and based on various analyses of future price trajectories, our overall view is that spark spreads are likely to improve in the second half of the decade with electricity prices anticipated to be around 3.5 to four times that of natural gas in 2020 for commercial and industrial users, as illustrated by Figure 3.
|Figure 3: Historic and forecasted electricity and gas prices Source: Delta-Energy & Environment, 2014|
In recent years, the UK has witnessed a significant increase in the number of biogas facilities coming online following the introduction of favourable incentives. These support mechanisms range from the Renewables Obligation (RO) which incentivises large-scale renewable electricity generation, the Renewable Heat Incentive (RHI) which supports small renewable heat producers, and the FiT which benefits small-scale renewable electricity generation and electricity grid export.
However, it is unlikely that support will increase beyond 2014-2015, and thus we see the natural gas/biogas share of the market still in favour of natural gas systems in 2020.The biogas share will receive a short-term boost with the expansion in 2014 of the RHI to benefit size bands with more than 200 kWth capacity (in addition to < 200 kWth systems which are already supported). In the second half of the decade, we expect that this sector will remain generally flat while the FiT remains in place.
In contrast, we forecast steady growth for the natural gas CHP market based on improving spark spreads and continuing minor policy support (e.g., enhanced capital allowances, carbon reduction compliance and increasingly stringent building regulations). Having said that, aid in any shape or size, when removed, can be a shock to the system. For example, the Climate Change Levy, a tax on fossil-fuelled energy delivered to non-domestic users, was exempt for CHP owners via Levy Exemption Certificates (LECs), worth a modest £0.00541 ($US0.01)/kWh. In 2013 the UK ceased production of the LECs, followed by a brief period of reduced investor confidence in natural gas CHP systems. So, the recent announcement that electricity consumers will not have to pay the replacement Carbon Price Floor for electricity consumed onsite and generated by ‘good quality’ CHP is welcome news.
Thus, while not the primary driver for natural gas-based systems in the UK, policy incentives still matter. Overall, though, we are not optimistic – and do not assume – that the UK government will introduce any further material incentives for gas-fired CHP before 2020.
|Figure 3: Annual installed capacity in the UK and German gas engine markets Source: Delta-Energy & Environment, 2014|
As with any modelling exercise, our gas engine sales forecasts are sensitive to changes in the boundaries. This could range from energy price spikes or slumps to the unlikely introduction of new and generous policy incentives; from a drastic cut in state funding to a bearish or bullish macroeconomic environment; from supply-side push to withdrawal from the market of key industry players. But, at this point, our forecasts convey what we believe is the most probable scenario for the UK market. There is also some continuing uncertainty around the specifics of the proposed EMR, which is currently affecting energy investment decisions. It is, however, very likely that a capacity market will be adopted as part of the EMR, which CHP could harness for increased value towards 2020.
Steady growth ahead
Since gas engines, in almost all cases, are repackaged as CHP plants (and thus achieve a much higher efficiency than stationary power-only plants), they will be an important feature of the UK’s future decentralised energy system. It is hard to expect spectacular growth for maturing markets. However, given that most signs point to improved economics for gas engine systems in the coming years, a steady increase in gas engine orders is likely for the UK market, especially for the sub-2MWe engine size class.
Dina Darshini is an analyst at Delta-Energy & Environment. More information on leading distributed power markets can be attained via Delta-ee’s Distributed Power Service.