Dina Darshini shares some key market highlights over the past year and explains why the global gas engine market is set for growth to 2020.

Distributed power is a growing sector globally – but where are the sweet spots?

Research from Delta-ee’s Distributed Power Service forecasts that for gas engines sized 400 kWe and above, the market will increase from an annual installed capacity of 4.5 GWe in 2015 to over 7.0 GWe by 2020 (at a compound annual growth rate of 9%), driven by a recovering global economy, stronger policy support within emerging markets, electricity prices trending upwards, and a growing trend for flexible, gas-fired power generation.

Today, Europe is the leading market for gas engines sized between 400 kWe and 2 MWe, with Germany holding majority market share. For larger gas engines (2 MWe – 20 MWe), key regions include those that have a need for flexible power plants that can cope with the growth in intermittent renewable energy generation such as North America and Europe, or regions aiming to ramp up security of supply to match growing demand such as South and South East Asia.

Key global drivers and market disruptions in 2015

Fall in global oil and gas prices

From a norm of roughly $100/barrel in the past decade, the price of Brent crude, the main international benchmark, collapsed in late 2014, and has since been oscillating between $38 and $55 per barrel. This put downward pressure on oil-indexed gas and liquefied natural gas (LNG) contract prices in some global regions, particularly in Europe and Asia. In parallel, the slowdown in Asian LNG demand (due to the re-introduction of some nuclear power capacity) and stagnant European gas demand also had a direct causal impact on European hub and LNG spot prices. The combination of these and other complex factors led to a drop in retail natural gas prices across key gas engine markets (with three- to nine-month time lags) – a favourable driver for gas-based technologies.

However, there are two things to equally note: [1] the full impact of cheaper retail gas prices was dampened because competing energy sources such as electricity, diesel and heating oil for the most part also enjoyed price reductions in 2015; and [2] weaker gas engine sales were noted in 2015 – due to shaky investor confidence – in major oil-producing countries that suffered a blow to their economies.

Regulatory changes in Germany

From August 2014, Germany’s Renewable Energy Act (EEG) was revised to include legislation stating that all new combined heat and power (CHP) systems have to pay a proportion of the EEG surcharge (30% in 2015, 35% in 2016, and 40% from 2017) for on-site consumption of CHP electricity. In early 2014, there was a rush in the sub-1 MWe gas engine segment to install CHP systems before this new legislation came into effect, resulting in a rise in gas engine sales in 2014, before a subsequent collapse in 2015.

Wärtsilä 34SG gas engine plant, Pearsall, Texas, US

Credit: Wärtsilä

Throughout 2015, there was also significant uncertainty associated with the revision to the German CHP Law – stalling investments even further. At the time of writing (late December 2015), the CHP Law (2016) reforms have just been finalized. While the level of support for on-site generation and consumption of CHP electricity has fallen, there is at least greater clarity of the future regulatory framework for CHP in Germany. Therefore, we expect a recovering market for natural gas-fuelled engines in 2016. Sales of larger gas engines (> 5 MWe) have already started to increase, driven by greater support for CHP electricity exported to the grid, and we expect this trend to continue in the period to 2020.

Slow global recovery and other macro-economic factors

Macro-economic conditions have a noticeable impact on the market strength for distributed power systems. Many of the world’s largest economies are still struggling to fully recover from the 2008 financial crisis, are experiencing a slowdown in annual GDP growth rates (e.g., China), or officially entered into recession in 2015 (e.g., Brazil). Others, such as Russia, face a multitude of factors such as international sanctions, falling currency values (the rouble dropped by 55% against the euro since 2014), and the ongoing volatility surrounding oil prices; while Turkey has witnessed government instability and a weak lira (the key impact of which is that imported capital goods, including gas engines, become relatively more expensive). Gas engine sales in both countries dropped considerably in 2015, although a recovering market is expected in the second half of the decade.

Outlook for gas engines to 2020 and growth opportunities

Overall, 2015 saw a slight dip in annual installed capacity of reciprocating gas engines compared to 2014. I touched on some of the key factors causing this downturn in the previous section, but remain cautiously optimistic that the outlook for 2016 and beyond will look much brighter. This is based on [1] firm orders agreed in 2014 or 2015 (which typically have a >1 year lead time in construction), so we have much higher confidence in these numbers; and [2] favourable market drivers such as stronger policy support within emerging markets, electricity prices trending upwards, and a growing trend towards flexible gas-fired power generation – against a backdrop of a recovering global economy.

Figure 1. Annual installed capacity of gas engines used for stationary power applications regionally (2015)

Take Mexico as an example. The Mexican gas engine market is in a period of growth. In 2013, only 19 MWe of additional capacity was installed (in terms of engines sized > 400 kWe), but in 2014 the market more than trebled to 77 MWe new capacity. We expect over 300 MWe of annual installed capacity by the end of the decade. Why?

1. Mexico’s government passed an historic energy reform bill in December 2013, paving the way for deregulation of the electricity sector and opening up a competitive retail market for independent generators for the first time. As a consequence of this, we are likely to see more activity from independent power producers, and especially those using flexible natural gas-fired power plants. Some of this new capacity is likely to employ gas-fired internal combustion engines (with project capacities likely in the high 10s to 100s of MWe). Indeed, there is already a 139 MWe power plant using gas engines under construction in Nuevo Leon which is due for commissioning in 2016.

2. In addition to providing competition to Mexico’s state-owned utility, CFE, a programme of Clean Energy Certificates is to be launched which will incentivize renewable energy sources as well as high-efficiency CHP facilities. This move alone is likely to encourage increased uptake of gas engines within biogas applications, and gas engine CHP projects, towards the end of the decade.

Sometimes, even mature gas engine markets can experience further growth spurts. The UK, for instance, has primarily been a gas engine CHP market – modestly growing in line with healthy spark spreads. Going forward, though, we anticipate a short period of heightened activity in gas engine sales, primarily in the form of backup capacity generators that have been guaranteed via Capacity Market auctions. Through the Capacity Market, the UK government offers payments to electricity suppliers for making ‘backup capacity’ available. These power generators need to be ready to deliver from 2018/19 onwards (four years ahead of each auction, the first of which was held in late 2014).

GE Jenbacher J620

Credit: GE

Scanning across Figure 1 again, it would be impossible to adequately discuss each key gas engine market’s growth prospects and the main end-use segments to target in each country (e.g., biogas or landfill applications, CHP for commercial buildings, industrial sites, district heating, independent power producers and peaking power plants, etc) in this article.

Figure 2. Historic and forecast annual installed capacity of reciprocating gas engines used for stationary power applications in the UK

However, I will comment on the US – simply because it is currently the largest gas engine market globally in terms of annual installed capacity (which differs from Germany, which is the largest gas engine market in terms of number of units sold per year) – and we anticipate increasing sales leading out to 2020. The outlook for the US gas engine market is multi-faceted and complex – not least because some states offer more promising opportunities than others, but also because there is growth potential across both the sub-5 MWe and the >5 MWe engine size classes and in both CHP and power-only applications. We expect the installed capacity of non-dispatchable resources such as wind and solar to rise as individual states ramp up efforts to meet renewable energy generation targets by 2020-2025, with California in particular aggressively pursuing a renewable energy mix share of 33% by 2020. Demand for flexibility, quick startup capability, and other ancillary services is expected to grow as a result, with large gas engines likely to enjoy greater deployment. At the same time, installations of CHP systems are also increasing due to the positive outlook for natural gas supply and stable spark spreads, environmental regulatory pressures on power plants and commercial/industrial boiler replacements, and growing federal and state policymaker support of CHP technologies as a supply hedge during power outages.

My final remark on the global gas engine market out to 2020 will centre on spark spreads and accessibility to gas supplies. In general, most signs point to electricity prices trending upwards. Increasing uptake of subsidized renewables, the emergence of capacity/balancing markets, and upgrades to aging grids are contributing to the gradual rise in the price we pay for electricity. Meanwhile, gas prices are likely to stagnate or rise only slightly. We also are likely to see market disruptions in the form of new (e.g., Australian) LNG supply meeting some Asian LNG demand, while the US/North America region attempts to reconnect with the global system through new LNG export projects.

In parallel, some countries with sparse gas grids are ramping up efforts to extend their networks, which will help with the technical feasibility of gas engine installations. The government of Indonesia, for example, plans to build more LNG import terminals and gas distribution networks across the country. However, such expansion projects tend to take five to 10 years (i.e., will likely be completed after 2020). In the meantime, Indonesia is exploring the use of floating storage and regasification units, which typically have two- to three-year construction periods.

Set for growth

The global gas engine market is set for growth over the next five years. But navigating through key market disruptions and understanding market drivers are fundamental to successfully identifying sweet spots across the globe.

Dina Darshini is a market analyst at Delta Energy & Environment, a consultancy specializing in global heat and distributed energy markets. To find out more about Delta-ee’s ongoing Distributed Power research, please contact Dina at dina.darshini@delta-ee.com