Brazil & Poland offer a safe harbour in a storm

In a world where the cogeneration and stationary power market growth prospects look challenging, Brazil and Poland stand out for their strong growth potential, finds Michael Brown.

The gas-fired Dalkia Wrzesnia CHP plant in Poland

Two markets are increasingly talked of as bright prospects for CHP growth.

Poland is often discussed as a largely untapped gas-fired CHP market with large projected capacity needs, relatively favourable policy towards decentralised energy, and potentially vast reserves of shale gas. But will reality reflect the potential?

On the other side of the Atlantic, Brazil is a fast emerging and increasingly proven market that can offer an abundance of gas, active industrial support and upcoming policy incentives. So will the strong market growth continue?

Here we provide a high level view of the market opportunity to 2017 for <10 MWe natural gas & biogas CHP in Poland and Brazil, including both the gas engine and gas turbine markets.

Poland’s projected CHP capacity by fuel type

Poland’s CHP potential

The key features of the Polish market today are:

  • Coal predominates. More than 90% of current electricity generation is based on coal. Less than 5% is gas-fired, and renewables are only now emerging.
  • Ageing power plants. There are few countries in the world where the operational power plant fleet is so old. With demand continuing to grow, most plants are more than 30 years old, and since 1990 less than 10 GWe of new capacity has been added to the system.
  • A strong tradition of large centralized CHP plants serving urban heat networks. Smaller decentralized projects of less than 10 MWe are uncommon.

Looking forward up to 2017, we see that policy and spark spread influences are weak in the short term, but potentially strong after 2015:

  • Gas supply is still regionally focused in the country’s south and west, but new LNG infrastructure is being developed and there is a growing probability of shale gas exploitation (although a shrinking view of the volume of those reserves).
  • The electricity sector will be dominated by coal for decades, but Delta-ee has identified a strong economic potential for smaller-scale decentralized gas-fired CHP by 2020 (around 3.2 GWe). We also see up to 2 GWe of biogas-based generation by 2020.
  • National policy towards decentralized CHP appears encouraging; it is, for example, a central part of the National Energy Strategy. But short-term implementation of meaningful support measures remains highly uncertain and the existing Yellow Certificate system expires at the end of this year.
  • The macro-economic landscape is better in Poland than elsewhere in the EU (2012 GDP growth forecasts are 3.3% compared with 0.5% for the EU).
  • The spark-spread is poor today, with relatively low power prices and high gas prices. We do not see this changing until after 2015, with downward gas price pressure through new LNG and shale gas supply, and upward electricity price pressure (possible 30% increase by 2015 and 60% by 2020) through the need for investment in new power sector infrastructure.
  • The main end use markets for sub-10 MWe systems are likely to be:Biogas AD in the near term (such as agriculture and waste water);Small industrial applications (such as the food industry) and district heating.

Overall, we believe there is some significant uncertainty around the future Poland market for sub-10 MWe gas-fired projects, but that there is a potentially very high upside. The figures on page 14 summarize: the key drivers and barriers today and our view of 2017; our market projections for 2014 and 2017.

Brazil’s projected CHP capacity by end-use application

Brazil’s drivers for cogen

Turning now to Brazil, the key features of that emerging market today are:

  • Hydropower predominates. More than 75% of current electricity generation is based on hydropower. Less than 8% is gas-fired, and renewables (biomass in particular) are only now emerging.
  • Frequent grid disruption “industries in the Sàƒ£o Paulo region have been reporting up to 84 power outages per year. Unfortunately, seasonal shortages in hydro capacity correspond with high demand, largely for air conditioning. Largely in consequence, peak power prices are around 5-8 times higher than off-peak prices.
  • Strong CHP market growth in recent years. Brazil is one of the few countries outside of Europe to proactively incentivize CHP, and more than 1200 MWe of gas-fired capacity has been installed since the 1990s, making it one of the most buoyant global markets. There has been strong growth in the commercial sector (such as shopping centres) for CCHP applications, and for on-site power and peak shaving applications in industry.

Looking forward up to 2017, we see the future market drivers as remaining positive, certainly up to the 2016 Olympic Games:

  • Gas supply: major discoveries have increased production from 600,000 m3/day in 2009 up to 22 million m3/day in 2011 and the share of gas in the energy mix may increase to about 20% by 2020. With new supply also from Bolivia (pipeline) and Africa (LNG), plus ongoing investment in T&D infrastructure, the feasibility of CCHP is growing all the time.
  • The electricity system is also expanding, with new Amazonian hydro capacity and new T&D infrastructure coming online, although it is possible that labour and community disputes may delay some of these projects.
  • Incentive measures are implemented at both state level ” such as the mandated CHP tariff in Sàƒ£o Paulo State ” and, especially, at federal levels. At the national level, the energy regulator recently approved an option for CHP of up to 1 MWe to offset electricity supplied to the grid against future consumption. There are several other examples and, overall, we expect support measures to continue.
  • The spark spread is modest (the key benefit of on-site generation is the avoidance of very high peak-time power prices) but Delta-ee believes that it can only improve as gas prices fall with increasing supply.
  • In end-use applications, we expect continuing growth in industries (such as brewing and petrochemicals) and the commercial sector (supermarkets and shopping centres). These markets will be strong leading up to the 2014 Football World Cup and the 2016 Olympic Games, with a likely slowdown after that.

Overall, we believe that the future Brazil market for sub-10 MWe gas-fired projects represents a continuing and growing opportunity, at least to 2016, and that there is room for even more players in the market. The figures on page 16 summarize: the key drivers and barriers today and our view of 2017; our market projections for 2014 and 2017.

Michael Brown is a director of Delta Energy & Environment, Edinburgh, Scotland, UK Email: michael.brown@delta-ee.com

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