The use of natural gas as a fuel for power generation has increased rapidly in Europe over the past five years. This trend is set to continue with deregulation at the expense of conventional technologies – and fuel diversity.
MarketLine International, UK
The utility, IPP and industrial power industries across the EU continue to turn to natural gas as the fuel of choice for implementing new projects. Equipment order trends are irrefutable evidence that the utility power plant market has in most cases moved from asking the question “which type of power plant should I build?” to “which type of CCGT should I build?”
Little needs to be said about what the IPP`s favourite technology is, and although the industrial market shows more diversity, gas-fired cogeneration and CCGT projects now dominate here too.
The industrial market
This situation is reflected in Table 1 showing installed industrial capacity by technology in the EU. Between 1993 and 1998, industrial CCGT capacity grew at an average annual rate of 17 per cent, with installed capacity more than doubling over the same period. Industrial cogeneration capacity has also increased rapidly when one considers the size of the installed base. Almost 5 GW of capacity has been added over the past six years, most of it gas-fired, rapidly increasing the amount of gas used for power generation.
But industrial order volumes have fallen in recent years. Total industrial power plant order volumes fell by almost 40 per cent to under 1 GW during 1998 as the effects of electricity market liberalisation, among other factors, began to make their presence felt. The current market situation is one of uncertainty for potential investors in industrial power, and has led to lower volumes in the market. The low order volumes seen in 1998 are not expected to continue over the next six years, but it is likely that the market will become more polarised in terms of both the countries and products that see industrial investment.
On the product front, the next six years are expected to bring substantial investment in the large power plant market sector, reduced investment in the middle tier and strong activity in the smaller market. The large industrial on-site power plant market should benefit significantly following deregulation, as large manufacturing companies make moves to reduce their electricity costs and improve revenues via sales to the grid. In some of the EU`s smaller markets, on-site industrial power plant operators will provide the most competition for incumbent utilities, as the total market may be too small to attract IPPs and foreign utilities.
Joint ventures between domestic utilities and industrial manufacturers are also likely to spring up, with the utility helping the industrial company to construct and possibly operate the on-site facility rather than risk losing its business altogether.
Volumes are also forecast to be healthy in the small industrial power plant market. The small industrial power user is least likely to benefit from electricity market liberalisation as utilities target the largest spenders first with attractive supply offerings. Small users are therefore pushed to invest in on-site power as a way to reduce costs and continue to compete with their larger competitors.
It is in the middle tier of the market where liberalisation should really bite. In this sector of the market, the largest by a considerable distance, potential investors will be large enough to obtain competitive utility pricing but too small to have any serious ambitions in the electricity industry. This is the primary reason why volumes will be smaller over the next six years than they have been over the last six years.
Of course competition and deregulation is developing at different speeds across the EU, and in many markets its effects will be offset by the regulative situation in the industrial power market. But these effects will be felt throughout the region until more is known about the development of competition and electricity prices.
In terms of industry sector, the chemicals industry is forecast to be the leading on-site power developer in Europe. Of the top ten industrial sectors across Europe, measured in terms of forecast installed capacity, the chemicals industries of Germany, Italy, France and the Netherlands will take four of the places. Apart from these, the refining sector in Italy is the only non-German sector, and the German coal industry is the only sector forecast to see a fall in installed capacity.
The leading industries analysed in Figure 1 are prime candidates for gas-fired on-site power development, with many manufacturing plants in this sector large enough to support 300 to 600 MW CCGT, or large cogeneration schemes. It is these sectors that are likely to see utility-industrial joint ventures, or leading manufacturers beginning to form separate energy subsidiaries to take advantage of the opportunities in the deregulated electricity market.
The utility market
The power plant market for utilities has shown an even greater preference for gas-fired generation in the EU over the last six years. EU CCGT capacity has grown at an average rate of 24 per cent over the last six years, whilst other major technologies have seen their capacities rise slowly or even fall. Conventional thermal capacity has fallen at an average rate of one per cent per year, but this apparently small decline is enough to wipe off 10 GW in capacity in six years, such is the size of the installed base across Europe.
Cogeneration, again predominantly gas-fired, has also seen strong growth in the EU utility power market, with around 6 GW added between 1993 and 1998.
Gas availability and price across the EU have been major factors in the development of this market. There have been three major developments in pipeline extension in Europe: the Interconnector, the Gazoduc Maghreb-Europe (GME) and the Yamal pipeline. The first will carry gas from Bacton in the UK to Zeebrugge in Belgium and the continental gas grid. The GME pipeline began to transport gas supplies in November 1996 from the Hassi R`Mel field in Algeria into Spain and Portugal, with possible extensions north into France mooted for the longer term. Finally, the Yamal pipeline is due for completion between 1999 to 2001 and will carry gas into Europe from the huge Siberian fields.
It is generally thought that these projects and the process of gas market deregulation across Europe will allow for lower natural gas prices, at least in the short to medium term. Although this will be enough for much industrial investment, there remains some level of uncertainty for utility investment. This combined with the requirement to support national coal industries in the UK, Germany and Spain will provide a brake for gas-fired generation. However, with current economic conditions and the need for competitive generation portfolios, this will only slow the uptake of gas-fired generation in the short term.
Conventional thermal capacity is presenting a major challenge for European utilities and governments attempting to meet the Kyoto conference agreements on CO2 emissions. Even in France, a country with large nuclear generation capacities, there is almost 22 GW of coal or oil-fired conventional thermal capacity. The challenge is that much of this capacity is relatively old and inefficient.
As an average, more conventional thermal capacity in the EU is over 30 years old than under ten years old, indicating that much plant (just over 34 GW of the EU`s conventional thermal capacity is over 30 years old) is in need of refurbishment or replacement.
MarketLine forecasts that in part this issue will be dealt with by the replacement, or in some cases the repowering, of conventional thermal plant with CCGT plant. This trend has already been in evidence in the UK, where almost 7 GW of conventional thermal capacity has been lost between 1993 and 1998.
Although the UK government has placed an indefinite moratorium on the approval of new gas-fired plant, many other countries in Europe are now in the position the UK was in at the start of the decade, and will take up the slack of diminishing markets like the UK and Italy.
Thus, a burst of utility CCGT plants in newly competitive markets such as Germany and Spain are expected to go ahead. Little conventional thermal or nuclear investment is expected to take place as utilities and governments hold back from environmentally and politically unsound generation, and none are likely to find the costs of renewables easy to swallow. This leaves cogeneration and CCGT as the answer to many of the problems, despite concerns raised by many commentators over the security of supply.
Across the EU, over 15 GW of conventional thermal capacity is expected to be retired or repowered between 1998 and 2003, while CCGT capacity is forecast to almost double to 65 GW in total installed capacity. CCGT is forecast to remain the fastest growing sector of the market with a reduced compound annual growth rate (CAGR) of 11 per cent, due the larger installed base in 1998 compared to 1993.
Figure 1. Forecast of leading EU industries for on-site power Source: MarketLine
Figure 2. Age profile of the conventional thermal capacity installed in the EU by country, 1998 Source: MarketLine
Figure 3. CCGT to replace over 15 GW of conventional thermal capacity between 1998 and 2003 Source: MarketLine