EXPLORER special on generation - LBD-Beratungsgesellschaft mbH

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SPECIAL CO2 price in Euro/t 60,0 55,0 50,0 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 07.05 01.06 07.06 01.07 07.07 01.08 07.08 01.09 07.09 01.10 07.10 EUA price front year (EEX) net efficiency of substituted coal power plants - market opinion figure 2: Development of the EUA price and efficiency of the coal-fired power plants substituted in line with market opinion (due to coal, natural gas and EUA prices); source: EEX, Reuters, LBD analyses; as per: 30 November 2010. [ ] = CO 2 euro t [ ] (APgas − APhc) euro MWh ⎛ emission factor t ⎞ hc ⎜ [ MWh] ⎟ ⎜ WG ⎟ hc ⎝ ⎠ − emission factor ⎛ t ⎞ gas ⎜ [ MWh] ⎟ ⎜ WG ⎟ gas ⎝ ⎠ formula 1: Equation to determine the fundamental value of EUAs according to the fuel-switch method. net efficiency 60% APgas € – marginal costs, excluding carbon costs, of the ousting combined cycle power plant APhc – marginal costs, excluding carbon costs, of the coal-fired power plant last ousted emission factor – tons of carbon emissions of each fuel heat volume used, natural gas or hard coal, respectively WG gas – efficiency of the ousting combined cycle power plant WG hc – efficiency of the coal-fired power plant last ousted 55% 50% 45% 40% 35% 30% 25% 20% 1 5 % 1 0 % 5% 0% 2 <strong>EXPLORER</strong> markttrends December 2010 Lbd-beratungsgesellschaft As the global economy picks up, coal prices will increase. A weak US dollar will soften the price increase in euro per tonne. The intensity of competition on the European gas market will remain high, at least until new growth markets in Asia boost demand for LNG and as long as importers are unable to cut down on their long positions under long-term procurement contracts through price reviews without adverse effects on the market. In the near future, there is no expectation that the competitive strength of coal will improve compared to natural gas. Prices for carbon certificates (EuA) EUAs are priced on the market according to the fuel-switch concept. This concept is based on the assumption that the European carbon reduction targets can only be reached when electricity from natural gas ousts electricity from coal. For this to happen, the marginal costs (clean) of natural gas power plants must be lower than those of coal-fired power plants. The fuel-switch concept enables the fundamental value of EUAs to be determined. If the gas price rises in relation to the coal price, the price for EUAs also rises. If the gas price falls in relation to the coal price, the EUA price also falls. What’s decisive for competition between fuels is the efficiency of coal-fired power plants most recently ousted in the merit order. The reliability of this concept can be verified on the basis of the calculated efficiency of the coal-fired power plant ousted. Figure 2 shows that from mid-2007 to mid-2009 efficiency ranged between 30 % and 35 % and then rose to and remained above 35 % (refer to the blue time series). EUA prices will only rise when the price of natural gas increases in relation to coal. A contrary trend is mostly likely to be seen in the near future.
<strong>EXPLORER</strong> markttrends December 2010 3 The fuel-switch concept leads to a very flat merit order for all natural gas combined cycle and coal-fired power plants. Figure 3 shows an increase in marginal costs of just 10 euro per MWh in the demand range from 36,000 MW to 70,000 MW (vertical grid load in the transmission grid). Natural gas combined cycle power plants are used before coal-fired power plants. Gas-fired steam power plants usually range behind coal-fired power plants. This very flat structure leads to very low producer margins. With an actual power peak of less than 60,000 MW in the transmission grid, neither natural gas combined cycle power plants nor coal-fired power plants competing on a marginal cost basis can cover their operating costs not to mention generate contribution margins for capital costs. Producer margins as the best indicator for competition intensity Producer margins have fallen drastically. The contribution margins to be generated do not fully cover the fixed operating costs of older power plants (price basis: spot market 2010, futures market 2011). Figure 4 shows the development of producer margins since 2005 which were generated in order to cover fixed operating and capital costs. Power plant use (8,760 h) is analysed on the basis of daily trading settlement prices for electricity, gas, coal and EUAs for the front year. The result is the sum of expected contribution margins. The contribution margin level in November 2010 (for the front year) is comparable with the level in mid-2005. Today, combined cycle power plants generate a contribution margin level comparable with that of coal-fired power plants with an efficiency of 39 %. This is also a consequence of the fuelswitch price concept on EUA markets. The Euro / MWh 100 90 80 70 60 50 40 30 20 1 0 0 gEnERATIOn Demand range (vertical grid load 2009) 0 5 1 0 1 5 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 GW Nuclear energy Natural gas Hard coal Lignite Others figure 3: Merit order of available power plants feeding into the transmission grid to cover vertical grid load in Germany; source: Platts 2009, 50Hertz, Tennet, Amprion, EnBW, LBD analyses; Stand 30.11.2010). Euro/kW(el) 300 250 200 150 100 50 0 07.03 01.04 07.04 01.05 07.05 01.06 07.06 01.07 07.07 01.08 07.08 01.09 07.09 01.10 07.10 01.11 fixed costs CCGT power plant fixed costs coal power plant new clean dark spread coal power plant (34,0%) clean dark spread coal power plant (44,5%) clean dark spread coal power plant (39,0%) clean spark spread CCGT power plant (55,0% (LHV)) figure 4: Development of specific contribution margins of various power plants with domestic sites in the NCG market territory. The grey and light green bars in the background show the bandwidth of fixed costs for coal-fired or combined cycle power plants; source: EEX, Reuters, LBD analyses; as per: 30 November 2010.
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