UK Gas Plants Power Ahead as Coal Sector Eyes More Closures

UK gas power plants are set to benefit from rising profitability as oversupply pushes input costs down, although more closures are predicted in the coal sector as emissions costs soar.

Falling gas prices due to a surfeit of supply have made gas more competitive to burn for electricity generation than coal.

As input costs fall, gas plants can increase the rate at which they generate electricity, leading to greater efficiency through economies of scale. That lifts their margins.

Gas plant generation margins - known as clean spark spreads - for delivery in winter 2016/2017 have risen 33 percent or 2 pounds per megawatt hour in a week to around 7 pounds/MWh, according to Macquarie.

"If maintained, this is a major positive for (gas plant operators) SSE and Centrica," analysts at the bank said.

"Falling gas prices are reducing costs faster than power prices as the punitive carbon price holds up the cost of coal production," they added.

The British government announced plans in November to close polluting coal-fired power plants and replace them with gas plants by 2025.

On February 8, Engie's 1 gigawatt (GW) Rugeley coal plant in Staffordshire was the second to announce closure this year, following SSE's decision to shut most units at its 2-GW Fiddler's Ferry facility.

Analysts say three plants are particularly at risk in the next couple of months - EDF Energy's 2-GW West Burton A and 2-GW Cottam plants, and RWE's 1.6-GW Aberthaw. EDF and RWE were not available for comment.

The 2-GW Eggborough coal plant was granted a lifeline to remain open until March 2017 on February 9, after its operator said last year it was too costly to keep running, while Drax's 3.4-GW coal plant and EPH's Lynemouth plant are converting to biomass.

All power operators have been affected by a 20-35 percent drop in open-market electricity prices of recent months, as milder-than-normal weather has curbed demand.

But costs for coal plants have also soared since Britain's carbon price floor doubled last April to 18 pounds per tonne of carbon dioxide (CO2) emitted.

Clean dark spreads - UK coal power plant generation margins, which include costs of carbon emissions - are currently hovering around zero at plants with 36 percent efficiency. When coal transportation costs are included, the spreads of older plants are negative, consultancy Timera Energy said.

"This has acted to erode generation margins to the point that the entire UK coal plant fleet is unprofitable at current forward market prices," it added.

Asked for comment, EDF Energy referred Reuters to a January statement when it said its coal plants would continue to play a key role in providing security of supply until they can hand over to low-carbon generation.

Longer term, more coal plant closures will further tighten Britain's electricity supplies and could prompt more active government support for new gas plant builds.

"That is likely to mean direct support for large-scale new build gas plants. Renewable and nuclear plants have claimed their hand-outs. CCGTs (combined cycle gas plants) are likely to be next," Timera Energy said.