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European Gas demand to increase price

Monday, September 17 09:54:10

Germany is Europe's largest electricity market and is connected to nine neighbouring countries, so any change in its power production system has a knock-on effect on other European markets. "Although neighbouring countries of Germany are not planning to install high amounts of renewable generation capacity they still will experience an increase in (gas) price volatility," Poyry analysts wrote in the report. Germany's neighbouring markets will experience an increase in gas price volatility, but unconnected countries such as Britain or Spain will also see higher price jumps due to the huge amount of wind power set to connect to electricity grids.

Poyry forecasts power plant gas demand in the Netherlands to rise by 55 percent to 17 bcm/y and by 6 percent to 34 bcm/y in Britain, Europe's largest traded gas market. The need for gas-fired power plants to complement renewable energy production will be greatest in winter, when electricity demand rises and wind changes are more common, Poyry said. Overall German gas demand, including residential, commercial and industrial consumption, is expected to rise 22 percent to 110 bcm/y by 2030 and Dutch gas consumption will reach 52 bcm/y, up 21 percent by the same year.

Next to the prospect of huge trading profits, one particular sector of the gas market - storage - will also be able to take advantage of price volatility. Storage facilities are typically divided into two types: seasonal and fast-cycle sites. Seasonal sites store gas during the summer, when prices are low, and release it in winter, when prices are high, but fast-cycle facilities are able to store and then release gas at any time of the year. This characteristic will allow fast-cycle storage sites to respond to the short-notice needed for more gas in power plants more easily than seasonal storage sites, said James Cox, who led Poyry's report. But the geology for building fast-cycle storage, usually underground salt caverns cleared of their deposits to make room for gas, only exists in a limited number of countries, notably Britain, Ireland, the Netherlands and Germany.

Poyry's models predict that by 2030, Britain will be using five times more fast-cycle gas storage space than current levels. "Fast-cycle storage facilities experience an increase in revenues, benefiting from higher utilisation and greater price volatility," Poyry said, adding that 12-18 percent more storage volume will be required by 2030. The outlook for gas storage in the short term, however, is less attractive as low volatility means fast-cycle storage is relied upon less and the spread between winter and gas prices, which determines profits from seasonal storage, is expected to remain low for years to come.

As operators of gas-fired power plants in Europe will become busier, they also have to brace themselves for higher maintenance costs because the need to switch plants on and off at short notice will tire out equipment more easily. "It's the unpredictability and the fact to start up cold much more that will drive up the costs of maintenance," said Cox, adding it was hard to predict by how much costs would rise as there was little transparency on maintenance spending. Gas-fired power plant technology has typically been improving in efficiency, meaning generating more electricity for less gas, but modern combined-cycle gas turbine (CCGT) plants will focus more and more on being able to suddenly shut down or restart, Cox said, a characteristic which makes gas plants vital to back up renewables.

Higher fluctuation in demand for gas from power plants will also take its toll on gas networks whose operators will have to adapt to sudden gas requirements when renewable energy output drops. Network operators in Britain and Spain, two markets which already have a high amount of gas-fired power capacity and which expect a lot more wind power, will see the greatest need for more flexible gas systems to accommodate demand fluctuations within the same day, Poyry said. The ability for the network to respond to unpredictable fluctuations in gas demand is particularly important in the early morning periods, when electricity demand typically rises as the working day starts. Cox said that these changes do not require gas markets to move to an hourly balanced system, such as the one in operation in the Netherlands, as such a structure would render gas trading more difficult. ( C) Reuters