Coronavirus lockdown dampens UK CCGT demand to pre-fuel switch level

London — Enforcement of a nationwide lockdown and social distancing measures introduced in the UK to combat coronavirus have constricted gas demand for power generation to levels not seen since the effective phasing out of coal, data from S&P Global Platts Analytics has indicated.

Economic activity in the country has slowed since the introduction of the measures, announced by Prime Minister Boris Johnson on March 23, consequently damaging peak demand for electricity and, by extension, gas-fired power station offtake.

Metered allocations from CCGT unit exit points on the UK gas system have averaged just 39 million cu m/d since the measures were imposed, ranging between a low of 19 million cu m/d amid Sunday's warm weather, high wind generation and weekend demand profile, and 58 million cu m/d recorded on March 31.

Demand in the immediate aftermath of the lockdown came to 28 million cu m on March 24; the lowest recorded for a working day in this timeframe.

The news follows a statement from UK power market coordinator Elexon last week that demand for electricity had fallen between 15-19% since the lockdown came into effect.

This has been characterized by a distinct fall in peak electricity demand, and a flattening of the overall demand curve.

Indeed, Monday morning power demand in the country amounted to 25 GW as the working day began; unusually lower than Sunday's peak of 27 GW achieved as evening lighting demand kicked in, data from Elexon showed.

As a non-renewable source of electricity, CCGT units require procured feedstock gas, making it an expensive form of power generation compared to renewable sources. This means it is therefore more economic to run these plants at peak times when demand and hourly contract prices are higher.

With subdued peak demand resulting from coronavirus containment measures, gas-fired units are struggling to compete at times of high renewable generation, although opportunities remain for gas to thrive in filling the thermal gap left by low renewable output.

Profitable gas

Gas-to-power demand levels have been structurally higher since coal-fired generation dominated the power supply mix, and showed greater variation as renewable installations have increased.

Average CCGT consumption in the current market environment has not been this low for a March or April delivery since 2015, then recorded at 35 million cu m/d and 32 million cu m/d respectively. Subsequent years have seen average gas-fired power requirements in excess of 50 million cu m/d for these monthly periods.

After the introduction of the UK carbon price support in 2013 -- essentially a tax on carbon emissions -- and the growth in the complementary EU emissions trading scheme for carbon emissions permits, coal-fired generation soon became uneconomic.

Today, the month-ahead NBP gas price, last assessed at 16.85 p/th Monday, is remarkably more than two-thirds lower than UK coal-switching -- the theoretical threshold for gas to become less economic than coal -- assessed by Platts at 52.81 p/th Monday.

Despite this overwhelming gulf in profitability, the remaining 7 GW of the UK's installed coal-fired generation capacity is still supplying a trace element to the power grid, even in these testing times, owing to well-hedged power production positions.

Locked down

However, despite its significant advantage over coal-fired generation, the hedging tactics adopted by coal-generators are not as easily transferable to gas-fired plants, and are currently proving their undoing.

Day-ahead NBP natural gas prices collapsed at the end of March as the lockdown began to bite, and eventually slumped to an 11-year low of 15.85 p/th Friday.

While this would ordinarily be good news for power generators, in these extraordinary times it signifies how power purchases were potentially the last bastion of support for gas and power prices in the low-demand environment.

It also very clearly illustrates how some CCGT purchase positions have been not filled in advance, lest they need to be unwound and sold at a loss, in a weakening spot market.

The lockdown has also taken its toll on wholesale power prices, diminishing returns for gas-fired power. Last week witnessed the lowest day-ahead baseload and peak prices since the second quarter of 2007, with peak assessments even falling below the base momentarily; something virtually unheard of in the power markets.

Consequently, the day-ahead clean spark spread for 50% efficient gas-fired plants was assessed at just GBP1.82/MWh Friday; a seven-year low for summer delivery.

Movements in UK power prices are strongly connected to UK gas prices, given that gas makes up the vast majority of thermal generation in the country, making the traded feedstock commodity effectively the best barometer of marginal power supply.

Market sources told Platts that the near absence of CCGT gas buyers in the NBP spot market led to the recent collapse in prices, as gas-to-power positions are more commonly optimized on a day-ahead basis, given their role filling the thermal gap left by renewable generation.

Moreover, some CCGT consumption positions are not even balanced on the spot market at all, if the demand profile is offset with an equivalent entry of gas from a coastal terminal. This balances the power-production gas portfolio, while also benefiting from the Optional Commodity Charge, or 'short-haul', reduced tariff for usage of the National Transmission System for gas.

Such contractual arrangements are agreed in advance with the Transmission System Operator for the reduced rates, and with supply partners for beach gas, as part of a 'beach swap,' and are invoked as required, sources said, and would only serve to detract buyers from spot markets.

Therefore, with motivation to buy evaporating, gas-to-power offtake could be limited for as long as the lockdown is in force.