Cogeneration is on a roll in Europe. traditionally the Netherlands has been the place where CHP and captive power plants have prospered at the expense of monopoly utility energy markets, until the Gröningen gas bubble burst. We now have to wonder if the Dutch experience will not turn out to be a microcosm of what will happen to the burgeoning gas fired power plant markets in Greater Europe and other parts of the world.
The Dutch government issued something of an embargo on the installation of more gas fired power plants long before the prospect of deregulation and unbundling was seriously considered. Now the UK government has done something similar with one major difference.
Speaking at the recent I. Mech. E. conference CHP 2000, UK Minister for the Environment Michael Meacher revealed that plants of less than 100 MW would now be allowed to proceed, and small distributed CHP projects are actively being encouraged by the present government with new public funding.
In Germany, the large local monopoly utilities have largely succeeded in squeezing out local CHP and IPP projects to the point that even the municipal Stadtwerke are now running for cover, but a new wave of on-site industrial captive power plants is now threatening to initiate competition in power supply where deregulation failed. Germany’s new energy law in response to the EU Energy Directive threatens use-of-system charges for third party access to transmission lines that would make independent power projects quite uneconomic. What we see in Germany is new industrial on-site power plants being owned by the monopoly utilities and essentially leased to the users under agreed tariffs.
So much for competition in the Federal Republic, but when we look at the UK something very similar is happening. As may be inferred from the article on the Seal Sands in this issue, it is the two large ex-CEGB quasi monopolies that are installing the majority of the more substantial new industrial CHP plants as well as owning controlling interests in many of the new quasi independent large combined cycle projects.
It seems that large industrial consumers are now neither motivated to take on the perceived level of risk nor attracted by the prospective rates of return from IPPs. The large established utilities, however, can afford to finance such projects on their balance sheets with little concern for the financial risks involved. It is clear that long term partial recourse finance is no longer available for IPPs, and that cash rich large utilities must find their feet in competing in the merchant power trading market to survive.
IPP economics now depend on very demanding stringencies. The project schedules have to be incredibly short, capital equipment must be acquired at such low costs that manufacturers cannot survive for very long on the low or negative levels of profit they are making on their products, and thermal efficiencies of generating plant must be so high that immature technology must be used, and that in itself introduces a level of risk that tends to defy competition.
Even more critically, fuel costs must be minimal and diminishing over the full term of the project. As ever, natural gas holds the key to survival, and throughout Europe we see it is the big electricity utilities that start to become the big gas suppliers.
The prospective European gas interconnector is the influential wild card. The treaty on the 235 km underwater gas pipeline connecting the UK and Belgian grids was signed at the end of 1997.
This represents a massive reinforcement of the international position of the RTR project for upgrading the gas trading and transit network, and since the interconnector project delivers North Sea gas to Tractebel’s back door, the role of their Distrigas subsidiary within the European gas transport system will be substantially strengthened.
Tractebel president Baron Bodson has predicted lower gas prices as a result of this development, but it is difficult to see anything but a continuing premature ramp in gas prices for UK IPP power generators, reversing the competitive edge of new entrants to the power generation market. The prospect puts further stress on the need for an effective electricity futures market activity in the UK to replace the inadequate forms of CFD contract on which electricity traders in this country have survived since privatisation.