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Cheap US coal, overcapacity hit Europe gas plants
Gas projects in Eastern Europe need huge investments but utilities have idled gas-fired power plants because of cheap US coal supply
The boom in production of American shale gas has seen the country’s coal exports rise, as thermal power in the US is replaced by cheaper domestic gas. This, in turn, has brought down the price of coal on the international market and driven European utilities to increase their usage of coal fired power plants. US Energy Information Administration data shows a 23% rise in US coal exports to Europe in 2012.
Statkraft, a Norwegian utility, has idled a gas facility, and E.ON has said it may do the same on several plants across Europe. With high oil prices dragging up the price of gas contracts, it is simply cheaper to burn coal.
This, however, is not the only reason why power stations are being mothballed and projects cancelled, according to Kash Burchett, European energy analyst at IHS Global Insight.
“You’ve also got a lot of overcapacity in the market. The reason for that is obviously the recession. Demand from industry and manufacturing is quite low, particularly in continental Europe,” Burchett said. “Equally, there’s a lot of new capacity coming online, which were investment decisions sanctioned in the run up to the recession or even during it, with the expectation that demand was going to remain quite high.”
With utilities’ balance sheets in a “wretched” position, laden with debt, and trying to deleverage, an inability or unwillingness to invest in large, capital-intensive projects could mean supply concerns down the line, Burchett said.
Long-term demand for gas in Europe will be critical for the success of several large scale projects in Southern Europe and Central Asia. BP hopes to dramatically expand production from its Shah Deniz field in Uzbekistan, building a huge new pipeline from the Caspian Sea to Turkey as part of a $40 billion project.
From there, it is assessing two potential bids, one for the Trans Adriatic Pipeline (TAP), which would carry gas to Italy, and the Nabucco pipeline, which would snake through Eastern Europe to Austria. BP’s vice president for the development of the Shah Deniz asset, Al Cook, told a panel on energy security at the EBRD meetings that the company expected to make a final decision on which route it would back first by the end of 2013.
The economics of the project, Reinhard Mitschek, the CEO of Nabucco Gas Pipeline International, the company developing the northern route, told the panel, assume continuing demand from Poland, Germany and France.
Gas will inevitably remain part of the overall energy mix in the region—Turkey alone will double its installed capacity in the next decade—but displaced coal from shale gas has added more complexity to an already complex power industry, according to Aygen Yayikoglu, managing partner of Crescent Capital, a private equity firm that invests in power generation in Southern Europe.
Oil prices, security of supply concerns, demand issues and, crucially, whether or not regulators enforce a price for carbon emissions, which would immediately cut back on the expansion of coal power, are all contributing to the uncertainty.
“And since we’re talking 10, 20-year timelines [while projects are completed], I find the shale issue one among four, five very important issues, and they’re all interacting.”
- Follow us on twitter @emrgingmarkets
Statkraft, a Norwegian utility, has idled a gas facility, and E.ON has said it may do the same on several plants across Europe. With high oil prices dragging up the price of gas contracts, it is simply cheaper to burn coal.
This, however, is not the only reason why power stations are being mothballed and projects cancelled, according to Kash Burchett, European energy analyst at IHS Global Insight.
“You’ve also got a lot of overcapacity in the market. The reason for that is obviously the recession. Demand from industry and manufacturing is quite low, particularly in continental Europe,” Burchett said. “Equally, there’s a lot of new capacity coming online, which were investment decisions sanctioned in the run up to the recession or even during it, with the expectation that demand was going to remain quite high.”
With utilities’ balance sheets in a “wretched” position, laden with debt, and trying to deleverage, an inability or unwillingness to invest in large, capital-intensive projects could mean supply concerns down the line, Burchett said.
Long-term demand for gas in Europe will be critical for the success of several large scale projects in Southern Europe and Central Asia. BP hopes to dramatically expand production from its Shah Deniz field in Uzbekistan, building a huge new pipeline from the Caspian Sea to Turkey as part of a $40 billion project.
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From there, it is assessing two potential bids, one for the Trans Adriatic Pipeline (TAP), which would carry gas to Italy, and the Nabucco pipeline, which would snake through Eastern Europe to Austria. BP’s vice president for the development of the Shah Deniz asset, Al Cook, told a panel on energy security at the EBRD meetings that the company expected to make a final decision on which route it would back first by the end of 2013.
The economics of the project, Reinhard Mitschek, the CEO of Nabucco Gas Pipeline International, the company developing the northern route, told the panel, assume continuing demand from Poland, Germany and France.
Gas will inevitably remain part of the overall energy mix in the region—Turkey alone will double its installed capacity in the next decade—but displaced coal from shale gas has added more complexity to an already complex power industry, according to Aygen Yayikoglu, managing partner of Crescent Capital, a private equity firm that invests in power generation in Southern Europe.
Oil prices, security of supply concerns, demand issues and, crucially, whether or not regulators enforce a price for carbon emissions, which would immediately cut back on the expansion of coal power, are all contributing to the uncertainty.
“And since we’re talking 10, 20-year timelines [while projects are completed], I find the shale issue one among four, five very important issues, and they’re all interacting.”
- Follow us on twitter @emrgingmarkets
11 May 2013
