The coming revolution in conventional power production

The ongoing energy transition represents a paradigm shift that will not just bring new ways to generate, store and transmit power – it will also transform existing ones. At PwC Strategy&, we’ve analysed the effects that will be felt throughout the power and utilities value chain and are presenting them in a series of articles to help readers and clients navigate the energy transition to best effect. After working on the conventional power generation segment of the ecosystem here’s a summary of the main take-ways

The issue

At its heart, the energy transition is about decarbonising the power sector. Across Europe, we’re seeing the electricity mix shift away from carbon-intensive conventional power generation towards clean and renewable technologies. This process is supported by EU and national policy objectives to phase out coal and nuclear plants and increase the cost of emissions.

A parallel development caused by efforts to reduce CO2 is the future electrification of the heating and transport sectors. Partly because of this, demand for electricity across Europe is set to increase by 17% by 2050. In markets such as the Netherlands, demand growth could, according to our analysis, surge by as much as 35% in that period.

The conundrum

There are specific problems linked to the transition. Conventional baseload power generation is stable, whereas renewable power production is intermittent. As we shift from the former to the latter, wholesale power prices are likely to rise and wholesale price volatility could increase, with more frequent power price spikes and zero or negative power prices.

Security of supply may also become more limited, particularly during periods of low renewable power production. This may mean that more and more dispatchable capacity is necessary to provide additional supply when alternative sources fall short. As long as access to sufficient storage capacity remains limited by economics, technology and physical proximity, the intermittency of renewable power generation will have to be offset by a flexible power counterbalance.

The solution

Gas power plants are flexible and well positioned to deal with the intermittency of future supply, while producing only around 50% of the greenhouse gas emissions of coal plants. Following a few years of poor market conditions where gas power plants across Germany and Netherlands were mothballed, gas power plants are now coming back online and are once again looking at positive clean spreads.

But the economics of gas power generation remain dependent on global gas and coal commodity prices, CO2 prices and, of course, wholesale power prices. Based on current trends, gas power is likely to remain more expensive than coal until the early 2030s due to an expected decline in coal prices which will be only partly offset by increasing CO2 prices (after that, increasing CO2 prices will push the cost of coal above gas).

The upshot

Power prices will become more volatile, with more differences between high and low-demand periods. During periods of high renewable production, zero marginal costs will lead to low or even negative power prices – for example, on 29 December 2017 in Germany, energy-intensive industrial customers were paid up to €50/MWh to consume power due to strong winds. Conversely, during periods of low renewable production, and with less coal and nuclear capacity, the price will be set by the more expensive gas technologies. These price swings will become more extreme and frequent as the share of renewables in the electricity mix increases.

New capacity deployments will need to be highly efficient and flexible to take full advantage of increasing supply intermittency and associated price volatility. There will also probably be a positive business case for small-scale peaker plants in the form of open-cycle gas turbines and liquid fuel generators. Utility-scale battery energy storage systems may also profitably provide reserve capacity as peaker facilities.

What this means for you

It’s important for stakeholders in power generation and transmission to position themselves and plan effectively to address future market challenges and capture emerging opportunities. PwC Strategy&’s report on this topic features separate recommendations for policymakers, producers and consumers; I can’t include them all in here, but feel free to send me a PM with any questions or remarks you might have.

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