GLG News by John Cousins

Implications: Many current fuels and clean sources for power generation provide non-firm supplies. Coal remains the cheapest most cheaply and easily stored power generation fuel, and therefore must remain in the fuel misx of most generators.

Analysis: Wind and hydro power is intermittant. A period of a high pressure system may creat little wind for wind farms. Hydro output is either must take due to the finite capacity behind dams and the need to maintain minimum river flows, and during drought conditions, there is generally no or at best reduced output. Nuclear power is relatively expensive to construct, and is often ruled out on political grounds. Oil is relatively easy to store and utilise, but is particularly expensive. Natural gas supplies can be seriously curtailed for political reasons, and isexpensive to store, and arguably too valuable for use as a chemical feedstock, to ituse for power generation. Coal has escalated in cost in recent times but still remains a cost effective for power station. Provided adequate stocks are maintained at collieries, ports and power stations it is the best way to maintain security of supply. New cleaner coal technologies are increasing the amount of coal generation that has acceptable limits of emissions, and more clean up of existing coal-fired plants will reduce emissions. The world trade in physical coal is now around 800 million tonnes annually, with a global network of producers, and well established price markers. With coal on the ground a generator can produce electricity and provide firm generation capacity.

   

Implications: Globally thaere is great demand for power generation equipment and skills for construction, testing and operation of new plant. Plant owners who delay orders or have consent delays imposed upon then risk joining the queue for key components and skills for manufacture and commissioning of new plant.

Analysis: Many first world countries have delayed the ordering of new electricity generating plant due to many reasons.

First world contries are in general not training enough skilled engineers and technicians with the requisite skills to construct, commission and operate the new plant that is required globally.

Manufacturing capacity and the provision of sophisticated materials for new advanced generation plant are finite and insufficient to satisfy global needs.

Other countries such as China and India are constructing new plants quickly and are ahead in the queue for key components.

First world countries need to order equipment timely and regularly to ensure they access the global demand for key components and skills, or they risk being left waiting in the queue for these key elements of new build power generation equipment.

Implications: Throughout the boom period of BP's performance staffers have been incentivised by a target driven culture that has seen to be counter-productive to the overall group performance and image.

Analysis: BP staffers were incentivised to reach and exceed stretched targets and were rewarded accordingly. Current problems in US, Europe in both technical and commercial issues appear to eminate from this target driven culture and incentives to reach the stretch and stretch-stretch targets. This has led to the current low standing of BP globally and contributed to the demise of the former CEO. It remains to be seen if new CEO will be able modify the culture whilst also increasing performance of the group. Target driven cultures need an over-arching test to ensure the achievement of personal and area targets do not have an adverse effect on overall group performance.

Implications: BAA owns and operates the three main London Airports at Heathrow, Gatwick and Stanstead together with the three main Scottish hubs at Edinburgh, Glasgow and Aberdeen. The final airport in the group is Southampton. As such BAA has for years enjoyed near monopoly for business and leasure travel to and from London and Scotland. This has bread complacency and led to high staff numbers and poor productivity.

Analysis: As a regular traveller through many of BAA's airports throughout the last 30+ years I have experiency both a steady decline in the condition of the airports estate and staff attitudes.

True there has been an exceptional amount of investment in new buildings, but the pressure on increasing capacity has still not kept pace with numbers travelling. The commissioning and opening Terminal 5  at London Heathrow  next spring may lead improved levels of service and relieve capacity contraints at the other four terminals. There will however be a considerable time before the rest of the Heathrow estate is brought into the 21st century. Meanwhile the condition of the existing terminals remains in a state of squalar and deprivation as capacity pressures reduce cleaning and materials.

The only answer is to break up BAA and introduce more cometition into travel to London and Scotland. Increase competition for business and leisure traveling public must be the only way to improve the conditions at BAA airports. From a situation of using Heathrow as the main London hub and gateway to global travel only 20 years ago, business travelers only now use the airport when there are no other alternatives.

Implications: Whilst Cape sized vessels are the work horses of bulk commodity shipping the overall bulk shipping market needs to be considered. Considerable bult commodity transport is carried in smaller Panamax and Handy sized vessels.

Analysis: At present bulk sea freight rates are excellent for the ship owner, and a large capacity increase at the start of the next decade will cause rates to weaken. However Cape sized vessels are restricted by the their size into deep ports that can handle their draught restrictions. A large amount of low sulphur Russian coal that is the staple diet af many European coal-fired power generators is delivered in much smaller vessels. (UK takes more than 50% of its power generation coal from Russia) This is because the Russian load ports have restricted facilities and draught restictions that limit the size of delivery vessel. These factors will moderate downward pressure on shipping rates, and Russia's position as a "coal price taker" may be modified by becoming a "price setter" due to demand for its low sulphur product as we move further into an emissions restricted era.

Implications: Bulk freight rates slumped to uneconomic lows in the second half of 2001. Typical rates for Cape Size vessels from South Africa to Europe fell to US$4.5/te, and from Australia to Europe to US$6.60/te. For Panamax vessels Australia to Europe fell to US$9.25/te and from South Africa to Europe US$6.5/te. The growth in world bulk freight particularly in the far east has bouyed demand and saved the day for ship owners

Analysis: Ship owners will try to ensure rates never fall to such unsustainable levels again, and will therefore be very prudent in raising capacity. look at the effect of shipping costs in the European CIF (carriage, insurance and freight) coal price that recently passed US$100/te for 25.1GJ/te having languished in the US$30/te to US$50/te range between 1991 and 2003. The demand for coal in China, India and the Far East is only part of the reason for burgeoning international coal prices. Shipping costs are a big part of the increase. Demand for coal in Europe is likely to remain firm, and therefore shipping rates will remain firm as ship building capacity concentrates on higher value construction of cruise liners, LNG carriers and double hulled bulk liquid carriers.

Implications: Phase 1 (2005-2007) could be described as a complete failure or merely a leaning experience. Phase 2 (2008-2012) will build on earlier phase, but there are doubts that individual staes have been stringent in the issue of emission allowances. Phase 3 (beyond 2012) is a great opportunity

Analysis: Phase 1 has proved that the systems have worked, that emissions can be verified on a site by site basis and that data can be accurately. It was marred by states awarding too many free allowances, and this resulted in a price collapse.

There are still doubts about the issue of allowances in Phase 2, but most states have tightened their allocation, in many cases only after the rejection of national plans by the European Commission.

Phase 3 discussions are on going, with the mood for change going towards the auctioning of all allowances. Decisions must be made soon and the price of carbon emissions needs to be firm well into the future to ensure investors and utilities have the confidence to order low emission high efficiency plant to replace old dirty plant that must close by end of 2015 due to the EU Large Combustion Plant Directive

Implications: Cancellation of the proposed TXU coal-fired plants may lead to a perceived lack of firm generation capacity that can be adequately filled by new reliable and safe nuclear plants. Being first in the queue to license new nuclear reactors, will put NRG in a powerful position. There are more than sixty examples of GE designed, BWR power plants successfully operating or since de-commissioned globally. Examples of BWR’s are to be found in USA, Finland, Germany, India, Japan, Mexico, Spain, Sweden and Switzerland. The UK nuclear regulators, HSE together with the Environment Agency (EA), have developed a Generic Design Assessment (GDA) process for the new generation of nuclear power stations. A GE-Hitachi consortium has submitted its ESBWR that employs a direct-cycle, natural circulation boiling water reactor to the UK GDA process. Other designs submitted to GDA are two PWR's and an advanced Candu Reactor design.

Analysis:  BWR plants operate at lower pressure than PWR’s, and the pressure vessel is subject to significantly less irradiation compared to a PWR, and therefore does not become brittle with age. It also operates at a lower nuclear fuel temperature, with fewer major components and potentially lower risk of rupture causing loss of coolant compared to a PWR.

If the world is truly convinced on Global Warming the way ahead must be through reliable and safe nuclear power plants.

Implications: UK Government hope that privately financed nuclear power stations will be built to provide low carbon, firm electricity generation to increase security of supply. Around 13GW of coal and oil fired power stations will close by 2015 together with up to 6GW of nuclear capacity. UK's long term carbon dioxide emissions targets and aspirations will be impossible to meet without new build nuclear, as renewable technologies cannot be built quick enough or provide firm generation capability. Because of the long planning, construction and commissioning cycle for nuclear plants, an early start is necessary for new plants to be in service before 2015 to 2020

Analysis: The first of a new fleet of nuclear stations will have advantage in being in pole position for later nuclear plants. There are at least five nuclear power designs designs offered by a range of global manufacturers.:
    Areva NP (PWR)
    Atomic Energy of Canada Ltd (CANDU)
    General Electric Energy (Boiling water reactor)
    Westinghouse Electric Co. (PWR)
    Pebblebed Reactor.

The UK nuclear regulatory authority is the Nuclear Installation Inspectorate (NII), part of the Health and Safety Executive. NII said ealier this year that it can only evaluate three nuclear designs for licensing, and to add a fourth to the list would add an extra two years to the planning and licensing period. This is due to well known resource problems at the Agency. If UK government is not wanting to sink public money into new nuclear plants, it should allow promoters of new nuclear stations to have some choice in the designs that they will finance and construct. By limiting the nuber of reactor designs considered for licensing, UK is already into "picking winners" a disasterous trap that UK fell into in the 1960's when it developed gas cooled nuclear reactors when the rest of the world were concentrating on water cooled reactors.

Implications: The Miller Field has been in production since 1992 and is almost depleted. EOR was added to the field in 1996, using alternating water sweep and gas re-injection. A dedicated pipeline system exists between the Miller platform and Peterhead Power Station with no third party use, and gas re-injection exists on the production platform. If CCS is not viable without subsidy for this project, what chance has CCS of being commercially viable at other sites where infrastructure has to be built and where there will be no revenue stream from EOR? Is it wrong to provide government assistance for CCS on a natural gas project, and would any public funds be better spent assisting CCS on a more carbon intensive coal-fuelled project? Does existing infrastructure assist CCS or does it hinder the project economics?

Analysis:  BP have been working on this project for more than 2 years, and have always said it needed government assistance to be successful. BP's Partners in the Miller Field Shell and ConocoPhillips dropped out of the project many months ago, and Scottish and Southern Energy (SSE) who operate Peterhead Power Station are in Partnership with BP and Rio Tinto joined the consortium earlier in May.

SSE have 2300MW of installed generation plant at Peterhead, but can only despatch 1524MW due to transmission constraints. Why would SSE want to invest in adding 475MW of new generation to the already 775MW of stranded assets.

BP have failed to attract any third party business to the Miller infrastructure, despite other pipeline systems in that region of the North Sea attracting significant additional fields to existing infrastructure. BP now find the Miller infrastructure is empty and will be faced with decommissioning costs if no extra business can be found.

If this CCS project is not viable having considered an extra 57 million barrels of EOR, use of redundant infrastructure and gas re-injection equipment, and delaying decommissioning costs for up to 20 years. Then what are the chances for CCS project where there are far less commercial opportunities?

Implications: During 2006, UK coal-fired power station generated just over 50% of UK electricity, and of the c.52 million tonnes of coal burnt in these power stations only 17.5 million tonnes was produced from UK mines. Around 22.3 million tonnes of coal was imported from Russia and burnt in UK power stations in 2006. UK natural gas resources are declining more rapidly than anticipated even with development of marginal oil and gas fields being stimulated by high prices. Increasing amounts of natural gas will have to be imported in the future with much of it coming from Eastern Europe. UK needs nuclear power for security of supply going forward.

Analysis:

The two remaining Magnox stations are in trouble due to graphite core depletion. Oldbury has been shut since summer 2006 and is awaiting a regulators permission to start up, but in any case will close for good in 2008. Wylfa 1100MW Magnox station is due to close in 2010.

The 14 Advanced Cooled Nuclear reactors at 7 plants have had poor reliability in recent years. 4 Reactors have been shut down since September 2006 with boiler tube weld problems. 1 re-started on 20 May, and another is sorting problems prior to re-starting. The other two should get the OK to re-start in the next few weeks, but all four will be restricted to 70% for the forseeable future.

2 plants are currently due to close in 2011, a further 2 in 2014, 1 in 2017, and the remaining two in 2023. After that UK's sole PWR Reactor will be the only nuclear station operating beyond 2023.

UK needs nuclear power to maintain security of electricity supplies.

Implications: The SNP, Green and Liberal Democrat Parties all campaigned against more nuclear power stations in Scotland in the lead up to the May 3 election. A recent poll suggested more than 72% of newly elected member of the Scottish Parliament were against building any more nuclear power stations in Scotland. Whilst UK energy policy is a matter reserved for the Westminster Parliament, decisions on planning and location of new power stations in Scotland is matter for the Scottish Parliament

Analysis:  

The Dounreay and Chapelcross nuclear plants in Scotland have closed during the past decade and are being de-commissioned. The Hunterston 'B' nuclear station is currently set to close in 2011, leaving only the Torness plant that is licensed to operate until 2023.

A series of new nuclear plants in UK would be expected to locate at least one such plant in Scotland, but the anti-nuclear feeling in Scotland will resist such a move.

The Labour Westminster Government and the Scottish SNP led Parliament look set to be a logger heads on new nuclear plants, yet Scotland needs a balanced mix of electricity generating plants.

Scotland is rich in renewable energy resources, but there is a need for firm power generation, provided by fossil fuelled or nuclear generating plants. The two Scottish coal-fired plants at Longannet and Cockenzie were commissioned in 1973 and 1966, and will need considerable investment to keep operating and comply with emissions legislation.

Implications: Phase 1 of the EU ETS(2005 to 2007) has been characterised by a majority of EU Nations allocating too free many Carbon Reduction  Allowances. Verified emissions out-turn for 2005 caused the traded price of caron permits to collapse, and this has been reated when the verified emissions for 2006 were published in May 2007. Allocations for Phase 2 of the EU ETS (2008 to 2012) should have been approved several months ago, but States delayed submitting National Plans and many of these have seen the proposed Cap on emissions reduced by the European Commission (EC). The EC appears to be trying to be tough on State that are not seen to be reducing emissions fast enough and setting easy targets for carbon dioxide reductions.

Analysis: The proposed Cap on emissions for Phase 2 of the EU ETS is only around 1% lower than the actual EU emissions in 2005.

Czech Republic announced in April that it would make a legal challenge to the EC decision to scale back its proposed Phase 2 Cap of 101.9 million tonnes of carbon dioxide to 86.8 milllion tonnes (Mte).

Only the UK, French and Slovenian National Allocation Plans have been approved without requiring revisions, and the proposed Spanish plan has been only marginally scaled back.

Germany is furious that its proposed Cap of 482 Mte has been reduced to 453.1 Mte.

The European Commission is trying to hold the line of reducing emissions, but individual Nations, whilst supporting the ETS in principle, do not want to reduce emissions at the expense of harming its industry.

The Commission will therefore have reconcile these differences if Phase 2 is to be successful. Phase 1 could be described as a trial of the many systems for the ETS, but Phase 2 has to be seen to be reducing emissions significantly.

Implications: Germany, Spain and Hungary have coal production costs of more than twice the world market for coal and are dependent upon State Aid. Czech Republic, Poland, Slovakia and UK are more or less competitive on the World market, and are either un-subsidised or only receive a low level of subsidy for new investment or to mitigate inherited liabilities. New accession countries such as Romania and Bulgaria have to apply by end 2007 if they need subsidy for their mines. Many European coal produces have lived with subsidy for years, and may not be able to respond to future price pressures.

Analysis:  

Global coal prices have remained firm and above US$60/tonne during the past three years and the forward curve for globally traded coal delivered to Europe currently remains firm at around US$70/tonne until 2010.
International coal prices delivered to Europe traded between US$30 to US$40/tonne between 1999 and 2003.
The globally traded physical market for coal was around 550 million tonnes in 2006 and is set to reach 800 million tonnes by 2010.
Delivered market prices for coal are an amalgam of production and sea and rail transport costs, that are influenced by other commodity price fluctuations. If oil product prices start to fall, pressure will be on coal producers and transporters to lower costs. If European coal prices start to fall, the European producers will become increasingly uncompetitive and will demand more subsidy. In these circumstances, the European Commission may be forced to change their view that State Aid subsidies should end in 2010.
Environmental Lobby group Greenpeace accuses the European Commission of "dithering and delay" over phasing out subsidies for coal, and says subsidies for polluting technologies should be diverted to renewable energy sources. Whist this will put pressure on the Commission they be unable to resist the demand for subsidy from inefficient producers to maintain employment levels.

Implications: Power generators will co-operate with gas turbine manufacturers to develop new, higher output more efficient GT's, but seem unwilling to order new models. The latest Siemen's H Gas Turbine will be the worlds largest and most powerful gas turbine to date, and will have an output of 340MW. Previous new models of gas turbine have suffered problems when put into commercial service, and orders only start to flow once all the problems have been ironed out. Can the period between launching a new model of gas turbine, and a successful order book be reduced?

Analysis: Experience over the last fifteen years suggests that when a new gas turbine model first goes into service, operational and engineering problems occur. The first GE 9F gas turbines had major problems in the mid 1990's leading to one European Licencee going to the wall. When Alstom introduced their GT26 in the late 1990's major problems and failure to reach guaranteed performance almost brought the company to its knees. The first GE 9H gas turbine returning 60% effiency was launched and commissioned in 2003 at Baglan Bay in South Wales, and has recently been put up for sale by FG Power Systems. New gas turbines boast higher output, greater efficiency, lower life-cycle costs, lower emissions and increased operational flexibility, yet recent European orders would suggest that buyers prefer to order earlier more tried and tested gas turbines. Orders for gas turbines for UK's latest CCGt power plants have chosen gas turbines that have been around for 8 or 10 years. The importance of proven reliability and operational flexibility appears to be valued ahead of absolute performance in terms of fuel use.

Implications: The Robert Barr article quotes Scotland's First Minister Jack McConnell as seeking assurances from the EU on the Iberdrola take over of Scottish Power, but refusing to say whether the deal would be good or bad for Scottish business. In reality the First Minister has very little say in the matter, but needs to say something as he has to fight a general election in May 2007 and is currently well behind in the opinion polls to the Scottish National Party. Energy matters are not a devolved power to the Scottish Parliament and are a reserved power for the Westminster Government of Tony Blair.

Analysis: The Westminster Government are not likely to stand in the way of this merger or in further consolidation of the EK energy supply business. Consolidation has reduced the UK market to six really big energy supply companies: RWE Npower, E.ON Powergen, Centrica, EdF Energy, Scottish & Southern Energy and Scottish Power. Scottish Power was the smallest of the six and was ripe for take-over due to losing its way in its US investments before selling out to Warren Buffet's Mid American Holdings, and sacking many of its senior managers. Iberdrola looked at Scottish and Southern before deciding Scottish Power was an easier target. With four of the Big Six UK energy suppliers now subsidiaries of major European energy companies, Centric and Scottish and Southern Energy may also be vulnerable to takeover.