Powerful changes in power generation

by Pál Gerse,
Business Development Expert, MET Power Hungary

The power market has profoundly changed in Hungary and all over Europe. The economic crisis, the political interventions and the support of renewable energy production have altered the market conditions of traditional power generation.

The new era has started with the EU energy policy’s triple 20% targets, followed by policy actions. One of the action plans, the Roadmap 2050 visualizes a nearly 100% decarbonisation as the main target in power generation until the middle of the century. The basic rule, the mandatory purchase of energy coming from renewable energy sources (RES) divided the electricity market into regulated and free segments. The Fukushima accident has also boosted the increase of renewable sources.

As a forerunner, Germany decided to close nuclear plants and accept Energiewende to fully replace these plants with RES generation. New EU policies are influenced by green movements, interested industry segments and political turbulences on primary energy markets (Ukraine, Middle East).

Renewable energy depends on weather

Nevertheless, renewable energy sources could not yet adapt to open market conditions because of their dependency on weather conditions (wind, sunshine) and high development costs. To overcome these obstacles, renewable sources need economic and political support, i.e. foreseen price levels and sales opportunities, so governments decided to grant these price levels for their generation. In addition, system operators in EU member states are obliged to purchase the totality of renewable generation.

Consequently, conventional power generation is in trouble and the competition for decreasing sales possibilities has dramatically increased. The natural-gas-fueled power plants are particularly suffering, even the highly efficient ones. Their generation costs consist of low fix cost elements and high variable costs (contrary to nuclear or coal power plants), so their market share is shrinking and these units do not even get enough income to cover their operational expenses.

The situation is even worse in Hungary, as gas power plants have another strong competitor: import supplies coming from foreign – nuclear or coal-fired – units and from the surplus of renewable power generation in Germany. Without enough revenue these plants are making losses, so the owners have to decide about their future. Taking into account future market possibilities, they may be ready to finance losses for a few years, but not in the long run.

While wholesale prices are constantly decreasing, nobody talks about the costs of energy policies. The subsidy of RES generation has appeared in consumer prices, increasing in most European markets.

Capacity markets may help

The current state of fossil-fueled generation portfolio will change in the near future. Many of the units, especially the efficient ones, may be for sale and could be relocated in places where demand is growing faster and market prices promise return on investment.

Decision makers should analyze the situation and the related risks, taking into account that energy supply security is a fundamental requirement and a national responsibility. They should propose correcting actions which help maintain the necessary capacity level.

One of the actions may be the introduction of capacity markets, already in place or under realization in many EU countries. The main goal is to maintain strategically important capacities (power plants) inside the power generation system, thus guaranteeing supply security.

Capacity markets make energy supply more stable, balancing the weather-dependent – therefore unpredictable – RES generation and the constantly changing power consumption. During peak time (during the day), power consumption drastically increases, so one needs flexible power plants capable of instantly providing large quantities of electricity. That is exactly what gas-fuelled power plants are able to do.