Quantifying wind & solar intermittency

We look at how to quantify the swings in wind & solar output that are driving increasingly important gyrations in power market supply stacks and prices.

Timera Angle

Timera speaking at EAGC 9th Nov

David Stokes (Timera MD) will be speaking at the European Autumn Gas Conference in Berlin on 9th Nov (11:30-12:00). The presentation on ‘Investment Opportunities in European Gas & LNG Infrastructure’ will cover:

  1. Market tightening: Why hub prices have doubled since Jul 2017 & what’s next
  2. 3 key drivers: How LNG flows, switching and Russian flows are driving marginal pricing
  3. Value capture: How market evolution and roll-off of LTCs is shifting asset value nearer to delivery
  4. Portfolio construction: How energy companies are restructuring gas portfolios in response
  5. Asset investment: How market transition is causing a structural shift in gas asset risk/return profiles

Shell led Canada LNG project FID

The Shell led Canada LNG project sets out a marker for the next wave of supply:

  1. Size & timing: A $14bn initial project of 14mtpa from 2 trains is scheduled to deliver gas by 2025. Further trains are likely to be cheaper once transit infrastructure is in place.
  2. Supply gap: This project breaks a hiatus of major FIDs since 2016. The slow pace of investment may cause the LNG market to swing into deficit by 2022 if Asian demand growth continues at current rates.
  3. Market risk: The recent surge in TTF prices to 10 $/mmbtu may have helped the FID decision. But project partners carry substantial market risk across the 5+ year development window.
  4. Capital: The project (& market risk) is being backed by the balance sheets of oil majors (Shell, Petronas, PetroChina). This may be the dominant financing model for next wave.
  5. Model: The project illustrates the key ingredients required to get past next wave FID: low cost of capital, low cost reserves, ability to bear market risk & market access.

Capturing flex value - 5 challenges

The value of flexible UK power assets (e.g. engines, batteries, CCGTS & DSR) is increasingly focused on margin capture from price shape and volatility close to delivery. 5 key challenges owners & investors are facing:

  1. Prompt value: Quantifying & managing asset exposure to price shape & volatility.
  2. Liquidity: Lack of liquid granular products to hedge shape & volatility.
  3. Transaction costs: value erosion from execution of hedging & optimisation.
  4. Risk adjustment: Appropriate discounting of uncertain extrinsic revenue streams.
  5. Pricing options: Structured probabilistic framework to define, price & exercise asset optionality across Wholesale, BM, Ancillary & Embedded Benefit markets.

Energy transition in practice

Two recent podcasts from Columbia Energy Exchange make for some very insightful summer listening:

  • Shell’s transition to power: Shell Exec Maarten Wetselaar talks about how & why Shell is reorienting its business model towards power (e.g. recent acquisition of First Utility in UK). He also addresses Shell’s strategy for renewable technologies and the role of gas in response to evolving energy markets.
  • Shifting energy landscape: Obama Administration US Energy Secretary Ernie Moniz talks about some key structural drivers transforming energy markets. Moniz sets out a very engaging perspective on the evolution of low carbon technology, the role of nuclear and the impact of climate policy and geopolitics.

LNG derivatives market maturing

Cheniere & CME Group are developing a physically settled LNG futures contract, delivering at Sabine Pass. This will add to existing SGX & ICE LNG futures contracts and some bilaterally traded derivatives. Liquidity is embryonic but starting to grow. 4 factors driving growth:

  1. Spot liquidity: Derivatives require a liquid spot reference price. This is being facilitated by growth in spot cargo trade and maturing price markers.
  2. Increasing flexibility: LNG portfolios are becoming more complex and flexible. E.g. US export contracts are rapidly boosting shorter term trading & optimisation of LNG supply.
  3. Asian buyers: Structural imbalances & new supply in Asian LNG portfolios are seeing buyers expand commercial & risk management capabilities to support portfolio management.
  4. Commodity traders: Intermediaries such as Vitol, Trafigura & Gunvor are rapidly expanding their LNG market presence. Their focus on shorter term arbitrage opportunities & risk management requirements are a catalyst for liquidity.

The majority of LNG portfolio hedging will continue to be done at key liquid hubs (TTF, NBP, HH). But growth in derivatives will facilitate greater flex to realise value from regional spot price liquidity & volatility.

UK power transactions ramp up

UK thermal power assets are changing hands with the following portfolios in play:

UKPR, the UK gas engine & battery developer, has just been sold to Singaporean utility Sembcorp by private equity players Inflexion & Equistone for £216 million, after a complex & drawn out process.

Green Frog UKPR’s major competitor has had less luck with its parallel sales process with preferred bidder I-squared pulling out (8 £/kW capacity price unlikely to have helped).

Scottish Power has flagged the potential sale of UK gas-fired plants (timing to be confirmed) in stark contrast to its rival SSE who has just announced a £350m investment in a new CCGT (Keadby 2).

Calon is considering the sale of its portfolio of 3 UK CCGTs according to a recent FT article. This would follow Centrica & Engie’s sales of UK CCGT portfolios.

Centrica & EDF are both planning to sell stakes in existing UK nuclear assets, Centrica to exit & raise capital and EDF to sell down a 20-30% stake.

Timera Snapshot

Shipping charter rates explode higher

Spot charter rates are an important driver of regional gas price differentials and flows. Rates have surged above $150k per day in 2018 to an all time high. This is partly due to strong Asian LNG demand and longer average journey times. Higher charter rates and a narrowing Asia/TTF spot price spread have seen LNG starting to flow back to Europe over the last 4 weeks as Asian buyers look to be well contracted into the winter.

Timera briefing: European gas market in transition

Timera has just published a briefing pack on the transition taking place in the European gas market. This covers:

  1. Analysis of tightening European & global gas market balances
  2. Dynamics of 3 key current drivers of European hub prices (LNG flows, switching, Russian flows)
  3. Potential paths for hub prices, seasonal spreads & volatility
  4. Commercial challenges facing gas players given market transition (capturing asset value, portfolio construction, asset investment)

This pack can be downloaded here: European gas market in transition

Winter alert: Russian flows hitting constraints

A tight European gas market focuses attention on Gazprom as the key marginal supplier of gas as winter approaches. Northern pipeline routes from Russia have hit max flow constraints this year. That leaves the Ukraine route as the key source of additional supply. Gazprom has auctioned ~0.6 bcm of incremental gas since Sep, flagging 1.1 bcm more for auction by year end (& this may rise). But supply outages or a cold snap over winter may see constraints on all Russian entry points into Europe. That means TTF prices rising to (i) push CCGTs out of merit & (ii) attract LNG from Asia.

European & Asian gas price surge

European hub prices have surged more than 30% over the last 3 months (blue line in chart).  TTF has risen to maintain power sector switching levels as carbon prices have also jumped. Asian spot LNG prices (red line) have followed suit in order to maintain a price spread that continues to incentivise diversion of LNG away from Europe to Asia.  The result is an intensifying focus on how Gazprom will respond.  TTF at 10 $/mmbtu is a shot in the arm for global LNG developers looking to FID new projects.  The threats posed by new price taking LNG supply are not in Russia’s interest. Watch out for a Gazprom volume response.

UK wind & solar swing distributions

What will be the annual range in wind & solar output be in 2030?  The chart shows the projected distribution of annual volume range from low (5th percentile) to high (95th percentile) wind & solar output in 2020 vs 2030. Analysis assumes 25GW solar and 35GW wind installed by 2030. Fluctuations in wind and solar output are set to become increasingly important drivers of power price shape & volatility in the 2020s. The ability to capture margin from shape & volatility will underpin the value of flexible assets (engines, batteries, DSR & CCGTs).

UK marginal price setting dynamics

We extend last week’s analysis of wind & solar output distributions out to 2030 in the chart. Two key factors are combining to drive up intraday price shape and volatility. Firstly engines, GTs, batteries & DSR are replacing retiring coal & CCGT units with lower variable cost. This is lifting prices in periods of high demand & low wind/solar output.  Secondly increasing levels of wind and solar capacity are acting to pull down prices in periods of low demand & high wind/solar output. Wind/solar output distributions are rapidly becoming a major factor driving power asset risk/return dynamics.