May 30, 2012 / 1:27 PM / 6 years ago

UK gas plants face profits squeeze until 2016-Nomura

* Spark spread seen rising to 6 pounds/MWh by 2014

* Idling capacity could help prices, spreads

LONDON, May 30 (Reuters) - Excess capacity and high running costs threaten to squeeze profit margins for the UK’s gas-fired power generators until 2016 spurring some to turn to cheaper coal, Nomura analysts said on Wednesday.

The spark spread, the profit derived from burning gas to produce electricity, should remain weak unitl 2014 as operators prove unwilling to support power prices by mothballing surplus gas-fired power plant capacity, a they said in a research note.

Idling plants would reduce UK electricity supplies and make gas-fired generation more profitable as operators can charge more for output.

Nomura estimates showed that while profits from burning gas will improve from 3 pounds per megawatt hour (MWh) to 6 pounds/MWh by 2014, they would still lag higher earnings from coal-fired plants.

“For spreads to improve materially by 2014, our analysis suggests a further 4 gigawatt (GW) of gas capacity would need to be retired,” the analysts said.

Yet just 1 GW of capacity is expected to be closed before the end of 2013, they said.

Sweeping shutdowns of coal capacity under EU-wide regulation that bans highly polluting power stations, up to 6 GW by March next year, should help deal with surplus supply of electricity, the note said.

While coal plants face permanent closure, gas plant operators are opting to idle rather than retire their assets, raising the risk of an extended supply glut.

Britain’s six dominant utilities Centrica, E.ON , EDF, Iberdrola, RWE and SSE, as well as independents such as Drax and Intergen, expect difficult operating conditions for gas-fired power producers in the medium term, but potential improvement from 2016, Nomura said following an industry-wide consultation.

‘PRISONER‘S DILEMMA’

“We think that industry participants recognise that gas capacity needs to close for spreads to improve, but are waiting for others to close their capacity first,” it said.

Uncertainty over the impact of the government’s Electricity Market Reform (EMR), volatile fuel prices and an unpredictable demand outlook have paralysed decision-making, while taking action to artificially inflate power prices as Britain grinds deeper into a double-dip recession may trigger a political and consumer backlash, it said.

Utility indecision led Nomura to reduce its stock price expectations on Drax and SSE, warning that investors are overly optimistic about improvements in UK power prices.

The UK’s electricity market is oversupplied largely due to a drop of about 6 percent in power demand since the last peak in 2008 driven by economic downturn.

Nomura expects 4 GW of flexible oil-fired capacity will cease to be available to the system from the end of 2015.

Likewise, the EU’s Industrial Emissions Directive will require a significant amount of thermal plant to be phased out between 2016 and 2023, while potential nuclear phase-outs from 2018 will add to tightness.

Into that gap will step intermittent output from renewable energy sources, with wind making up 15 percent of UK generation by 2017, the analysts noted. (Reporting by Oleg Vukmanovic; editing by Jason Neely)

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