UK Generation Margins 2001-06

Table of Contents

• CATALYST
• SUMMARY
• METHODOLOGY
• ANALYSIS
  • Generation margins are determined by transfer pricing issues and commodity price movements
    • Generation assets are important cushions against commodity cycles for Vertically Integrated (VI) utilities
    • Transfer pricing is a key internal decision for utilities as costs and profits are assigned to various business units
    • This brief models the performance of UK VI generators by using an asset database and historical commodity prices
    • Coal has been by far the most stable energy commodity in the UK since 2001
    • The introduction of carbon pricing has done little to close the gap between the dark and spark spreads
  • The growing dark-spread has seen coal plant become the most profitable thermal plant to operate
    • SSE changed its generation portfolio through the acquisition of the two coal power plants in 2004
    • The distinction between coal and gas generation margins has grown since 2001
    • The purchase by SSE of two coal plants in 2004 has dramatically improved its generation margins
    • Under the modeling assumptions, coal-heavy generators are likely to have enjoyed greater profitability in 2005/06
  • While carbon pricing has not made much difference historically, it could yet be an effective mechanism
    • If the costs of carbon were passed through completely by generators, coal margins would have taken a considerable hit
    • Centrica is the only major generator to be a net seller of carbon emissions during 2005
    • A utility' s commitment to coal power production is not enough by itself to explain its usage of carbon emission credits
    • Once windfall carbon credits are accounted for, the profitability of coal-dominated portfolios returns
    • A carbon price of £20/tonne, with 2005 exposures, clearly would have promoted gas-heavy portfolios historically
• APPENDIX
  • Extended methodology
    • Appendix - Model Assumptions
  • Further readings
  • Ask the analyst
  • List of Tables
    • Table 1: Appendix - Model Variables
  • List of Figures
    • Figure 1: Coal has been by far the most stable energy commodity in the UK since 2001
    • Figure 2: The introduction of carbon pricing has done little to close the gap between the dark and spark spreads
    • Figure 3: SSE changed its generation portfolio through the acquisition of the two coal power plants in 2004
    • Figure 4: The distinction between coal and gas generation margins has grown since 2001
    • Figure 5: The purchase by SSE of two coal plants in 2004 has dramatically improved its generation margins
    • Figure 6: Under the modelling assumptions, coal-heavy generators are likely to have enjoyed greater profitability in 2005/06
    • Figure 7: If the costs of carbon were passed through completely by generators, coal margins would have taken a considerable hit
    • Figure 8: Centrica is the only major generator to be a net seller of carbon emissions during 2005
    • Figure 9: A utility' s commitment to coal power production is not enough by itself to explain its usage of carbon emission credits
    • Figure 10: Once windfall carbon credits are accounted for, the profitability of coal-dominated portfolios returns
    • Figure 11: A carbon price of £20/tonne, with 2005 exposures, clearly would have promoted gas-heavy portfolios historically
    • Figure 12: Appendix - Relevant Formulas used in model