Gas Losses Shown as Dutch Unit Finds Israel Home: Energy Markets

Source: Enecogen via Bloomberg

A yellow gas-fired generator, manufactured by Siemens AG, is transported by a crane in the harbour in Rotterdam. Close

A yellow gas-fired generator, manufactured by Siemens AG, is transported by a crane in... Read More

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Source: Enecogen via Bloomberg

A yellow gas-fired generator, manufactured by Siemens AG, is transported by a crane in the harbour in Rotterdam.

A 30-meter crane pulled a yellow gas-fired generator weighing as much as 28 double-decker buses from the Enecogen power plant in Rotterdam three months ago. The unit that powered homes and businesses in the Netherlands now is doing the same job 2,000 miles away in Israel.

The journey that took the cylindrical generator from Europe to the Gezer gas plant near Tel Aviv followed an agreement by state-owned Israel Electric Corp. Ltd., or IEC, to pay 40 million euros ($53 million) to Eneco Holding BV and Dong Energy A/S for the Siemens AG-manufactured unit. For IEC, the deal was a solution to a looming power shortage after a generator failed at Gezer. For Enecogen, it was a chance to offload a unit operating at only a quarter of its expected running hours just 20 months after being commissioned.

“We never anticipated taking out one of our generators” when the plant was built, Toby Ellson, a spokesman at Eneco, said by phone from Rotterdam. “It was a challenge to move 340 tons of metal. We had to dismantle part of the building.”

European utilities are paring back, switching off and even selling gas plants as the region’s record-long recession saps demand and nations from Germany to Spain expand use of renewable sources such as solar and wind. The cost for utilities to burn coal instead of gas has plunged in the past two years as slowing Chinese demand and a jump in U.S. exports have helped to create a global glut of the fuel.

Profitable Coal

The clean-spark spread, a measure of the profitability of gas-fired plants, has been negative since Jan. 31 and will stay below zero until 2016, based on forward prices and fair-value calculations on Bloomberg. It was minus 5.33 euros a megawatt-hour as of 11:51 a.m. in London, according to Dutch gas, power and emissions prices for next month. That compares with a profit of 22.17 euros a megawatt-hour for coal plants. The differential between burning the fuels reached a record 30.52 euros in March.

“The outlook in Europe for gas is pretty bleak in the next two to three years,” Gary Hornby, an energy-markets analyst at Inenco Group Ltd. in Lytham, St. Annes, England, said July 31 by e-mail. Gas-fired power use will probably be limited to times of “cold weather or low renewable generation for the next few years,” he said.

Gas costs three times as much in Europe as in the U.S., where the use of new technologies to extract the fuel from shale formations is more advanced. U.S. demand from power plants burning gas rose 17 percent in July from a month earlier, according to the Energy Department in Washington.

Record Exports

U.S. monthly coal exports have climbed 84 percent since 2009 through May, reaching a record 13.6 million tons in March, according to U.S. Energy Information Administration data on Bloomberg. China’s growth in coal demand fell 1 percentage point in the first half from a year earlier as the nation’s economy slowed for a second straight quarter by the end of June.

The most efficient gas-fired plants in the PJM Interconnection LLC grid, the largest market in the U.S., serving cities including Philadelphia, Washington and Chicago, will make a profit of about $18 per megawatt-hour in September, based on benchmark gas prices at the Henry Hub in Louisiana, the delivery point for futures traded on the New York Mercantile Exchange.

The economy of the 17-nation euro region emerged from a record-long recession in the second quarter. Gross domestic product expanded 0.3 percent after a 0.3 percent contraction in the January-March period, the European Union’s statistics office in Luxembourg said today.

Magnum Turbines

Vattenfall AB, the Nordic region’s largest power producer, plans to cut generation at its three-turbine Magnum gas-fired plant in the Netherlands by 66 percent. The eight-month-old 1,311 megawatt station is designed to supply electricity to two million households a day. Vattenfall will only run one of the three units at a time when the facility starts selling commercial power in January, Martijn van Gemert, a company spokesman in Amsterdam, said yesterday by e-mail.

“We will only start them up if the longer-term market conditions for gas plants improve,” he said by e-mail.

EON SE (EOAN), Germany’s largest utility, kept open its money-losing Irsching gas plant in Bavaria only after winning compensation from the nation’s grid operator, which will use the facility to ensure security of supply. EON said last month it will shut its unprofitable 430-megawatt gas-fired Malzenice station in Slovakia in October.

Idle Gas-Plants

“EON is assessing the feasibility and impact of relocating an asset with Malzenice as a case study,” said Fabienne Twelemann, an EON spokeswoman in Dusseldorf. “This assessment will take a few months. No decisions have been taken yet.”

RWE AG will idle 954 megawatts at its Weisweiler and Gersteinwerk-F facilities until at least the end of next year, Jan-Peter Cirkel, a spokesman for Germany’s second-biggest utility, said Aug. 9 by phone from Essen. That’s equivalent to a fifth of the nation’s gas-fired capacity. The units haven’t operated since April 2012, RWE data on Bloomberg show.

RWE slumped 79 percent and EON shares slid 76 percent from record-high levels in Frankfurt in 2008 after renewable energy flooded Europe’s biggest power market. RWE fell 4.8 percent today to 21.25 euros, while EON dropped 1.2 percent to 12.35 euros.

Ten gigawatts of net new gas-fired capacity has been added in western Europe since 2010, most of which is now unprofitable, according to Brian Potskowski, an analyst at Bloomberg New Energy Finance in London. A supply of 1 gigawatt, or 1,000 megawatts, is enough to provide power to about 2 million European homes.

EU Target

Power produced from gas-fed plants in Germany last year declined to 11 percent of total demand from 14 percent in 2010, according to data from Berlin-based AG Energiebilanzen e.V., an association of energy lobbies and research institutes.

Renewable energy will meet 20 percent of Europe’s energy demand by 2020, according to a European Union target, compared with 13 percent in 2011. Germany, Europe’s biggest wind- and solar-power producer, generated 22 percent of its electricity from renewable sources in 2012 and has a target of 35 percent within the next seven years.

Israel’s IEC bought Dong and Eneco’s plant as a replacement for a generator that broke down in March, rather than wait as long as 14 months for a new one to be supplied. The unit was producing power on July 4, in time for Tel Aviv’s summer, where the 10-year average temperature is 30 degrees Celsius (86 Fahrenheit), or about 13 degrees warmer than Rotterdam, CustomWeather Inc. data published Bloomberg show.

Leviathan Field

Israel has found enough gas under the Mediterranean to supply the country for decades and leave enough for exports. In March, production started from the Tamar field, a project that may add about 1 percentage point to GDP, according to the Bank of Israel. Leviathan, almost twice Tamar’s size, is scheduled to come on stream in 2016, according to Noble Energy Inc., the Houston-based company which owns about 40 percent of the field.

IEC’S May 9 purchase, which included shipping and installation, was brokered by Munich-based Siemens, Yitzhak Balmas, a vice president at IEC, said by phone from Tel Aviv.

“We visited the power plant in Rotterdam and found out it was almost the same generator,” he said. “We had Siemens’s assurance they would match up.”

As part of the deal, Siemens is making a replacement generator for Rotterdam-based Eneco and Dong in Skaerbaek, Denmark that will be delivered in mid-2014, Ellson said.

One of the biggest challenges was the speed that IEC needed the generator installed and operating, Alain De Cat, head of Siemens energy services for Europe and Africa, said July 3.

Peak Times

IEC’s purchase price includes compensation to Enecogen for the absence of the generator, which is used as a back-up plant able to start quickly at times of peak demand.

“It’s win-win as we save on the service costs of keeping a plant that isn’t running, and by getting a new generator the lifespan of the plant is extended,” Ellson said.

Operators of gas-fed plants in countries such as Spain and Italy may consider similar sales to profit from assets that are running for a few hours or not at all, according to Ilesh Patel, a London-based partner at Baringa Partners, a consulting firm that counts EON and Electricite de France SA among its clients.

“It’s an extremely tough time for gas generators,” Patel said in a July 5 interview. “If you look at gas plants that are less than two years old in tough markets, around 6 to 8 gigawatts could be candidates for similar moves.”

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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