Vitol Power Boost Signals Gas Revival as U.K. Tax Hobbles Coal

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A Gas Fired Power Station in the U.K.
An employee passes an electricity transmission substation at a gas fired power station. Photographer: Chris Ratcliffe/Bloomberg

In the control room at Vitol SA’s generating plant 145 miles north of London, Dave Brignall’s team monitors screens showing everything from the price of gas to changes in outside air temperature. Any movement may prompt adjustments to electricity production.

The facility, VPI Immingham, is part of the comeback of gas-fired electricity generation after years of dominance by coal. Following a half decade of low industry margins, the 1,240-megawatt plant produced 54 percent more electricity this winter than last, in part because of the lowest prices for the heating fuel since 2010.

Even as similar plants are shuttered in the U.K. and on the continent, gas is poised to gain ground in generating electricity as an 88 percent increase in the U.K.’s tax on carbon takes effect today, reducing coal’s price advantage by about half. Trimming the nation’s dependence on coal-fed power will help reach a target to cut emissions by at least 80 percent from 1990 levels by 2050.

“The conditions going forward are certainly improving for gas plants relative to the last few years,” Russell Dodgson, a commercial director at VPI Immingham, said in an interview by phone from London March 18. “From 2011 to 2014, gas was far more expensive than coal as a fuel source and that’s been to the detriment of some gas plant economics.”

European Plants

Across the continent, gas-fired power plants accounting for almost 30 percent of capacity are at risk of shutting or being mothballed as utilities burn cheaper coal, according to researcher Sanford C. Bernstein Ltd. Operators announced in the past two months that almost 2 gigawatts of gas plants will be taken off the continental grid, enough to power 4 million homes.

With gas prices 15 percent below their five-year average, and the increasing cost of polluting, this trend may be reversing. The U.K. introduced the so-called carbon price floor in 2013 to set a minimum cost on emissions from power plants.

The floor will rise to 18 pounds ($26.72) a metric ton from today for the rest of the decade, from 9.55 pounds previously. That will make coal 5.46 pounds a megawatt-hour cheaper to burn than gas, compared with 10.01 pounds on March 31, according to data compiled by Bloomberg.

More Steam

As cold weather returned, Vitol’s Immingham plant, near the U.K.’s biggest coal port, produced 2 terawatt-hours of power from November to February, up from 1.3 terawatt-hours a year earlier.

The facility is in a better position than neighbors because it provides steam to two oil refineries that process about 25 percent of the U.K.’s oil, Brignall, Immingham’s plant manager, said at the site last month. Stations owned by EON SE and Centrica Plc in the nearby Killingholme area are for sale or being taken out of the market.

Vitol, the world’s largest independent oil trader, bought the plant in 2013 as it and other firms diversified their assets. Andrea Schlaepfer, a spokeswoman for Vitol in London, declined to comment on the plant’s profitability.

“In the U.K., it’s the carbon price floor that will kill coal in terms of power generation economics,” David Price, a senior director of coal at IHS Inc., said in an interview in London Feb. 11. “In the rest of Europe, it will take a little longer because they don’t have the same taxes.”

U.K. power plants will use 21.7 billion cubic meters of gas this year, an increase of 1.4 billion from 2014, estimates New York-based Pira Energy Group. The increase in the carbon price will hit coal units “more heavily,” Bruno Brunetti, a senior director of electricity at Pira, said by e-mail March 30.

Cold Weather

Vitol’s plant, with capacity to meet about 2.5 percent of the U.K.’s peak demand, is producing more electricity as cold weather returns after the mildest winter in seven years in 2014. The site, near the Grimsby & Immingham port, which handles 17 million metric tons of coal annually, is still not operating around the clock as it was originally designed to.

A video link connects the power plant with VPI Immingham’s sales staff in London to help fine tune generation minute-by-minute. While in the past output was the main target, competition with coal and renewables mean the facility’s focus has shifted to efficiency and being able to provide power at short notice to balance the grid.

“Our view has changed from looking at what the market is doing to what the weather is doing,” said Brignall, who was part of the team that commissioned the Immingham site in 2003. “We don’t want it to be windy and warm. We hope for cold.”

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