E.ON converts its Grain power station

Jan 10, 2005 01:00 AM

E.ON's recent announcement that it is seeking to convert its Grain power station from oil to Europe's largest gas fired power facility raises interesting questions with regard to future security of supply and capacity availability in the UK. However, E.ON will have to acquire significant volumes of gas by the project's start up if it is to avoid an excessive exposure to the wholesale gas market.
E.ON has announced its intention to seek planning and regulatory permission to convert its oil fired Grain power station, located in the Thames estuary, into a gas fired facility of 2,400 MW capacity.

E.ON has stated its belief that up to half of the UK's power stations will need to be replaced by 2016 as a result of government and European environmental legislation such as the Renewables Obligation and the Large Combustion Plant Directive, both of which are aimed at reducing emissions from power generation.
According to our Forecast Portfolio Profiles model, which calculates the structural net gas and power trade requirements of the UK's leading seven utilities on a quarterly basis over a five year forecast period, E.ON already has something of a short gas position. This means that it is more exposed to wholesale market volatility than some of its peer group who have larger volumes of upstream equity gas and Gas Purchase Agreements in their supply portfolios.

E.ON has equity gas equating to around 2.3 TWh in 2005. The company will be faced with a theoretical exposure to the wholesale market of nearly 62 TWh in 2005 (though a proportion of this trade requirement will have been hedged).
A combination of declining equity gas assets resulting from field maturity and increased gas demand resulting from market share growth will increase the magnitude of this short gas position such that the model currently points to a total gas short of 69 TWh by 2009 (where all other factors remain equal).

Assuming a 65 % load factor, the conversion of Grain to 2,400 MW of gas fired capacity will in itself addaround 29.7 TWh to the call on the E.ON gas portfolio.
This makes it even more important for the company to boost its gas supply portfolio through either the purchase of additional equity gas or the agreement of long term gas contracts if excessive exposure to the wholesale markets is to be avoided.

Source: Datamonitor
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