Growth and Infrastructure Bill

Memorandum submitted by GDF SUEZ (GIB 77)

About GDF SUEZ

GDF SUEZ UK-Europe (formerly part of International Power) has 13.9 GW gross capacity in operation, which includes over 9GW gross (6GW net) of plant in the UK market made up of a mixed portfolio of assets – coal, gas, CHP, wind, a large open cycle diesel plant, and the UK’s foremost pumped storage facility. Several of these assets are owned and operated in partnership with Mitsui & Co. Ltd. The generation assets represent just under 9% of the UK’s installed capacity, making GDF SUEZ Energy UK-Europe the country’s largest independent power producer. The company also has a retail supply business and a significant gas supply business in the UK, both serving the Industrial and Commercial sector. It does not have a domestic supply business.

Summary

1. This submission is sent on behalf of GDF SUEZ Energy UK Europe (GDF SUEZ).

2. GDF SUEZ’s written submission on the Growth and Infrastructure Bill relates only to Clause 22 which proposes to delay the next revaluation of business rates by two years. GDF SUEZ believes that this will result in the continuation of relatively high rateable values for power stations, which are not consistent with worsening underlying market conditions since 2008.

3. The wholesale generation market is currently oversupplied as a result of a combination of additional new build capacity, and the prolonged impact of the economic recession on electricity demand. Currently gas spark spreads1 are very low and generally insufficient to cover fixed costs including business rates.

4. Power station operators anticipated a 2015 revaluation to help mitigate these poor market conditions. Whilst the Government claims that a delay will give more certainty as to the amount payable by businesses, our view is that we had certainty via a reasonable expectation that a revaluation would take place as normal and that this would give some financial relief in difficult times.

5. GDF SUEZ urges this Bill Committee to remove Clause 22 from the Bill so that the rating review can go ahead as originally planned in 2015. This will allow business rates to reflect current economic circumstances.

Background to business rates calculation for power stations

6. Business rates are calculated as at a datum point. For the current rating period, this datum point was 1st April 2008. For the power station sector, the Valuation Office Agency constructs a two year ‘forward curve’ of prices (from available market data) as at the datum point and escalates these prices for a further 3 years by the Retail Price Index to give a five year view of revenues that a power station could be expected to earn from a rating perspective. The datum point is also used as a reference date for the relevant fuel cost calculation which informs the projected variable cost of operation and therefore also the projected gross margin.

Current state of the wholesale market

7. As at the 1st April 2008 datum point, ‘clean baseload gas spark spreads’ [1] were around £8/MWh. The graph below shows this.

8. Each point on the price curve is the average of these spark spreads calculated from the difference between reported wholesale power baseload prices and wholesale prices for gas for the four seasons ahead. As an example, for the 1st April 2008 datum point, the prices shown will be the average of the spark spreads of winter 2008/09, summer 2009, winter 2009/10 and summer 2010 [2] . Summer 2008 will not be included in the average as the summer 2008 product will have ceased trading on 31st March 2008.

9. The graph clearly shows that after a rise in spark spreads over summer 2008, they start to decline. The average of the baseload spark spread for the front four seasons currently sits at only £2/MWh2.

10. Thin margins mean that a typical Combined Cycle Gas Turbine (CCGT) plant is unable to cover its fixed costs such as business rates and network connection charges. Out of this margin must also come any debt repayment charges. The current valuation does not therefore reflect current economic circumstances. Load factors on CCGT plant are also now well below 2008 expectations which puts further pressure on contribution towards fixed costs.

Impact of the delay to the rating revaluation

11. Electricity reserve margins are forecast to fall from 2015 onwards (as non compliant coal plant and ageing nuclear plant retires). Low load factor plant will be very much needed in the future to ensure continuing security of supply at peak, and help meet demand when intermittent generation, such as wind, is unable to generate.

12. If the rating valuation is delayed as proposed in the Growth and Infrastructure Bill, it will embed the high 2008 valuation for a further 2 years which would further threaten the economics of this capacity and risk unnecessary closure decisions.

13. This analysis has focussed on the impact of the delay on gas fired plant as this has been particularly affected by the changes in market dynamics. In the view of GDF SUEZ, other types of generation will also be affected although not perhaps to the same extent. Therefore, we would expect that a 2015 revaluation exercise to also be important to other types of operators.

Irrelevance of domestic electricity price rises

14. In considering the issue of the delay to business rates, it is important to separate out the generation and retail parts of the electricity market. Vertical integration in the electricity sector allows profits to be moved along the value chain. Whilst some companies have increased their profits (as reported recently), the graph above shows that the generation part of the market is not a healthy one.

December 2012


[1] The clean spark spread is the net of the wholesale baseload electricity price less the wholesale gas price and the cost of carbon at a generic assumed efficiency level for a power station. It therefore represents the margin available to gas-fired power stations on each unit of electricity generated.

[2] These values exclude the impact of some additional variable operational costs such as transmission losses (approx 1% of the baseload power price), Balancing Services Use of System charges (around £1.50/MWh) and variable operating and maintenance costs (typically £1.20/MWh for a baseload CCGT)

Prepared 10th December 2012