Factors to consider for a gas generation strategy for Guyana

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Natural gas generating capacity will form an integral part of Guyana’s future energy generation mix and it will be a reliable and flexible source of electricity. Using gas as a fuel in the power stations will provide a significant proportion of the electricity generation. Gas will allow Guyana to set the long-term electricity price for most of the year, as generation from gas will be used to meet the peaks in the local electricity demand. The emerging energy market in Guyana will also expect that gas will play a major role in the electricity mix over the coming decades, alongside low-carbon technologies as the country develops its sustainable growth strategy and decarbonise the electricity system.

It is the cleanest fossil fuel, and much of the new gas capacity needed would effectively be replacing ageing heavy-fuel and diesel capacity. Gas is also important for balancing out the increasing levels of intermittent and inflexible low-carbon energy on the system. Unabated gas generation will begin to play a crucial role in the generation mix for many years to come, and the amount of gas capacity Guyana will need to call on at times of peak demand will remain high. In the long term, the development of cost-competitive Carbon Capture and Storage (CCS) should ensure gas can continue to play a full role in a decarbonised electricity sector.

Gas-fired power stations are relatively cheap and quick to build, and investment in new gas plant will offer employment opportunities throughout the country. Gas generation is, in general, an efficient form of thermal generation, meaning that more electricity can be produced from less fuel than is the case with other fossil fuel technologies. While development times for new gas plants will vary between projects, they are generally relatively quick to build, meaning that development can respond quite rapidly to changes in market conditions, such as closures of other generating plants announced at relatively short notice or delays in delivery of other planned projects.

To ensure the security of Guyana’s gas supply, there should be:
  • Support from government agencies to work with industry to consider the case for interventions to enhance gas supply security through improving the operation of the market, via increased transparency and measures to promote the standardisation of interruptible contracts, and their investigation into the price responsiveness of interconnector flows.
  • Consider as to whether there is a case for further measures to encourage gas storage, and the commitment to publish such findings.
To ensure that Guyana makes the best use of its natural resources, there should be:
  • An institutional arrangement for Unconventional Gas and Oil that, working with other related agencies, will join up responsibilities across government, provide a single point of contact for investors and ensure a simplified and streamlined regulatory process.
  • Announced the plans to consult on an appropriate fiscal regime for gas activities, on the terms and durations of licenses, and on an updated strategic environmental assessment with a view to further offshore (and onshore) licensing.
Together, these measures should ensure that:
  1. Adequate gas generation capacity is available, including ensuring that Guyana maintains an appropriate capacity margin to maintain the security of electricity supply;
  2. There is competition in the electricity generation market and opportunities for investors in gas generation plant;
  3. Flexible plant is available to meet the intermittency associated with renewables, providing back-up energy particularly in times of peak demand and low renewable generation; and,
  4. The necessary gas supply infrastructure is in place to support the role of gas in generation.

The precise role for gas generation will depend on how the market develops over the coming years and the level and pace of development and deployment of other (particularly low carbon) technologies, overall electricity demand and capacity retirements. It will, however, continue to play an integral role in Guyana’s electricity mix both in maintaining sufficient capacity margins and in balancing out increasing quantities of low-carbon generation, much of which is relatively inflexible or intermittent.

Given the considerable uncertainty over how the electricity sector will develop to 2030, Guyana will have to model this development using different sets of assumptions in order to simulate a number of different scenarios. This includes a scenario with a diversified electricity mix as well as scenarios in which one low-carbon generation technology is deployed more heavily than the others. However, under all scenarios, it should be expected that there is a continued need for new investment in gas plant to maintain adequate capacity margins, meet demand and provide supply-side flexibility for an increasingly intermittent and inflexible generation mix.

Looking further into the future the picture is inevitably increasingly uncertain, as the underlying technology, costs and demand assumptions, for example, are themselves very uncertain over four decades.

Enabling Investment – Maintaining Security of Supply

There are significant security of supply challenges in the coming years as capacity margins tighten. Guyana will have to take a number of steps to address these, including policies to reduce demand for electricity and increase the responsiveness of the demand side, working to ensure the country has a diverse mix of electricity supplied from different sources.

Even with these measures, investment in new gas plant will be critical in maintaining secure and affordable electricity. However, changes in the market create a particular challenge for gas investors, who will be increasingly reliant on high prices in short periods to recover their costs of investment. While, in theory, some investment should take place under these conditions, in practice prices in the electricity market may not provide the correct signals to ensure enough investment in flexible plant comes forward to maintain optimal security of supply.

This market failure is commonly referred to as the problem of ‘missing money’. There are at least two reasons for ‘missing money’:

  • due to the current imbalance settlement pricing system (cash out), the scarcity price of electricity does not rise high enough to reflect costs of action taken to balance the system or the true value of preventing power cuts to consumers; and,
  • at times when the wholesale electricity market prices peak to high levels, investors fear that either the regulator or government will act on a perceived abuse of market power, for example, through the introduction of a price cap.

Investors are therefore faced with uncertainty on load factors for their plant, uncertainty on when and how often it will run, and uncertainty on the prices that can be achieved when it does run. Hence, Guyana will have to consider reform of balancing arrangements to better reflect costs at times of scarcity. Some considerations may help address part of the ‘missing money’ problem in the electricity market by providing generators with greater opportunities to recover their fixed cost.

However, with the possibility of capacity margins tightening, and the long-term nature of work to increase the responsiveness of the demand side, to develop the single market and to reform cash out, Guyana will have to recognise the need for intervention as part of Electricity Market Reform.

Thus, there will have to be the consideration for the introducing of legislation for a Capacity Market, in which generation and non-generation providers of capacity like a demand-side response (DSR) and storage will be paid for providing reliable capacity. In return, capacity providers will be obliged to deliver energy at times of system stress and will be penalised if they fail to do so. In this way, a Capacity Market will directly tackle the ‘missing money’ in the electricity market by explicitly paying for resource adequacy and ensuring adequate investment to minimise the chances of blackouts.

Strengths and Weaknesses of Gas Generation
The strengths include:
  • a proven, well-established technology;
  • low capital costs of any generation;
  • low risk and trusted by investors;
  • a flexible source of generation, well-suited to helping balance a system increasingly serviced by inflexible and intermittent sources;
  • around half the carbon emissions of traditional sources of energy, and significantly less emissions of localised pollutants;
  • short construction time, and a technology that has responded relatively quickly to changes in conditions, such as greater demand;
  • flexibility in the location of the plant, and notably that it can often be built on sites with existing infrastructure;
  • an important role in providing ancillary services; benefits from a well-functioning and liquid gas supply market; and,
  • ability to retrofit Carbon Capture & Storage (CCS) in the longer term.
Consideration of weaknesses include:
  • unabated, it has higher emissions than nuclear and renewables;
  • cost of gas has increased wholesale electricity prices significantly in recent years;
  • greater reliance on gas will reduce diversity of supply; potential short-term price volatility;
  • over-reliance on gas will make it difficult to decarbonise by 2030 and, in the longer term, may affect our ability to meet 2050 targets;
  • and, a lack of proven flexibility where CCS is attached.
Key factors driving economics

The following key factors are among those driving the economics of gas generation:

  • spreads and predicted revenue over the life of the project, including the impact of more intermittent generation on load factors;
  • forecast capital and operation and maintenance costs;
  • political and regulatory risk;
  • cost of gas compared to other traditional sources; demand outlooks;
  • wholesale prices, both gas and electricity;
  • charges;
  • the particular issue of liquidity; and,
  • the view of forward prices in supporting investment and finance prospects for independent generators.