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Centrica statement confirms focus on flexible small-scale power generation

13 May 2014

On May 8, Centrica gave a business update and full year outlook, which provided long term investment details, announced a strengthening of its strategic relationship with Qatar Petroleum International (QPI) and a refocusing of investment in UK power generation.

Centrica's Cygnus field - Photo: Centrica
Centrica's Cygnus field - Photo: Centrica

Main points of the statement included:

  • Continued investment in security of supply; large-scale Cygnus and Valemon gas developments on track; £60 billion of commitments in place to procure gas and power for our customers
  • Further strengthening of our relationship with QPI through sale of 40% of Centrica’s gas assets in North America into joint venture partnership for C$200 million
  • Refocusing investment in UK gas-fired power generation on flexible smaller plant; releasing capital from larger power stations with a book value of around £500 million
Sam Laidlaw, Chief Executive of Centrica, said:

“Customer relationships are core to the long term health of Centrica. The investment we are making in smart connected homes and innovation is helping customers reduce and control their energy consumption, which is the most sustainable way to keep bills down. The combination of mild weather, and our expectation that we will not change energy prices this year, means the average British Gas household energy bill is expected to be lower in 2014 than in 2013.

“Investment in security of supply remains a key priority. We continue to invest in new sources of gas for the UK and we have commitments totalling around £60 billion to help secure energy for our customers. We have further strengthened our relationship with Qatar Petroleum International through today’s transaction, and look forward to continuing to work with them as we consider investment opportunities in gas and power on both sides of the Atlantic. We are also refocusing our UK power generation investment towards more flexible plant, with a view to bidding into the capacity market.

“The decisions and actions that management is taking across the Group will leave the business well-placed for the long term. While earnings are anticipated to fall in 2014, we expect an improvement in 2015, assuming more normal weather conditions and reflecting the prospects for underlying growth in Direct Energy, UK gas storage, British Gas Services and British Gas Business.”

The statement had the following to say on the subject of investment and UK gas-fired power generation strategy:

“It is vital that we maintain our focus on capital discipline. We continue to invest in new sources of gas for the UK, including the large-scale Cygnus and Valemon projects in the North Sea which remain on track; we have an attractive opportunity to explore the potential of natural gas from shale in the UK; and we have commitments totalling around £60 billion to help secure energy for our customers, including the North American export contract signed with Cheniere in 2013. In total, we expect to deliver around £1.3 billion of organic investment across the Group this year.

“Upstream in North America, we have today announced the sale of 40% of our gas and liquids assets in Canada to QPI for C$200 million (£107 million), fully aligning our interests and further strengthening the relationship with our Qatari partners. After completion of the transaction, the partnership will have 2P reserves of 1,664 bcfe and current production of 390 mmcfe per day. We will continue to examine the potential to invest in further energy-related projects together, on either side of the Atlantic.

“Optimising our portfolio is an important part of our business strategy, as illustrated by the recent disposals of our Texas CCGTs and non-core North Sea E&P assets, for value. In this context, we have announced today that we intend to focus our UK gas-fired generation strategy on smaller flexible “peaking” plants and we will seek to release capital from the three larger operating power stations in the portfolio. This move follows the completion of a strategic review of our gas-fired power business, which reflected continuing operating losses from the fleet since the beginning of 2013, caused by low spark spreads and resulting low load factors, and the end of free carbon allowances. In addition, the generation market is undergoing significant structural change following the passing of the Energy Act at the end of 2013, with capacity payments due to be introduced from 2018.

“Centrica currently owns eight gas-fired power stations. One (Roosecote) has been closed and is being decommissioned, and one (King's Lynn) has been mothballed. The smaller three remaining plants (Peterborough, Barry and Brigg) currently operate under Short Term Operating Reserve (STOR) contracts. The three larger power stations (Langage, Humber and Killingholme) have a combined capacity of 2.7GW and currently operate in the open market, albeit with low levels of utilisation. Centrica also has a tolling agreement for the Spalding power station until 2021, with options to extend thereafter.

“With Centrica having successfully adapted its smaller assets to serve as flexible “peaking” plants, it will now focus on this part of the market for gas-fired generation, with flexible plants working alongside baseload nuclear output, variable output from our wind portfolio and peaks in downstream market demand. In this context, the review highlighted investment opportunities to upgrade and develop a number of the smaller plants. Under draft rules, the plants could qualify for capacity market agreements, if they were to participate in the capacity auction due to take place at the end of this year.

“In addition, to address the continuing operating losses from the fleet, Centrica will seek to release capital from the three larger operating plants. Subject to the receipt of acceptable offers, a portion of the funds from the disposal may be recycled back into upgrading the smaller remaining plant. Centrica expects the larger plants to continue to operate under new ownership. The aggregate current book value of these three plants is approximately £500 million.

“Centrica will maintain a development, construction, operating and market facing skill base relating to power generation. These skills will also be relevant for the management of the Spalding tolling arrangement and our nuclear and wind investments, as well as for the procurement of power for British Gas customers through power purchase agreements with independent producers. Centrica also intends to offer its services to third party owners of gas-fired generation assets, potentially including new owners of plants sold by Centrica. This will facilitate the introduction of new capital into the sector, including from infrastructure investors who may not have operating capability in the UK, and may be particularly relevant for development opportunities targeting the capacity market from 2018 onwards.

“Centrica sees merit in vertical integration between electricity supply and generation. However in current market conditions with low plant utilisation, gas-fired generation offers reduced vertical integration benefit. Centrica is confident that its capacity from retained assets, together with liquidity in the wholesale power market, will enable it to cover its peak load requirement for the British Gas customer base.

“Following this strategic review, for accounting purposes Centrica will classify Langage, Humber and Killingholme as "assets held for sale". As a result, depreciation will no longer be charged on these assets, reducing annual depreciation by approximately £60 million. In light of its revised plans, Centrica will review the carrying value of its power stations, including that of the Spalding tolling contract, which is accounted for as a finance lease, and it is expected that any material adjustment to the carrying values will be recorded as an exceptional item in the Group's 2014 results."

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