Interdependencies between the long-term investment decisions of the power and gas industries : the case of the UK

Abstract

This thesis was set out to explore the interdependencies between long-term investment decisions of the UK’s power and gas industries. The interdependencies between these two network industries have been growing during the past two decades. Technical, commercial, and regulatory decisions made with narrow scope, without considering potential interaction between the two industries, might cause unwanted consequences or fail to take advantage of opportunities. Four complementary studies have been conducted to offer different lenses through which to view gas and power interdependencies: a literature review of research traditions in long-term investments in power and gas sectors, a case study that dissects the UK’s gas-to-power supply chain segment-by -segment, an econometric study that test for cointegration between gas and power prices series, and a System Dynamics simulation model that allows for quantitative testing of uncertain scenarios. The findings of the more general studies have been able to inform the research methodology of subsequent, more specific studies. The first study, the methodological review, has identified seven lines of inquiries active in gas and power research on long-term investments. It found that gas sector researchers most commonly investigate the evolution of supply and demand. On the other hand, power sector researchers most commonly investigate the design of regulatory frameworks. The exploratory research objective of this thesis re-articulated in terms of these lines of inquiries. The case study found that in the UK’s gas to power supply chain, mainly coordinated through the market mechanism, uncertainties plague two particular segments: domestic gas production and power generation. The regulatory actions carried out by the government to achieve is sustainability and security goals, mainly targeting the power generation segment, exposes power and gas sector agents to regulatory uncertainty. The cointegration study found that the UK’s gas prices are cointegrated with the North-western European gas hub’s prices, and that the UK’s power prices are cointegrated with the Dutch electricity price. It also found that the Dutch power price is driven by the North-western European gas prices, which have experience a transitioning relationships with the German import price during 2011-2015. Finally, the SD simulation model developed is validated using a base case scenario: 2011-2015 historical data and the author’s best estimates for 2016-2030 are used. The simulation results show that the model captured key features of the UK gas and power markets and sector investment decisions, but deviation existed concerning the price-responsiveness of LNG supply, the level of gas-fired power generation given historical costs, the uptake of biomass generation, and the price of power and marginal cost for power generation.