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The Value of Siemens High Efficiency Gas Engines

Aurora Energy Research – Report commissioned by Siemens

Authors: Katharina Doyle, Felix Chow-Kambitsch, Nicholas Goh

Executive Summary - Flexible generation is key for integrating the large volumes of intermittent

renewables needed for decarbonisation. By 2030, flexible capacity is expected to reach almost 30% of generation capacity in Great Britain (GB). Gas reciprocating engine capacity will grow by nearly 1GW per year between 2018 and 2021

- Short start-up times and the ability to run long-durations mean gas reciprocating engines are well placed to capture market opportunities for flexible generation

- Siemens engines have a 44.4% LHV efficiency, 2.2% more efficient than a standard gas reciprocating engine in the GB market. The engines comply with the Medium Combustion Plant Directive (MCPD), with nitrogen oxides (NOx) emissions of 250 mg/Nm3

- The higher efficiency of the Siemens engines allows them to be more competitive in the electricity market. The Siemens engines are expected to run in excess of 2,000 hours per year in the 2020s, around 13% more hours than a standard engine

- Relative to a standard engine, the Siemens engines are expected to earn an additional £8.6/kW/year (or 14%) of gross margin from electricity sales throughout the asset lifetime

The GB electricity market is experiencing major change Decarbonisation is transforming the GB power market.

Over the coming decade the GB energy system will undergo fundamental change. Existing large transmission-connected plants will incrementally retire making way for intermittent renewable generation.

GB policy is a predominant driver to this change; it focuses on delivering low-carbon energy at a competitive cost, while supporting renewables and mandating coal exit by 2025. As a result, a general trend to switch from coal to gas-fired generation has become evident, as well as increased penetration of renewables.

The increase in renewables penetration and retirement of the existing thermal fleet will result in the need for flexible peaking capacity.

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Significant subsidies for renewables have contributed to over 40GW of new-build capacity in the last nine years. Moving forward, subsidy schemes are expected to deliver additional growth for offshore wind. 1 Technological advancements continue to enable major efficiency improvements and cost reductions.

The increase in renewables erode the need for baseload generation in favour of flexible peaking generation. The “residual demand” after accounting for nuclear, wind and solar generation will have little space for baseload by 2030. See Figure 1.

Figure 1: Renewables growth erodes baseload load factors.

1 Contracts for difference are the main subsidy

mechanism to deliver additional renewables capacity.

The retirement of the existing thermal fleet will create opportunities for new entrants, as shown in Figure 2. Aurora anticipates 35GW of existing nuclear and thermal capacity will retire over the next two decades.

Figure 2: Retirement timeline for existing assets in GB.

The market design is supportive of flexible capacity.

The GB power market has multiple revenue sources that can be accessed by flexible generation. The four sub-markets relevant for flexible generation are represented in Figure 3.

Figure 3: GB market structure.

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Renewables growth erodes baseload load factors; Flexible technologies are better positioned to make up demand

Sources: Aurora Energy Research

Demand mainly met by baseload generation

GB power demand in a typical week, GW2017

Space for baseload

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60Demand mainly met by flexible generation

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Residual Demand

Solar

Wind

Nuclear

Space for baseload

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Existing capacity by technologyNameplate, GW

CoalNuclear OtherCCGT

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Flexible generation can combine and optimise between the four sub-markets. This means they are not entirely reliant on one revenue stream and they can adapt their mix of revenues in response to market and policy changes.

National Grid is in the process of reviewing its ancillary services contracts through their System Needs and Product Strategy (SNAPS). They have reiterated the importance of flexible assets and is in the process of generally standardising and simplifying the procurement of such contracts.

In additional to market based revenue streams, flexible capacity connected at the distribution level can access location specific revenue streams. These include embedded benefits 2 , behind-the-meter benefits and Local Flexibility Markets (LFM).3

The rise of gas peaking generation The last 5 years has seen rapid growth in gas reciprocating engine capacity.

Over 4 GW of gas reciprocating engine capacity is expected to be operational by 2021/22 as brought forth by the Capacity Market. See Figure 4.

2 Embedded benefits include Triad benefit, Generator

Distribution Use of System (GDUoS) benefit and

Balancing Use of System (BSUoS) benefit (which is

currently under review by Ofgem)

Figure 4: Deployment timeline for GB reciprocating engines.

Market conditions are to supportive of gas peaking plants.

The increase in renewables shifts the remaining dispatchable capacity from baseload to peakload. Figure 5 shows that more Capacity Market contracted capacity will be expected to run at less than 30% load factors over the next decade.

Figure 5: The GB system necessitates rebalancing from baseload to peakload.

3 Local Flexibility Markets are new initiatives by the

Distribution System Operators (DSOs) to reinforce the

local network by procuring network services from

flexible technologies.

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Gas reciprocating engines are well placed to capture this increasing need for peakload generation. With short start-up times and the ability to run long-durations (as compared to batteries or demand-side response), gas reciprocating engines are suited for balancing intermittent renewables.

The gas peaking market growth is expected to continue

Over 400% growth in the flexible generation space between 2015 and 2035 is expected. Approximately half of the flexible generation capacity in 2035 will constitute gas reciprocating engines. See Figure 6.

Figure 6: Capacity development in GB.

Siemens high efficiency gas engine Aurora has conducted a market modelling analysis of the Siemens gas engine

Siemens is an international technology company, renowned for its excellence in innovation and quality. Active in over 200 countries, Siemens focuses on electrification, digitalisation, and automation. The gas engine E-series is a high efficiency and low capacity launch in the

4 The Siemens gas reciprocating engine specifications

are provided by Siemens for a 2MW engine. The

distributed and flexible generation space.

This analysis was undertaken using data from Aurora’s October 2018 GB Distributed & Flexible Energy Forecast. Our in-house dispatch model determines according to marginal cost and a calibrated threshold for each market if a plant will dispatch. It will evaluate day ahead-, spot-, and system market prices in order to determine plant dispatch.

The key operating parameters of the Siemens engines are highlighted in Figure 8. This is compared against a “standard” gas reciprocating engine which is representative of what is typically seen in the GB market today.

Figure 7: Key operating parameters4

The higher efficiency of the Siemens engines allows them to be more competitive in the electricity market than standard gas engines

The Siemens engines’ higher efficiency enables them to capture more market opportunities than standard engines. Compared to a standard engine, the efficiency

standard engine specifications are based on what

Aurora commonly encounters in the GB market.

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The GB energy market is expected to become increasingly dominated by renewable and flexible technologies

GB CapacityGW

Total change2015-2035

-55%

+243%

+478%16 26 36 392843

5361

6858

48

3831

32

203520302015

10794

2020 2025

117128

140

8

Baseload Renewables Flexible Capacity

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Key Operating Parameters

Efficiency,

% LHV44.4 42.2

NOx,

mg/Nm3250 250

Siemens Gas Recip

Standard Gas Recip

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advantage allows for lower fuel and carbon costs. This makes them more competitive in the supply merit order of the wholesale and balancing markets.

This enables the Siemens engines to run more hours profitably. Between 2019 and 2035 the high efficiency gas reciprocating engine are expected to run on average 13% (or 227 hours) more per year than the lower efficiency counterpart. In the 2020s the Siemens gas engines are anticipated to run over 2,000 hours per year. See Figure 9.

Figure 8: Run hours in 2018, 2025, and 2030.

The running hours advantage of the Siemens engines is persistent throughout the year.

Run hours during an average weather year have a seasonal pattern with fewer hours in the summer and more hours in the winter. Compared to the standard engine, the efficiency benefits of the Siemens engines apply for all months of the year. See Figure 10.

Figure 9: Average monthly run hours.

The Siemens gas reciprocating engine is well positioned to derive higher gross margins from the Balancing Mechanism and Wholesale Market.

Our modelling results depict a clear opportunity to monetize high efficiency of gas engines. Between 2019 and 2035, standard efficiency gas reciprocating engines will derive an average annual gross margin of £60.2 per kW, whereas the Siemens gas engines will on average earn £68.8 per kW. This corresponds to 14% higher gross margins from the wholesale and balancing markets due to the 2.2% higher efficiency. See Figure 11.

The Siemens high efficiency gas reciprocating engines are expected to have higher gross margins during the mid to late 2020s. This is mainly derived by revenues in the Balancing Mechanism, as renewables increasingly enter the system.

Embedded benefit payments, which constituted approximately 41% of gas engine gross margin in 2018, shrink significantly to £8 per kW or 8% in 2025. This is a result of generators

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Monthly run hours (2025) generic vs Siemens gas engine

718863

1,329 1,4121,137 1,214

277

375

664807

577709

StandardSiemensStandard SiemensSiemens Standard

995

1,9931,923

1,238

2,219

1,713

+24%

+11%

+12%

Wholesale Balancing

Annual Run Hours, h

2018 2025 2030

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Monthly run hours (2025) generic vs Siemens gas engine

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0

200

100

250

DecJan Apr OctJulStandard Siemens

Monthly Run Hours, h

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losing a majority of Triad payments with recent policy changes.5 The loss in Triad revenue is expected to be mitigated by the growth in wholesale and balancing gross margins.

Figure 10: Annual gross margins in 2018, 2025, and 2030.

Energy trading business models are becoming increasingly important, and higher efficiency engines will be more in demand

Business models for gas reciprocating are shifting from an ancillary services business model to an energy trading business model. As such, demand for higher efficiency engines to capture the volatility in the Wholesale Market is expected to increase substantially.

Furthermore, the Siemens gas reciprocating engines are compliant with the Medium Combustion Plant Directive (MCPD) and the EU Emissions Trading System (EU ETS). With lower net emissions than the standard engines in the GB market, the Siemens engines are therefore more “future-proof” against stricter emission regulations.

5 Triad payments are to decrease linearly from winter

2017/18 until winter 2020/21.

Conclusion The Siemens gas reciprocating engines are well positioned to meet the market requirement for flexible generation. Relative to standard gas engines, the Siemens engines’ higher efficiency allows them to capture more market opportunities and generate higher gross margins.

Independence This report has been produced by Aurora Energy Research in cooperation with Siemens. The market forecasts in this report reflect Aurora’s independent view on the market for gas reciprocating engines, supplemented by further information on the high efficiency gas reciprocating engines provided by Siemens.

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Total Gross Margins (Siemens vs generic gas engine)

37 37

8 8 8 8

20 20

21 21 23 23

19 22

37 42 35 40

79

2428

2226

89

StandardStandard Siemens SiemensStandard Siemens

8883

99

9097+7%

+10% +10%

Wholesale

Balancing Embedded Benefits

Capacity Market

Annual Gross Margins,£/kW/year, real 2017

2018 2025 2030