Gas-fired power still looks a safe bet for Centrica in the renewables era

There will still be a need to have gas in the wings to keep the lights on, so the financials stack up on Severn plant purchase

The eye-catching non-Hormuz news in energy-land last month was that Great Britain is set for a record-breaking summer for wind and solar power generation. The national energy system operator even thought there could be periods – a sunny weekend or a bank holiday afternoon of low demand, for example – when more renewable power would be available than the electricity grid needed.

So, on the face of it, it is an odd moment for Centrica, the owner of British Gas, to fork out £370m to buy a 16-year-old combined-cycle gas turbine plant in south Wales. After all, the government’s clean power plan imagines that, come 2030, Great Britain’s entire fleet of gas plants will be used to generate only 5% of its electricity, down from 31.5% in 2025.

In reality, the purchase of the 850MW Severn plant near Newport makes strong sense. First, the pure financials stack up: Centrica said it expects top-line annual earnings of £30m-£60m from the facility from next year, implying an earnings yield of more than 10% in the middle of the range.

Second, it’s not as if gas-fired power stations earn nothing when they are standing idle. Most get paid just to be available to generate via “capacity market payments”. Severn’s fees from that source are expected to be £35m a year until 2030. It is unclear, under the government’s plans, how gas plants will be incentivised to stay on the system after 2030 but, since intermittent renewables will need to be supported by a power source that can be turned on at short notice, some form of financial carrot will have to materialise to ensure a core of gas plants survive until more nuclear capacity arrives.

Third, there will probably be value in being among the survivors. Severn, built in 2010, may not sound modern but, relative to other plants in Great Britain’s fleet, it is. It may have another decade of life without refurbishment – and refurbishment, note, has become more expensive for older plants now that waiting times for new turbines run into years. And, if the predicted datacentre boom in south Wales materialises, the plant is in the right place.

So it is hard to quibble with Centrica chief executive Chris O’Shea’s explanation: “With the delivery of replacement capacity being impacted by grid access, rising costs and supply chain constraints, alongside the closure of ageing gas assets towards the end of the decade, the need for assets like Severn will increase.”

This is the part of the energy transition that gets less attention amid the rollout of solar, wind and battery storage. There is still a need for gas-powered generation to keep the lights on when, for example, it’s a still day in the dead of winter. Gas plants, according to the grand plan, may only produce 5% of Great Britain’s electricity over the course of a whole year but their periods of generation will be concentrated and unpredictable, which probably implies a price premium.

For Centrica, the purchase is another step towards becoming an infrastructure-style business with regulated, semi-regulated and contracted revenues. Last year’s purchase of a 15% stake in Sizewell C power station for £1.3bn – on juicy-looking terms – was in the same style; so, too, the acquisition of the Isle of Grain gas import terminal. On cue, a warning that operating profits from the retail businesses – mainly British Gas – will be “at the lower end of guidance” this year, which knocked the shares down 5%, reinforced the logic of the strategy. An unglamorous gas plant looks more predictable.