Poyry - How will intermittency change Europe’s gas markets? - Point of View

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How will intermittency change Europe’s gas markets?

2 | PÖYRY POINT OF VIEW

Intermittency will change gas markets: are you ready?The rapid development of renewables across Europe is having profound effects, shaking up electricity markets and transforming how we generate electricity. An area that has never been fully investigated is what the impact will be on gas markets, as gas-fired CCGTs are likely to become the back-up to intermittent wind generation, leading to a concept we have dubbed ‘gas intermittency’.In partnership with Europe’s leading energy companies (including EGL, Eni, Gasunie, GRTGaz, RWE, Statoil and Vattenfall), Pöyry Management Consulting has undertaken a groundbreaking study, taking a ‘deep dive’ look at how intermittency impacts Europe’s gas markets.

In this Point of View, we share the highlights of the study covering the big questions:• What is the impact on gas demand: to what extent does demand volatility increase and does

seasonality decrease?• How are wholesale gas prices affected – do they become more volatile?• How do flows of gas between countries change – is geographic diversity and interconnection

important?• Do the flows of LNG change and how important is LNG to manage future demand volatility?• Do pipeline supplies offer opportunities to manage the increased volatility?• How will the usage of gas storage change over time, and will it become more or less profitable?• How much gas storage does Europe need and does the gas intermittency effect increase

requirements?

The main characteristic of wind and solar generation is their variability – in the case of wind generation, periods of very low generation of up to a week can be followed by very high levels of generation in an unpredictable fashion. For solar generation the variability differs, with a highly predictable day/night and seasonal cycle overlaid with unpredictable cloud cover. As a result of this variability, there is a need for thermal plant to balance the system and meet demand. And thus in periods of low wind or low irradiation, thermal power stations have to turn on to meet demand, and turn off in response to higher wind speeds and high irradiation.

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17 JANUARY 2012PÖYRY POWERPOINT 2010 TEMPLATE 1

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Figure 1 – Hourly plant dispatcH For gB in a typical FeBruary in 2012 and 2030the dispatch of plant on the system will alter radically over the next 20 years, with a system dominated by nuclear, coal and gas being replaced by large amounts of intermittent renewable generation.

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Figure 2 - Hourly ccgt generation in gB in a typical FeBruary in 2012 and 2030in response to wind generation, the utilisation of ccgts will change to become more intermittent.

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Although both coal plant and gas-fired CCGTs are able to respond to much of this variability, it is gas-fired plant that are of most interest, as the variability in their output has a direct impact on the gas network: periods of low wind/solar generation lead to higher gas demand and vice versa.The changes are shown in Figure 1, which compares the typical dispatch of the power

“The role of gas-fired generation is changing. Gas markets will change too.”

stations on the system in 2012 and 2030 for GB. In 2012 the system is much more stable, with regular patterns of day-night and weekday- weekend. However, by 2030, the large amount of wind and solar generation disrupts these patterns. Figure 2 shows the utilisation of the gas plant, and it is clear how this becomes

highly dependent on the weather and, in this example, on the wind generation.The increased volatility of gas demand will have an impact on the gas system and the gas markets, and in this Point of View we will summarise the major findings from the study and explore the key questions that this effect raises.


Gas demand is changing

Given the highly different generation mix and renewables targets across European countries, it is no surprise that there is a strong variation in results between countries. The example of Germany shown in Figure 3 illustrates the typical effects we see for countries with high levels of wind. By 2030, during a period of high wind on 3-4 October it is possible to meet the peak demand using only renewable generation , with nearly 50GW of generation coming from wind. During this period CCGTs are turned off and restart generation for the following two days, before being displaced again by wind overnight moving into 7 October. The

impact of increased intermittency is also felt by other generation types (for example coal/lignite and hydro), as the swings in intermittent generation exceed the CCGT capacity in Germany.It is notable that the load factors of CCGTs come under downward pressure as a result of the low variable cost of renewables. However, given the current oversupply situation in much of Europe, the utilisation of CCGTs actually rises in many countries over the next 10 years as this supply situation is alleviated, before falling as further renewables are built. CCGTs are also faced with more unpredictable running patterns in most countries but the number of starts does not necessarily increase – this depends on the market and the local supply situation. However, CCGTs broadly experience a greater number of cold starts which has implications for maintenance.As a result of the wind intermittency and the resulting variation in CCGT operation, the amount of gas used by the power sector varies enormously. Figure 5 highlights how the gas demand for power generation in the Netherlands and Germany changes from 2012 to 2030, becoming much more volatile.

total gaS demandAlthough the volatility of the gas demand from the power sector is important, it is only

one element of total gas demand – there is also the requirements from the residential, commercial and industrial sectors. Typically the power sector is between 10-40% of total gas demand depending on the country, so the significant impact shown in the previous charts will be attenuated to a certain extent, depending on the market and the amount of gas-fired generation.In Figure 6 we show the impact on total gas demand, again comparing 2012 with 2030. The change in gas demand as a result of gas intermittency is clearly visible, but the impact is less dramatic as 60-70% of demand is from the non-power sector and hence remains unaffected.The impact of intermittency on gas demand is typically larger in absolute terms during the winter when electricity demand is high and changes in wind generation are the greatest – these large swings require a matching response from thermal power stations. However, changes in demand from the residential, commercial and industrial sectors caused by temperature are also greatest during the winter, so the wind effect is less pronounced. The effect of intermittency on gas demand is larger in relative terms during the summer when non-power demand is lower and so gas demand for power generation makes up a larger proportion of overall demand.

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Note: CHP – Combined Heat and Power, CCGT - Combined Cycle Gas Turbine, CCS – Carbon Capture and Storage

Figure 3 - snapsHot oF german power generation in octoBer 2030with a sharp rise in wind between 3-5 october, the ccgts are displaced.


CountrieS moSt affeCtedThe countries which experience the greatest impact in gas intermittency are those with the largest increases in wind capacity. In these countries there is a requirement for other sources of generation to become more flexible to accommodate the variable patterns of wind generation and solar generation. Figure 4 illustrates that the gas markets in countries in North and West Europe will be most affected by intermittency (the darker the colour the more affected the country). In these regions, it is most likely to be CCGTs which respond to the changing output of wind generation. The countries in South and East Europe have much weaker correlation, as there is typically a lower level of wind generation which does not require the same response from CCGTs.

Figure 5 - gas demand From power generation in tHe netHerlands and germany

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AFFECTED COUNTRIES


“Gas demand will become less predictable as the presence of intermittent generation grows.”

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Figure 6 - daily variation oF total gas demand in tHe netHerlands and germany

Figure 4 - countries most aFFected By 2030darker green colour shows countries most affected by the ‘gas intermittency’ impact

about tableau maps: www.tableausoftware.com/mapdata


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Figure 7 - daily Flows oF gas in tHe netHerlands in 2012Flows are dominated by indigenous production, in particular the gronigen field, with significant exports to other european countries

Figure 8 - daily Flows oF gas in tHe netHerlands in 2030exports have reduced sharply as indigenous production declines, whilst storage usage increases in response to more volatile demand

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Gas supply is changing

Changing patterns of demand will require changes in the supply of gas; be it from pipeline supplies, LNG sources, storage or interconnection flows. In addition, the available supplies to Europe will alter over the next 20 years, with new pipelines, further LNG supplies and the potential growth in unconventional gas replacing declining conventional indigenous supplies.Figure 7 also shows the gas flows in the Netherlands in 2012 from our modelling. Flows are dominated by the Gronigen field (indigenous production) in blue, with large exports of gas to other countries. Storage is only used to a limited extent, owing to the flexibility provided by Gronigen.By 2030, the picture has changed dramatically, as shown in Figure 8. The indigenous production has dropped, leading to much lower exports. Gas demand volatility has increased and the sources of flexibility have reduced, leading to much greater use of gas storage.


The changes caused by intermittency have a different effect in each of the nations studied because of the different gas infrastructure and supply portfolios in each country. Looking at Germany in 2030 in Figure 9 shows the changes in one of Europe’s biggest gas markets. In particular, the gas flows are dominated by Russian gas via Nordstream, along with gas via interconnection both from the east and the west. There is significant use of storage responding both to changes in demand caused by temperature and heating load, as well as the effect of intermittency of wind and the demand of the power sector.In Iberia, the system is dominated with LNG imports and pipeline gas from Algeria with limited interconnection to the rest of Europe, and limited scope to build storage facilities. The power generation sector is a very large component of gas demand, and as a result the gas intermittency effect is significant, with a very volatile gas demand. The highly intermittent gas demand that develops by 2030 (as shown in Figure 10) is managed via LNG, with LNG tanks providing almost all the increased requirement for flexibility.

“Individual countries face radically different challenges, but flexibility is a concern for all.”

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Figure 9 - daily Flows oF gas in germany in 2030 there is significant storage usage to balance the highly variable demand, with most supplies coming from norway and russia

Figure 10 - daily Flows oF gas in iBeria in 2030the iberian peninsular has highly variable demand which is managed mainly by lng and pipelines from north africa


Gas storage: winners and losers

gaS Storage utiliSationOne of the key outputs from the modelling work is a detailed understanding of how gas storage will be used in the future, as our gas model accurately replicates the decisions faced by operators as to whether to withdraw (or inject) gas today or hold onto the gas in the hope of a higher (or lower) price in the future. The model simulates slow seasonal storage types such as depleted fields, which provide gas over the winter, as well as medium- and fast-cycle facilities that can withdraw and inject gas quickly and hence respond to daily variations in gas demand and supply.From the study, we have concluded that the impact of gas intermittency on seasonal and slower-cycle gas storage facilities is limited, and in most cases their current operational patterns are very similar to those we observe in 2030. This is because the underlying seasonality of gas demand does not change, and hence the requirements for seasonal storage does not change. However, gas storage facilities that are capable of cycling very quickly are well placed to meet the variations in demand that result from intermittency, and in all cases, there is increased utilisation of fast storage facilities. Figure11 below is an example how fast storage usage increases in Germany as the demand for gas from storage becomes more volatile.

Storage reVenueSGas storage revenue is fundamentally driven by the ability to buy gas at a low price, store it, and then sell it later for a much higher price. There are typically two broad categories of revenue for a gas storage facility – the revenues from the summer/winter difference in prices, and the revenues available as a result of trading around the volatility of the daily gas price.We have found that the changes in the gas markets to 2030 do not appear to increase revenues for seasonal or slower storage facilities that much, as most of their revenue stems from the summer/winter spread which remains broadly unchanged in our modelling. However fast-cycle storage facilities experience an increase in revenues, benefiting from higher utilisation and greater price volatility. However, the geology for fast-cycle storage, with large salt deposits, only exists in a relatively small number of countries, including GB, Ireland, Netherlands and Germany. As a result it is only in these countries that we see an increase in the value of storage facilities as a result of the gas intermittency effect.Figure 12 shows this increasing usage of fast-cycle gas storage in GB from 2012-2030, also highlighting how differing weather patterns lead to different utilisation. As part of our modelling, we looked at historical weather

patterns to help us understand how the future might look if we had similar weather to the past. In a warm winter such as 2006/07, utilisation can be as much as 50% lower than in a cold winter such as 2008/09.

requirementS for new Storage CaPaCityCurrently in Europe there are a large number of planned and proposed new storage facilities, with plans for up to 70bcm of additional storage, compared to current storage of 85bcm in the countries studied. There have been many calls to increase the amount of gas storage in Europe, to cover concerns about security of supply.As part of this study, we have assessed the requirements for new storage build, but have confined the analysis to the ‘typical’ effects generated by weather conditions assuming good availability of infrastructure. In particular, we have not tested the robustness of the European system to events such as the loss of major pipelines or restrictions of

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FIG 13 - 9


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Figure 11 - volume oF gas in Fast-cycle storage in germanythe construction of new storage facilities leads to greater storage volumes whilst the utilisation and cycling increases

“Typically an additional 10-15bcm of volume is required by 2030.”


flows from Russia. Although the modelling framework is well-suited to security of supply analysis, the study was intentionally focused on more frequent events of cold and calm weather rather than low probability, high-impact incidents.

In all the scenarios we examined, the study concluded overall that there is requirement for additional storage capacity in Europe, but the real need does not occur for another 10 or so years. The additional working gas volumes required are not that great – typically

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Figure 12 – utilisation oF Fast cycle storage in gBthere is much greater utilisation of fast cycle storage by 2030, but the range due to weather effects also increases

an additional 10-15bcm of volume is required by 2030, an increase of 12-18% on current volumes. However, the study concluded that there are limited new opportunities for profitable storage build.

1. Salt Cavern2. Oil and Gas Reservoir3. Depleted Field4. Transmission Pipeline5. Compressor

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How does gas storage work?

WHAT IS GAS STORAGE STORAGE?Gas can be stored underground in naturally-occurring geological formations. The most common types of gas storage are depleted gas fields, aquifers and salt caverns. Market participants often inject gas into storage facilities when prices are low, and withdraw gas when prices are high.


Increased price volatility = increased riskimPaCt on gaS PriCeSOur gas model has been specifically designed to examine how daily gas prices will evolve into the future, in particular to understand the value that stems from flexibility provision. It achieves this by looking at the fundamental relationships that drive gas prices on a daily basis, both the economic drivers of the cost of supply, and also the historical relationships that exist between changes in supply and demand and the resulting prices.From the extensive work carried out, we can conclude that as daily variations in demand increase and the European gas market becomes progressively tighter, this feeds through to increased daily variations in price. Figure 13 illustrates that the variation between prices each day becomes larger by 2030.Figure 14 shows that price volatility will increase across most gas markets in Europe. This increase in price volatility will be felt across the nations of Europe through interconnection. So even if one country does not invest in intermittent renewable generation capacity, it would still have increasing daily gas price volatility if its neighbours do. For example, although neighbouring countries of Germany are not planning to install high amounts of renewable generation capacity they still will experience an increase in price volatility due to high amount of renewables installed in Germany. This is consistent with

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Pric

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FIG16


Figure 14 – map illustrating cHanges in aBsolute daily gas price volatilitydarker colours indicates higher gas price volatility

market prices in recent years where there is a high degree of correlation between prices at different traded hubs.


The challenges of managing the systemwithin-day gaS demandWithin-day changes in gas demand – whether they are caused by consumers switching on their heating systems in the morning or off in the evening, or by power stations starting and stopping – cause changes in supply requirements that have to be managed by the transmission system operator (TSO). The TSOs have a number of tools available to them to manage these variations, including linepack (storage within the gas pipes themselves) and getting shippers to flow more or less gas into the system within-day. As part of this study, we looked at whether the gas intermittency effect would change the requirements for within-day flexibility, and whether gas demand within-day would become more ‘peaky’ – that is whether requirements for gas demand may become more concentrated at peak times of the day.We found that across most countries, there is an increase in the ‘maximum within-day peak’ of within-day gas demand for power generation. This is caused by the increasing number of CCGTs and the significant role that they play in absorbing intermittency from other generation sources. This is particularly important when falling wind generation coincides with rising electricity demand –

particularly in the early morning period. In this case a large number of CCGTs have to switch on to provide power both for the increasing demand requirements but also to compensate for the falling wind generation.Figure 15 illustrates how the ‘maximum within-day peak’ changes over time and in most countries there is an increase over time. This is particularly true for those countries for which CCGTs are already a significant part of the generation mix (GB, Iberia, Italy where the absolute difference is highest) but also for those countries where the number of CCGTs is increasing, but from a lower base (Germany and France where the absolute requirement is fairly low to begin with, but increases on a similar percentage basis). This means that TSOs will need to be able to manage increased within-day changes. It is difficult to put these changes into context for each TSO as the impact will differ for each country. For some nations with large networks and linepack, the daily change may not be significant. For others where demand from the power sector is currently very small (and will grow) or where the network has limited linepack the within-day changes we have highlighted might be quite considerable.

WHAT’S WITHIN-DAy GAS BALANCING?Balancing ensures that the pressure in a gas transmission system remains within safe levels. Inputs to and outputs from a network will respectively raise or lower the pressure in the system. In Europe, most transmission systems require that suppliers balance their inputs and outputs over any given day, a process known as daily balancing. Within-the-day, it is the responsibility of the network operator to balance the flows of gas on an hourly basis to ensure that the system remains at suitable pressures.

Within-day balancing – in contrast to daily balancing – requires suppliers to balance the system over time periods shorter than a day. For example, if daily gas demand were to become less predictable in the future, transmission system operators may adopt hourly balancing regimes to maintain the safety of their networks, forcing suppliers to match their flows of gas in and out of the network on an hourly basis.

Figure 15 – witHin-day FlexiBility required From ccgt operationsdark green shows a low requirement for within-day flexibility provision and dark red shows a high requirement


How does gas intermittency affect you?Investigating the myriad of impacts that occur on gas markets as a result of policy and market changes in the electricity markets has been a complex and detailed task, and it has required a large multi-client study supported by a number of the key players in the European gas market to achieve it.• The study has shown that the intermittency

effect in electricity markets is passed through into the gas markets. The main effect is the increased day-to-day variation in gas demand, with the effect most notable in those countries which build the most wind capacity and also have a large proportion of CCGTs in the generation portfolio.

• The most significant effect on energy market players is likely to be day-to-day price variations. Retail companies will need to ensure that their gas hedging strategies and short-term portfolio is robust to meeting these changes in demand within acceptable risk limits. The changes in wind output will exacerbate the changes in price which are currently often driven only by changes in temperature through the link to heating demand; though it should be noted that

temperature will remain a greater driver of demand and price than wind speed.

• In the future, running patterns of CCGTs will be strongly influenced by intermittency. Their gas purchasing strategy will need to enable CCGTs to respond to these signals or risk forcing the plant to operate at times of low spark spreads. This is likely to be a particular issue in countries where there is limited (or no) spot trading and thus generators are reliant on station gate delivered contracts.

• In interpreting the results and messages from this study, one should understand that there is no linear relationship between the amount of renewable generation capacity built and the effect on the gas market. Flexible response from CCGTs and, hence, gas demand, to manage the effect of intermittency differ, depending on a number of variables including amount of wind capacity installed, the generation mix and the relative costs of coal and gas generation

• As regards gas storage, the study concluded overall that there is requirement for additional storage capacity in Europe, but given good availability of infrastructure

and supplies the real need does not occur for another 10 or so years. Fast-cycle storage projects are well placed to benefit from the increased requirements for flexibility, but storage developers cannot rely on increasing levels of renewable generation to stimulate demand for their products and projects in the immediate future. Even though price volatility increases, this does not change the market significantly enough to ensure that all new projects would necessarily be profitable.

• How much additional storage capacity is required in the future will depend on the level of flexibility which comes from upstream gas fields alongside the level of installed renewable generation capacity.

Ultimately the future of gas and electricity markets is highly uncertain and subject to a myriad of foreseeable changes and unforeseeable events. The full version of this study has provided its members with an unprecedented insight into how the current direction of European renewables policy could affect the European gas markets.


How did we approach the study?

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HOW DID WE APPROACH THE STUDY?


We initiated the study in partnership with major players from Europe’s energy market including EGL, Eni, Gasunie, GRTGaz, RWE, Statoil and Vattenfall who formed the Steering Group, giving direction to the study and providing an external opinion on the work. The results of the study represent the views of Pöyry and are not necessary representative of the views of the companies involved.The study explored a number of future scenarios in order to quantify how different market environments would affect gas prices and flows. None of these scenarios represented a ‘base’ case, but rather alternative possible future worlds which could evolve. The scenarios aimed to capture a broad range of interests and were developed in collaboration with the Founders of the study. In particular, we examined three major power scenarios to assess how changes in the electricity market will flow through into requirements for gas. The High Renewables scenario explored a world where governments meet their renewable obligations and continue to decarbonise via extensive investment in renewables. The Central Renewables scenario examined a more central case where the renewables targets were not met until 2030. We also examined a more aggressive decarbonisation scenario, the Low Carbs scenario, to understand how widespread

Understanding the gas intermittency issue requires highly sophisticated models – not only the ability to model the entire European electricity market at an hourly resolution, but to be able to model the European gas markets simultaneously to capture the interactions between the two in a consistent manner. A further consideration comes from the weather it is critical to ensure that the modelling picks up the complex interactions between temperature, wind and solar irradiation across all the European countries, and also captures a sufficiently wide range of historical weather patterns to be representative. Finally, the modelling must represent the uncertainty of the future – in particular the decision faced by gas storage operators as to whether to withdraw gas today, or hold it in storage on the expectation of a future cold day.To achieve all of this, we have used two leading-edge models – the electricity market model (Zephyr) and the gas market model (Pegasus).

• Zephyr is a highly detailed electricity dispatch model that has been used to provide the link between intermittent wind and variable gas demand through gas-fired power plant. The model simulates all 8760 hours in the year across the 19 countries investigated.

• Pegasus is the main model of the study optimising flows of gas across the world in a way that replicates market behaviour. Pegasus has a detailed bottom-up approach where gas can flow freely between countries based on the fundamentals of each gas market and the connections between them. Pegasus uses a ‘rolling tree’ principle where decisions to flow gas are taken based on imperfect information as to how the weather will occur in future. Pegasus produces daily gas prices and the gas flows used to meet demand in each zone.

The relationships between the weather and energy market demand and supply (through solar and wind generation) are extremely complex and critical to accurate analysis. To do this we use highly detailed historical data of temperature, wind speed and solar irradiation, comprising over 100 million data points, to accurately represent a single future year. In particular we have used six historical weather years (2004/05-2009/10) to provide a range of potential outcomes. This approach enables us to determine the projected price both under ‘average weather’ and under more extreme weather patterns.

Using these sophisticated and integrated gas and electricity models, Pöyry has brought fresh insight to the challenges Europe will face on its path to decarbonisation.

Figure 16 - under-tHe-Bonnet oF pöyry management consulting’s powerFul modelling insigHt capaBility

If would like to access a copy of the full 200+ page study, or you would like to understand how Pöyry Management Consulting can help you with your projects, then please get in touch: [email protected]

deployment of renewables, nuclear and carbon capture and storage (CCS) technologies may alter the gas markets.In addition, the study examined gas market scenarios to understand how variations in the amount of storage build and the level of upstream flexibility would alter the impact.


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Copyright © 2012 Pöyry Management Consulting (UK) Ltd All rights are reserved to Pöyry Management Consulting (UK) Ltd. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form without the prior written permission of Pöyry Management Consulting (UK) Ltd (“Pöyry”).

Disclaimer While Pöyry considers that the information and opinions given in this publication are sound, all parties must rely upon their own skill and judgement when making use of it. This publication is partly based on information that is not within Pöyry’s control. Therefore, Pöyry does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this publication. Pöyry expressly disclaims any and all liability arising out of or relating to the use of this publication.

This publication contains projections which are based on assumptions subjected to uncertainties and contingencies. Because of the subjective judgements and inherent uncertainties of projections, and because events frequently do not occur as expected, there can be no assurance that the projections contained herein will be realised and actual results may be different from projected results. Hence the projections supplied are not to be regarded as firm predictions of the future, but rather as illustrations of what might happen.

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pöyry is an international consulting and engineering company. we serve clients globally across the energy and industrial sectors and locally in our core markets. we deliver strategic advisory and engineering services, underpinned by strong project implementation capability and expertise. our focus sectors are power generation, transmission & distribution, forest industry, chemicals & biorefining, mining & metals, transportation, water and real estate sectors. pöyry has an extensive local office network employing about 6,500 experts.

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