Labour's Price Freeze Could Undermine Low-Carbon Initiatives and Building New Generation, ICIS Data Shows

Labour's Price Freeze Could Undermine Low-Carbon Initiatives and Building New
                         Generation, ICIS Data Shows

  PR Newswire

  LONDON, September 25, 2013

LONDON, September 25, 2013 /PRNewswire/ --

Responding to reports that the Labour Party would freeze consumer energy
prices from 2015 to 2017, ICIS data highlights shrinking profit margins for
power plants at a time when the UK faces a supply shortfall and needs new
plants to be built.

ICIS data shows that on average, UK gas-fired power plants are making much
less money now than in 2010, and the government's carbon price floor policy,
which aims to reduce emissions, has sliced generation margins further.

Together, the carbon floor policy and a freeze on energy prices may mean power
companies cannot afford to run many of their plants.

"Prices in the forward electricity market are not high enough for companies to
invest in new sources of generation right now, despite predictions that the UK
faces a supply shortage from 2015. Any attempt to cap consumer prices could
squeeze these margins even further," Zoe Double, editor of European Daily
Electricity Markets at ICIS, says.

"Labour has been a long-time champion of the low-carbon energy transition, but
one of the cornerstone policies designed to encourage the shift - the carbon
price support mechanism - may undermine its price-freeze plan. This is because
the incrementally increasing carbon floor means wholesale electricity prices
will undoubtedly go up, while retail prices will be capped, potentially wiping
out utility profits and sending investors running scared," Jamie Stewart,
editor of European Clean Energy Markets at ICIS, says.

ICIS data shows that companies have not made any profit at all this summer
from running gas-fired generation as baseload - continuous generation 24 hours
a day, seven days a week.

And by 2015, when Labour has suggested a price freeze for consumers, even the
margins from coal-fired plants, which so far have held up better, are expected
to be squeezed to just a third of where they are now.

The drop in margins also mean power companies are less likely to build new
generation, as the return on investment from existing power plants is already
falling.

                             Gas-fired profit margins Coal-fired profit
                             (GBP/MWh)                margins (GBP/MWh)
    Summer 2010              GBP7.30/MWh              GBP3.90/MWh
    Summer 2012              GBP1.17/MWh              GBP14.21/MWh*
    Summer 2013 to date
    (including CPS)          GBP0.00/MWh              GBP18.84/MWh*
    Expected profit margins
    for Summer 2015** (when
    price freezes would
    start)                   GBP1.02/MWh              GBP6.55/MWh

* Profit margins for coal-fired generation have risen over recent years,
because costs have fallen. Coal is cheaper with global oversupply, and there
is similar oversupply for emissions certificates, pushing the price of both
fuel and certificates down.

** Based on current forward market prices.

Background information for editors:

The UK uses gas-fired and coal-fired generation in particular because these
are flexible, and able to respond to changes in supply from other types of
generation, particularly wind.

UK regulator Ofgem warned in October 2012 that the UK faces a shortage of
generation in late 2015, with more than 3 gigawatts (GW) expected to be
removed from the market by 2016.

ICIS covered the report here:
http://www.icis.com/heren/articles/2012/10/05/9601634/power/edem,esgm/uk-electricity-sector-faces-pinch-point-in-2015--ofgem.html

In April 2013, the UK government introduced an additional tax on fuels used
for electricity generation, called the carbon price support, which increases
over the coming years.

Forward market prices allow the likely profit margins for electricity
generation to be calculated, although this figure is theoretical as each
electricity plant is different. Electricity generators follow price signals
from market values to determine whether to generate, as burning fuel for
electricity generation is a cost.

In practice, gas-fired generation is only profitable during times of peak
demand, and the amount of time that gas-fired generators can make a profit has
become smaller as more renewable generation has been added.

ICIS data only shows the wholesale profit margins for each type of generation
based on forward market prices, and does not take into account any additional
costs of doing business for energy companies, such as taxes, staff salaries or
interest payments.

About ICIS

ICIS is the world's largest petrochemical market information provider and has
fast-growing energy and fertilizer divisions. Our aim is to give companies in
global commodities markets a competitive advantage by delivering trusted
pricing data, high-value news, analysis and independent consulting, enabling
our customers to make better-informed trading and planning decisions. We have
more than 30 years' experience in providing pricing information, news,
analysis and consulting to buyers, sellers and analysts.

With a global staff of more than 800, ICIS has employees based in Houston,
Washington, New York, London, Montpellier, Dusseldorf, Karlsruhe, Milan,
Mumbai, Singapore, Guangzhou, Beijing, Shanghai, Yantai, Tokyo and Perth. ICIS
is a division of Reed Business Information, part of Reed Elsevier Plc.

About Reed Business Information

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and Risk and Business sectors.

For further information please contact:

Zoe Double ICIS t: +44(0)20-7911-1875 e: zoe.double@icis.com Jamie Stewart
ICIS T: +44(0)20-7911-1933 e: jamie.stewart@icis.com
http://www.icis.com/energy
 
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