U.K Power Capacity Mechanism to Cut Trading Profit, BI Says

A U.K. government plan to pay power producers for back-up supplies will reduce price volatility and cut trading profits, according to Bloomberg Industries.

Traders can make money from the volatility in price differences between peakload power, delivered from 8 a.m. to 8 p.m. on weekdays, and around-the-clock baseload, Chris Rogers, a utility analyst at Bloomberg Industries, said today by e-mail.

“Power capacity markets provide extra revenue to power plants that meet peak demand, resulting in less price volatility and lower trading revenue,” Rogers said. “Traders will instead focus on capacity-type products.”

The U.K. government is increasingly concerned about the security of power supplies after the regulator Ofgem warned that capacity will decline, raising the risk of shortfalls from 2015. The government published the plans in its Energy Bill yesterday.

RWE AG, which has invested more than 4.5 billion pounds ($7.2 billion) in energy infrastructure in Britain since 2006, said yesterday it doesn’t support the proposal.

“RWE does not believe the case has been made for the introduction of a capacity mechanism at this time,” the company said in a statement on its website. “The introduction of a capacity mechanism will add significant unnecessary cost to the British economy and our customers.”

A final outline of the market model to be adopted is due in May 2013, with details in October and the first auction in 2014 for 2018-19 delivery, Rogers said.

Volatility in U.K. next-quarter power contract has decreased 56 percent since March to 14.73 today, according to Nord Pool Spot AS data compiled by Bloomberg. The measure of 30-day historical volatility was as low as 12.67 on Aug. 10.

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