Electricity in the U.K. is poised to cost almost twice as much as in Germany within two years as Britain lags behind in building solar and wind plants.
U.K. power will be 85 percent more expensive than in Europe’s biggest energy market in May 2015, according to data compiled by Bloomberg. That compares with an average premium of 17 percent over the past five years and 83 percent today, data from Marex Spectron Group Ltd., a broker in London, show.
While Germany is seeking to consolidate its status as Europe’s biggest producer of wind and solar power by boosting its share of renewables-sourced energy to 35 percent in 2015 from 22 percent last year, the U.K. is targeting 15 percent from 11 percent over the same period. Statkraft AS is closing money-losing gas-fed plants in Germany, while Macquarie Group Ltd. and Vitol SA are buying British power stations, betting on gains of as much as 19 percent in U.K. prices by 2016, according to Societe Generale SA.
“The U.K. has built significantly less renewables to date,” Ilesh Patel, a partner at Baringa Partners LLP, a consulting firm that counts EON SE and Electricite de France SA among its clients, said in a phone interview from London. “Germany has been on a fast-track wind and solar plan.”
U.K. power will cost 53.11 pounds ($83.39) a megawatt-hour in May 2015, compared with 33.27 euros ($44.40) in Germany, according to fair value calculations on Bloomberg as of 4:31 p.m. in New York. The British premium has averaged 8.52 euros over the past five years, 21.50 in 2013 and was at 25.42 euros today, Marex Spectron data show.
The gap may widen in coming years, according to Societe Generale. German next-year power will cost 39.70 euros a megawatt-hour in 2015, 6 percent less than the average during the first three months of 2013, as U.K. prices rise 11 percent to 59.40 pounds, Paolo Coghe, an analyst for the bank in Paris, said in a June 12 report.
“High generation levels from zero variable-cost technologies, such as solar photovoltaic and wind, are damping German power prices and hurting plant revenues by reducing the amount of time a plant might otherwise be called upon to operate,” Coghe said.
The lower German prices are no comfort for the 40 million households in Europe’s biggest economy. Retail prices have risen 17 percent since the end of 2009, according to Eurostat data compiled by Bloomberg Industries. The nation has the highest residential costs in Europe after Denmark as utilities pass on the costs of solar and wind generation, Jonathan Lane, head of consulting for power and utilities at GlobalData, a London-based researcher, said by phone on June 12.
German Chancellor Angela Merkel’s government should take steps to contain the cost of the switch to renewables as households have so far borne the brunt through power bills inflated by renewable-power subsidies while industrial users have been shielded from the increased costs, the International Energy Agency said last month.
“The fact that German electricity prices are among the highest in Europe, despite relatively low wholesale prices, must serve as a warning signal,” Maria van der Hoeven, the Paris-based adviser’s executive director, said May 24.
U.K. rates have risen more steeply than Germany’s since 2011, according to Eurostat. The cost of meeting renewables targets has contributed to rising bills, Centrica Plc, Britain’s biggest residential energy supplier, said in its full-year results on Feb. 27. The company has more than doubled prices since 2004, according to data compiled by uSwitch, a London-based consumer group.
Environmental policies such as feed-in tariffs and renewables-obligation certificates accounted for 9.4 percent of Centrica’s U.K. consumer rates last year. The Windsor, England-based utility said in October the policies would add an extra 40 pounds in 2013 after it raised average household prices by 6 percent, or 80 pounds a year.
U.K. electricity margins, the amount of spare generation capacity available at times of peak demand, may fall to 4 percent in 2015 from 14 percent, the U.K.’s Office for Gas and Electricity Markets, said in October. Coal-fed generation, including EON’s Kingsnorth plant and RWE AG’s Didcot-A unit have closed earlier than the 2015 deadline under the EU’s Large Combustion Plant Directive.
Statkraft, Norway’s biggest utility, will mothball its 510-megawatt Landesbergen gas-fed plant in Germany from July 1, the company said on June 6. The Oslo-based company shut its Emden plant last year.
Macquarie, Australia’s largest investment bank, bought the 540-megawatt Baglan Bay and 819-megawatt Sutton Bridge gas-fed power stations in the U.K., the Sydney-based company said in January. Vitol, based in Geneva, bought the 1,220-megawatt Immingham plant, it said May 10.
“The outlook for gas generation in the U.K. is set to improve over the next five years,” Brian Potskowski, an analyst in London at Bloomberg New Energy Finance, said June 12 by phone. “We will continue to see interest in assets.”
Profit from burning the fuel has dropped for three years and was at minus 90 pence a megawatt-hour today, according to Bloomberg calculations based on next-month power and gas costs and emissions prices.
Britain is encouraging renewable energy by setting a floor price for emissions costs, making it more costly to run fossil fuel-powered stations. The U.K. makes utilities pay about 18.08 pounds per metric ton of carbon dioxide emitted for the year through March 2016, the Treasury said in its March 20 budget. That’s in addition to a European carbon credit price of 5.18 euros a ton for December 2015 on the ICE Futures Europe exchange.
The floor price will help keep power costs high relative to continental Europe and boost baseload, or round-the-clock imports, James Cox, a principal consultant at Poeyry Oyj, a Helsinki-based adviser to governments and utilities, said May 8 by phone.
“In three to four years you would expect interconnectors to be importing baseload into the U.K.,” he said. “It’s going to be a very profitable time for anyone that has a power cable from the U.K. to anywhere else.”