U.K. Pays Out Less Than Expected in Power Capacity Auction

  • Britain's second auction clears 7.2% below last year's price
  • Auction secures 46.4 GW of power capacity for 2019-20

Britain’s second-ever auction for contracts that pay operators to keep power plants open cleared 7.2 percent lower than last year’s price and below the expectations of analysts from Sanford C. Bernstein & Co. to RBC Capital Markets LLC.

The U.K. secured 46.4 gigawatts of power plant capacity at 18 pounds ($27.26) a kilowatt for 2019-20 in the auction, compared with 19.40 pounds last year, National Grid Plc said Friday. EON SE, Electricite de France SA, RWE AG and Centrica Plc were among utilities to get contracts for some of their plants. Shares in Drax Plc, the most exposed company to the results according to RBC, fell as much as 4 percent.

The lower price came from “a glut of excess capacity entering the auction this year,” Tim Emrich, chief executive officer of U.K. Power Reserve Ltd., which received contracts for 160 megawatts in the auction, said by telephone. “It was partly interest from new build plants, new projects from last year without contracts and also the introduction of interconnectors into the auction.”

The U.K. is facing a looming power crunch as old coal plants are shut and a new nuclear facility is delayed until at least 2025. The market may be short of electricity at times from next winter as the margin of spare capacity is set to shrink to zero. This prompted National Grid to contract a reserve of standby plants and to pay large users to reduce demand. Such measures by the network operator boosted the nation’s supply margin to 5.1 percent this winter from what would have been a 10-year low of 1.2 percent.

Gas Plants

No new-build combined-cycle gas turbine plants were successful in the auction, according to Iain Turner, U.K. utilities analyst at Exane BNP Paribas. Gas plants emit about half the carbon dioxide of coal stations.

“We believe this will provoke the government to look again at the capacity rules as Secretary of State, Amber Rudd, wants to support new large gas plants,” he said.

The energy minister said last month that gas and nuclear will be central to the nation’s energy mix for decades to come as the U.K. plans to phase out coal plants by 2025.

SSE, EON

While SSE Plc won some contracts, it missed out on deals for almost 3 gigawatts of capacity, it said in a statement. Two of its biggest facilities, the Fiddlers Ferry coal plant and Peterhead gas-fired station, didn’t receive contracts.

EON’s coal-fed Rugeley also missed out in the auction, National Grid data show. Drax won contracts for two coal-fed units, the only eligible ones of its six after it converts a fourth unit to biomass this year.

Operators will probably shut about 4 gigawatts of plants that didn’t receive contracts in the “coming months,” according to Bernstein.

Contracts were awarded to 1.9 gigawatts of new small-scale capacity, including some burning diesel. With about 5 gigawatts of coal capacity due to close in March, the nation’s network operator expanded by 40 percent the amount of capacity it will pay to be on standby for next winter to boost the U.K.’s buffer of reserve supply.

Bernstein estimated the clearing price would be in line with last year’s level, while RBC and Exane BNP Paribas forecast 20-25 pounds.

Drax shares fell as much as 4 percent to 211.50 pence before trading at 212.5 pence by 12:09 p.m. in London. SSE fell 1.1 percent to 1,434 pence.

Capacity Payments

Capacity payments will make up 19 percent of Drax’s earnings before interest, taxes, depreciation, and amortization in 2020, according to John Musk, an analyst at RBC. The lower auction price will cut EBITDA by 1 million pounds compared to 2019, he said.

Cross-border electricity links, or interconnectors, were included in the auction for the first time and secured contracts for 1.9 gigawatts, according to National Grid. About 80 percent of power plants were given a one-year contract.

Carrington Power’s 880-megawatt combined cycle gas turbine, or CCGT, was successful in the auction after not getting a contract in last year’s tender. The Manchester, England-based station is scheduled to start commercial operations by the end of June and will supply about 1 million homes, according to the operator ESB in Dublin.

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