U.K. Set for 2.5 Billion-Pound Power Bill to Keep Lights On

U.K. utilities will today for the first time bid for government payments to keep their power plants open and avoid blackouts.

Companies from EON SE to Electricite de France SA will compete to secure contracts to deliver power from the winter of 2018, with 25 percent more capacity on offer than is being sought. While payments may be as high as 3.65 billion pounds ($5.7 billion) under the terms of the auction, Timera Energy, a London-based consultant, expects the bill to be 1.5 billion to 2.5 billion pounds.

The tender is intended to encourage power stations to stay connected to the network and spur building of new plants as pollution rules force some coal-fed facilities to shut and previously unprofitable gas generators are mothballed. The auction result may be significant for utility share prices, according to Andy Kelly, principal consultant at the consulting business of Poeyry Plc in Oxford.

“Whether a unit is in or out and the level of the clearing price could make a big difference to most of the utilities,” he said in a Dec. 12 interview. “It could be valuable.”

The U.K.’s spare capacity, the safety buffer between electricity supplies and peak demand, may fall below 2 percent next winter, according to the nation’s energy regulator. The government seeks 48.6 gigawatts in the auction, or about 90 percent of peak demand. It is also aiming to incentivize 20 gigawatts of new power generation by 2030 through the contracts offered by the annual capacity mechanism auction.

Four Days

Almost 65 gigawatts of power capacity has qualified for the winter 2018 sale, which can last as long as four days, according to National Grid Plc, the U.K. network operator running the auction. It opened at 9 a.m. London time at 75 pounds a kilowatt a year and will descend in 5-pound increments, with bidders dropping out as the price falls. A clearing price will be set when bids match the targeted volume.

Coal-fired generation is most likely to control where the auction clears because it is the most expensive to operate, according to Credit Suisse Group AG, which forecasts a clearing price of 25 pounds a kilowatt a year if no new plants are needed. Coal plant operators will need to make a decision on whether to close their stations if the price is too low, the bank said.

Sanford C. Bernstein & Co. estimates the clearing price will be be 38 pounds a kilowatt a year.

Publication Process

Provisional results will be published by the department for energy and climate change at 7 a.m. London time on the day after the auction finishes and the final version will be published by National Grid within the next seven days, according to the Department of Energy and Climate Change’s website. The latest the final results will be published is Jan. 5 and the soonest is Dec. 30, it said.

“Given it is a declining auction, the longer the wait, the lower the price has cleared at,” Mark Freshney, an analyst at Credit Suisse, said yesterday in a note. He expects an announcement on Dec. 17 or Dec. 18.

While the capacity market will add an average 14 pounds a year to bills from 2018 to 2030, customers will only see a 2 pound increase because of lower wholesale prices, DECC said yesterday in an e-mailed statement.

The auction “is the next stage in the government’s plan to ensure the lights stay on at the least cost – both now and in the future,” DECC said today in a statement on its website.

EON has 6 gigawatts of power stations that pre-qualified, RWE AG has 8 gigawatts and EDF has 11 gigawatts. New power plants with 9 gigawatts of capacity plan to participate, according to National Grid.

New Capacity

While ScottishPower Ltd.’s 2.4-gigawatt Longannet coal-fed plant has opted not to enter the auction, there’s no intention to shut it down, the company said Oct. 3.

“If the government asks consumers to make yet another sacrifice, it should be to help build a modern, smart, flexible energy system, not to waste their money on old coal,” Lawrence Carter, an energy campaigner at Greenpeace U.K., said in an e-mailed statement.

The clearing price is likely to be too low for most new build, apart from small-scale short-term reserve plants, Phil Grant, a partner at Baringa Partners based in London, said in an interview on Dec. 12.

“I do think that the capacity mechanism is going to deliver new capacity to replace old coal plants,” he said. “Between 2019 and 2023, you will see new capacity coming.”

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