Photographer: Simon Dawson/Bloomberg

U.K. to Start Power Payments a Year Early to Keep Lights On

  • Government plans to start capacity market auction in January
  • Seeks to increase amount of available capacity by 3 gigawatts

The U.K. will start payments to power generators to guarantee electricity supply in the winter of 2017 to 2018, a year earlier than previously planned, in an attempt to improve supply margins and encourage the building of new gas plants.

The Department of Energy and Climate Change wants to increase the amount of capacity available by 3 gigawatts, enough to supply about 6 million homes, and is consulting with National Grid Plc to decide how much to procure in an auction planned for January, it said in a statement on the government’s website. DECC will also increase the penalties for companies that fail to deliver on their capacity contracts.

“The reforms set out plans to buy more electricity capacity and buy it earlier -- encouraging more investment in our energy system,” DECC said.
“This will mean new energy infrastructure can be built, in particular new gas-fired power stations.”

The U.K. is facing shrinking supply margins as old coal plants are shut and no new gas-fired stations were successful in the most recent capacity auction held in December. National Grid issued its first warning of insufficient backup capacity since 2012 on Nov. 4 and said it expects 11 weeks of negative supply margins, when demand outstrips supply, next winter.

Previous Auctions

Two previous auctions have yielded low clearing prices, prompting SSE Plc to say it may be more economical to close its Fiddler’s Ferry coal-fed station early and exit its contract for 2018. Generators will receive 19.40 pounds ($27) a megawatt-hour for power capacity in 2018-19 and 18 pounds from 2019-20. Month-ahead electricity traded at 33.35 pounds a megawatt-hour on Tuesday, according to broker data compiled by Bloomberg.

The changes will probably make generators “reconsider their immediate plans to close coal units, as long as its not too late,” said Iain Turner, a utilities analyst at Exane BNP Paribas.

DECC said it expects diesel-fed generation will play a smaller role in future capacity auctions after incentives are removed and emission limits tightened. The new pollution rules could be in place by 2019.

The proposals made by DECC will boost the clearing price of future auctions by as much as 10 pounds for 2020-21 from the 2019-20 price, according to Ashley Thomas, an analyst at Societe Generale SA. Every 5 pounds added to the clearing price will improve Centrica Plc’s and SSE’s earnings per share by 1 percent, he said.

Shares in Drax Plc, which is in line to receive about 27 million pounds a year from 2018/19, rose 6 percent to 246.7 pence by 12:13pm in London. Centrica Plc gained 1.3 percent to 210.6 pence. The company will receive payments of about 70 million pounds a year, according to Jefferies International Ltd.

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