Competition will be fierce as target cut from last year
Auction guarantees security of supply, generator earnings
Revenue from traditional coal and gas stations faces renewed assault from new technologies including batteries as the U.K. offers guaranteed income for being available.
Competition in an auction that started Tuesday will likely be fierce, with generating capacity more than 50 percent higher than required. One of the U.K.’s oldest coal-fired power plants announced its closure last week after failing to win contracts in a similar, smaller contest.
Generating capacity totaling 75.1 gigawatts will compete for 49.2 gigawatts of contracts for the 12 months from October 2021, 6 percent below last year’s level. While the auction last year cost British consumers 1.2 billion pounds ($1.7 billion), it is attractive for investors.
“The whole world is looking for regulated returns and it’s a form of guaranteed revenue,” said Jonas Rooze, an analyst at Bloomberg New Energy Finance in London. “It is exactly what investors are looking for in a low yield environment.”
The auction price is expected to be lower than last year’s 22.50 pounds a kilowatt a year, analyst estimates show. The outcome is “significant” for utility earnings, according to RBC Europe Ltd., which assumes a range of 17.50 to 20 pounds a kilowatt.
Things to look out for:
1. The amount of coal capacity
The result will be a good indication for how much coal will still be around in future, according to BNEF. Britain will phase out coal by 2025 so the one-year contracts are a chance for operators to eke out another year of revenue.
2. New gas plants
Previous auction prices have been too low to make it worthwhile for operators to build new stations. Despite the government slashing its estimate for how much gas capacity will be needed by 73 percent, SSE Plc, Drax Plc and Eggborough Power Ltd. are proposing to build stations burning the fuel on the sites of retired coal plants.
“Given that an important objective of the capacity auctions is to add new capacity to partially replace coal plants that are being phased out,” not attracting any new gas plants in the auction “could be an issue,” said Deepa Venkateswaran, an analyst at Bernstein.
3. The rise of batteries
Batteries are becoming cheaper and able to store more electricity. Only 500 megawatts were successful in last year’s auction, and the capacity entering has doubled to 3.6 gigawatts this year, according to BNEF. On top of that, the rules have become less favorable for the technology.
4. Small plants
Small gas and diesel plants have been successful in previous auctions with 3.5 gigawatts winning contracts but the trend is waning, according to Timera Energy. Some operators are too optimistic in estimating profit margins and may have to write down their assets by the time the contracts start to pay, the consultants said.
How it works
In the descending auction, bidders withdraw as the price drops in regular increments until the government target for generation capacity is filled. Contract winners receive a steady payment on top of the electricity that they sell but must produce even at times of system stress or face penalties. The auction lasts for a maximum of three days.
The tender for four years ahead is the main auction with a supplementary auction a year in advance, a last chance for power stations that lost out in the main sale to secure revenue for another year. Britain’s oldest coal station, Eggborough, announced its closure after last week missing out in a top-up, which cleared at 6 pounds a kilowatt.