markets

On-Time Hinkley Reactor Could Upend U.K. Need for Gas in 2020s

  • Price in capacity auction expected to triple by 2025
  • Offshore wind could help replace capacity crowding out gas
Diggers near the site of Hinkley Point C nuclear power station in June 2016. Photographer: Andrew Matthews/PA Wire via AP Photo

Britain’s need for new gas-fired power generation will be reduced as long as Electricite de France SA delivers its Hinkley Point nuclear project on time.

The U.K.’s first new atomic plant in more than a generation plus continued subsidies for offshore wind means the government can reduce the electricity supply it secures at an annual auction, according to a report by Aurora Energy research. This scenario could threaten plans by Drax Plc, SSE Plc, RWE AG and Eggborough Power Ltd. to build new gas stations.

Read more about the U.K.’s dash for gas here

The government started its capacity market to ensure back-up electricity by making it attractive to build new generation units and keep existing stations open. So far, power prices at the auctions have been too low to encourage construction. Barclays Plc estimates that new gas-fired stations, known as CCGTs, will need payments of as high as 28 pounds ($39) a kilowatt. That’s three times higher than the price in the latest auction.

Declining Prices

Auction consistently clearing below 28 pounds needed to spur new gas

Source: National Grid data

The latest auction price was “driven to unprecedented lows,” said Richard Howard, head of research at Aurora Energy Research. This was due to falling power demand as well as competitive bids by so-called demand response providers, who reduce or shift their usage during peak times, and cross-border cables known as interconnectors.

While these factors will continue, auction prices are expected to recover to about 25 pounds a kilowatt by the middle of next decade as old stations close, according to the report.

Some of the need for new capacity could be met by EDF’s 19.6 billion-pound Hinkley nuclear project in southwest England due to start generating by the middle of 2026. The company is keen to avoid delays, which could add a further 700 million pounds to the cost.

Offshore wind could meet some of the need for extra capacity if the contracts-for-difference subsidy scheme continues, Aurora said. Renewables currently can’t participate in the capacity auction, but allowing new unsubsidized renewables to bid would reduce capacity market costs by 600 million pounds in the 10 years to 2035, it said in the report.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE