Uncertainty over the future operation of Britain’s energy market, rising financing costs and post-Brexit challenges to include interconnectors in the UK’s capacity market are expected to “add a risk premium into all forward capacity auctions,” Cornwall Energy says. Higher clearing prices at auction could add over £360 million to consumers’ energy bills.
The third UK capacity auction will be held this December, government confirmed on July 8, setting out the target to procure 52 GW of capacity for winter 2020/21.
Rising uncertainty over spark spreads
As for the anticipated clearing price - established via a descending clock auction - Cornwall Energy analysts initially estimated around £42/kWh which factored in a premium for potential changes in the embedded benefits region. Now, they have revised up their estimate.
“The increased uncertainty caused by Brexit, will, we believe, now push up the price to around £49/hW. This additional premium largely reflects the increased longer-term uncertainty around spark spreads, demand, and the role of interconnectors,” analysts led by Andy Mower said. Consumers may well have to bear the extra cost, which analysts expect to reach up to £364 million.
Recession could hit energy demand
Capacity payments are meant to secure sufficient available generating capacity at short notice to match peak demand, notably during the winter season. This was initially estimated to come at a cost of £2.1 billion, however, Brexit has exacerbated doubts over future levels of energy demand in the UK. An economic downturn might curb power demand which would affect the profitability of a power plant.
New-build gas power plants have been hard to come by, and proposed major CCGTs which won capacity contracts still struggle to attract financing. Now, the cost of capital is expected to rise further, requiring operators of new-build capacity to guarantee making higher returns quickly if to appease providers of debt and equity.
Restrictive debt financing
Capex-intensive infrastructure, such as power stations, that straddle the Brexit negotiations are likely to face difficulties in securing debt financing for long pay-back periods as forward wholesale market spreads are becoming increasingly difficult to anticipate.
Timings for future auctions are expected to remain unchanged. The next one up is the contract for difference (CfD) auction that helps underpin the development of renewables, notably offshore wind. Energy minister Andrea Leadsom just confirmed the timeline, saying £290 million of funding will be available at the Q4-2116 auction.
Rising costs for EU imports
Alluding to the recent fall in the pound and higher costs for kits from European manufacturers, Cornwall energy has estimated that government’s allocated funding in the next CfD auction could contract just over 1 GW in capacity.
“DECC and the Treasury will inevitably nervous about buying a level of capacity that the believe costs £290m –only to find that, if wholesale prices fall with demand adjustment, the actual cost to the Levy Control Framework (LCF) is significantly higher,” analysts remarked.
Reassurances from Whitehall
Yet, a government spokesman underlined there would be “no immediate changes following the result of the European Referendum,” hence the government would continue to “deliver its agenda,” including secure, affordable and clean energy. He underlined that the competitiveness of the capacity market made it “not possible to predict exact costs.”