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UK generators will continue to face challenging market conditions towards the end of the decade after the first capacity auction cleared on Thursday at a price well below analyst expectations, at £19.40 per kW per year.
The auction was designed to provide the UK’s beleaguered conventional generators a guaranteed return for their plants in exchange for security of supply as the power sector transitions to a low carbon future.
But the first auction, which secured 49.3GW of power supply for 2018/19, cleared after three days of steadily declining bids which fell far below the £25-40/kW predicted by analysts.
“The challenge for asset owners and project developers is that this capacity auction has not provided the cure to the challenging economics,” said Baringa partner Phil Grant.
Grant said that the low price level means generators may need additional support – either from further capacity payments or higher wholesale prices – to avoid having to shut down capacity.
“A clearing price of £19.40/kW is below the annual fixed costs (e.g. salaries, connection costs, insurance, ongoing maintenance) of the majority of generating plant. This implies that to remain economically viable in 2018/19, generators must be looking to make money elsewhere,” Grant said.
Prior to the auction Grant predicted it would be “competitive” due to the price dynamic between older plant vying for support to fund much-needed refurbishment work, and new plant which may need the guarantee to move ahead in the face of uneconomic market conditions.
The government’s provisional auction report shows that 12.9GW of refurbishing plant was successful compared to just 2.6GW of new build capacity. Meanwhile, existing plant dominated the auction at 68 per cent.
Of the total capacity, 45 per cent is gas-fired power while coal and nuclear capacity make up 19 and 16 per cent respectively.
Auction administrator National Grid will make the final results of the auction public on 2 January 2015.
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