Capacity market costs to climb by £364m due to Brexit

The vote to leave the European Union will increase the costs incurred during the next capacity auction by £364 million, Cornwall Energy has predicted.

Without the uncertainty created by Brexit the auction would other cost “in the region of £2.1 billion”, rather than the £2.4 billion now predicted.

“Throughout the period of the Brexit negotiations, we can reasonably anticipate a risk premium being priced into all forward capacity market auctions, the cost of which will ultimately flow through to consumers’ bills,” it said in a report.

The market intelligence firm had previously predicted a clearing price of £42/kW for the upcoming auction. It was more than double the clearing price for last year’s auction (£18/kW), reflecting “a premium for the risk of a possible change to the embedded benefits regime”.

It has now upped the prediction to £49/kW, due to “uncertainty around spark spreads, demand and the role of interconnectors”.

Regarding new build plants in particular, the increased clearing price also reflected the prospect of higher capital costs. The report said lenders and investors will expect a premium to cover “large capital expenditure programmes that straddle the Brexit negotiations” as well as “long pay-back periods … in which wholesale market spreads become difficult to predict.”

It also said it would “not be surprising” if the government reduced the £290 million budget which has been announced for this year’s contracts for difference auction, as uncertainty over wholesale prices could lead to fears of an overspend within the Levy Control Framework budget. 

Last week the government announced it would buy 52GW of capacity in the four-year-ahead (‘T-4’) auction scheduled for December.