UK power auction to benefit consumers, but deter new plants

LONDON (Reuters) - A British auction to secure backup power was completed below last year’s price at 18 pounds per kilowatt, costing consumers less money but sending a message to investors that building new thermal power plants in Britain is less lucrative than ever.

The Shard building is seen through electricity cables in London October 3, 2015. REUTERS/Kevin Coombs

The auction for 2019/20 is part of Britain’s capacity market mechanism, designed to ensure backup power is available when intermittent renewable energy sources fail to produce electricity by paying generators to keep plants on standby.

Britain is the first country in Europe to set up a new backup capacity market and other governments concerned about integrating growing renewable energy production are looking to see if it can work for generators as well as consumers.

The auction, completed on Thursday after three days, awarded power generators including Centrica, SSE and Drax contracts for a total of 46.35 gigawatts (GW) of power plant capacity. For the first time, operators of interconnectors to France and the Netherlands, such as National Grid, also won contracts.

“This result represents a good deal for customers - fierce competition in the capacity market has driven down costs, meaning future capacity has been secured (at) the lowest price possible,” said Energy Minister Andrea Leadsom.

The 2019/20 standby capacity scheme will cost consumers 834 million pounds, the government estimated, compared with 1 billion pounds for last year’s auction.


For investors, however, a price below last year’s 19.40 pounds signals the rewards for building new non-renewable energy power plants are low.

Britain needs new power plants as its spare power generation capacity, also known as the capacity margin, is tighter than ever as polluting coal plants and uncompetitive gas-fired ones have shut down or reduced output.

“This auction does not solve the long-term problem in attracting new entrant large scale gas plant to the market,” said Phil Grant, partner in the energy practice at consultancy Baringa.

The auction awarded contracts to 1.9 GW of power plants still to be built, compared with 2.6 GW last year, underlining less attractive conditions for new plants.

For the second year running, InterGen’s planned, large-scale Gateway gas-fired power plant did not win a contract.

Bernstein analysts said the main reasons for the lower price were weak demand and competitive bidding from oil-fired units.

“Diesel generation has once again been a clear winner. The current auction has been unsuccessful in attracting much needed new CCGT (combined cycle gas turbine) build,” they added.

They calculated around 1.1 GW of capacity contracts were awarded to diesel-fired plants. Think-tank IPPR said these types of units typically emit more carbon than coal-fired plants and almost three times as much as efficient gas-fired ones.

“The energy secretary is in the thick of crucial climate talks in Paris yet her department has just lavished million-pound subsidies on some the dirtiest energy sources on the planet,” said Greenpeace UK chief scientist Doug Parr, referring to ongoing negotiations on a global deal to fight climate change.

Additional reporting by Rishika Sadam in Bengaluru; Editing by David Holmes and Mark Potter