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Outlook 2019: UK power hits peak uncertainty


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London — UK generators go into 2019 out of pocket and down in the mouth.

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A series of late 2018 developments cut existing revenue and threatened future prospects as first the General Court of the EU intervened on the Capacity Market, then UK regulator Ofgem moved to cut balancing system payments to smaller players.

At the very least, generators will have to absorb the temporary loss of monthly payments under the Capacity Market totaling around GBP1 billion ($1.25 billion) for 2019 while remaining available under existing agreements.

The government is confident the market will be restored and missed payments reimbursed, as long as generators meet their obligations this winter. Legal observers are less confident.

It remains to be seen whether the loss to 2019 cashflow is material for marginal units. While the capacity market has likely saved some ageing plants from closure, these are generally owned by generators that can afford to maintain availability to October 2019 in order to pick up back payments.

Meanwhile, there is 4.3 GW of capacity with future CM new build contracts, of which 3.1 GW is unmetered. Theoretically this is all capacity that is at risk of non-delivery in light of the suspension of the CM, according to S&P Global Platts Analytics.

In reality, projects typically come online around 1-1/2 years ahead of the start of their CM contract, limiting the amount of new build under development and at risk of abandonment.

"Nevertheless the potential for mothballing or disconnection of small engines is real if there is no imminent clarity on the restoration of capacity payments," it said.


While the European Commission undertakes formal approval of the market's design, the government is seeking EC approval to run a one-off "replacement" T-1 capacity auction for 2019/20.

It had been seeking 4.6 GW in a 2019/20 T-1 auction set for February, before the General Court's ruling forced suspension of both T-1 and T-4 (2022/23) auctions.

The postponed T-4 auction, meanwhile, is now intended to be run as a T-3 auction sometime next year, although the government recognizes this shorter lead time could be problematic for some new-build bidders.

Planning a T-3 auction implied resolution of the EC's investigation within a year, which looked highly ambitious, according to LexisPSL solicitor Nicola Johns.

Formal investigations often lasted over a year, Johns said, while the UK would need time to consider how it intended to amend the market, and run consultations associated with this, to help solve the state aid position.

"It should also be noted that any future Commission approval could of course be challenged again by interested parties," Johns said. There would be a two-month period from the date of publication of any approval for such a challenge to be made.


T-4 Auction T-1 Auction
Awarded (de-rated MW) Value Awarded (de-rated MW) Value
BG 0 £0.00 1 £6,984
Centrica 0 £0.00 656 £3,937,710
E.ON 155 £3,005,273 78 £470,640
EDF 4,314 £83,687,992 466 £2,793,222
EDF Nuclear 7,876 £152,796,495 0 £0
RWE 7,920 £153,656,497 0 £0
Scottish Power 2,261 £43,855,524 0 £0
SSE 1,656 £32,134,432 1,045 £6,268,632

Note: T-4 auction cleared at GBP19.40/kW/yr, T-1 auction cleared at GBP6.00/kW/year
Source: National Grid CM register, last updated October 23/24, S&P Global Platts Analytics


Meanwhile, the political impasse over Brexit saw the pound plunge to its lowest value against the dollar since April 2017 after UK PM Theresa May suspended a vote on the government's EU Withdrawal Agreement December 10.

In light of the ECJ Advocate General opinion that the UK could unilaterally revoke Article 50, economists at JP Morgan adjusted their Brexit outlook to a 50% likelihood of a smooth transition (from 60%), a 40% chance of "No Brexit" (up from 20%) and a 10% chance of "No Deal" (from 20%). The chance of an early general election was relatively small at 15%-25%.

A smooth transition would see continuation of current energy rules to 2021 but with limited clarity on UK carbon pricing beyond that.

Under no-deal the UK would leave the EU ETS on March 29, replacing it with a new carbon emissions tax of GBP16/mt of CO2. This fixed tax, combined with the GBP18/mt of CO2 carbon price support (CPS), results in a total carbon price of GBP34/mt of CO2, a level the government said was the appropriate carbon price level, "serving possibly also as a longer-term indication of where it sees the total carbon price going," Platts Analytics said.

Another key change would be that the differential between the EUA price and the total UK carbon price would start to fluctuate with movements in the EUA price, with the potential for UK carbon costs to narrow their premium to (or drop below) EU carbon costs.

"Under a scenario with a fixed GBP34/mt of CO2e carbon price on UK generation, power prices across our forecast period fell only by GBP0.6/MWh, while net Continental imports for W-19 across all Continental links (including NEMO) reduced by only 200 MW on average," it said.


Finally, small embedded generation investment faces fresh uncertainty Ofgem consults on reforms to Balancing Services Use of System (BSUoS) charges from 2021.

The reforms could save consumers up to GBP6 billion, Ofgem said in November, but could also result in cancellation of renewable energy projects holding Contract for Difference agreements, as well as small generation projects with Capacity Market contracts.

With BSUoS charges currently at GBP2.33/MWh, the potential revenue loss is twice this for small generators that get the payment and are exempt from having to make it.


2019 2020 2021 2022 2023 2024 2025
Baseline 41.62 41.48 41.83 41.16 43.80 43.76 45.48
Full BSUoS reform 41.62 41.35 41.51 40.49 43.57 43.54 45.14
Partial BSUoS reform 41.69 41.39 41.65 40.82 43.67 43.53 45.41

All values are given in GBP/MWh and GBP2016 real
Source: Frontier Economics

-- Henry Edwardes-Evans,

-- Edited by Daniel Lalor,