Gas-fired power generation provided by independents and new market entrants has a vital role to play in attracting new investment capital into the industry, securing electricity supplies and minimizing the overall cost of electricity market reform to industrial and residential customers.
However, independent gas power station developers and operators as well as leading financial institutions are concerned that the Energy Bill makes no reference to competition in the electricity market. The guidelines issued last week by the Government relating to the operation of the proposed capacity market would make it impossible for independents and new entrants to raise finance in order to participate in the capacity auction and compete effectively with the “Big Six” dominant market incumbents.
– In a meeting with DECC’s Michael Fallon on 13 June, independent gas power station developers and operators (Stag Energy, Intergen and Carlton Power), supported by senior representatives from leading financial institutions and investors in the UK energy infrastructure sector, called on the Government to make explicit reference in the Energy Bill to the need to use the capacity mechanism to promote competition. This would be consistent with obligations contained in the Electricity Act 1989 and the EU’s Third Energy Directive.
– The explicit recognition in the Bill of the need to encourage competition will help ensure that the capacity mechanism is designed in such a way that allows independents and new entrants to (a) secure the funding (equity and debt) for new investment, and (b) compete effectively with the “Big Six” in the proposed capacity auction.
– In particular, independents require (a) contract lengths for new build of at least 15 years (10 years is currently proposed by DECC) to allow operators to spread capital repayments over a longer period and thereby reduce the annual capacity payment, and (b) contract terms which increase revenue certainty and reduce financial risk eg specific allowance for planned maintenance, a broad definition of force majeure and most important of all, a substantial reduction in the rate at which penalties are incurred and in the level of the proposed penalty cap.
– Penalties are to be imposed for non-delivery of energy at times of stress to ensure generators have an incentive to be available when needed. However, under current proposals generators could lose twice the value of the capacity payment each and every year which places an unknown and uncontrollable risk on generators and their financiers. Independents support the principle of penalties such as those that apply to offshore-wind and transmission developers but a penalty cap for non-delivery of energy of no more than 25% of annual revenues would be both more equitable and “fundable”.
– These changes in the design of the capacity mechanism would mean that independents can finance projects at a lower cost and require less support from the capacity auctions. This in turn would (a) lower the cost of delivering new capacity and reduce the windfall gain to existing plant bidding into the auction, and (b) reduce the overall cost of the capacity mechanism to all consumers.
– The “Big Six” dominate the market in both electricity production and supply. This vertical integration means that the incumbents have a captive market for their output while independents find it extremely difficult to secure long-term sales contracts to underpin the financing of new generation. Furthermore, the “Big Six” are less dependent on external project finance because they can finance on balance sheet and spread investments over a portfolio of assets.
– The Government has charged OFGEM with the task of increasing market competition. But short of formally unbundling generation and supply, which would be a costly and time consuming process, there is very little OFGEM can do. Proposals to force the “Big Six” to trade more of their power in the market may increase short term liquidity but will not lead to more competition in electricity generation and supply.
– Last week (27 June) OFGEM highlighted the increasing risks to security of electricity supply and the Government itself has accepted that as much as 41GW of new gas plant will be needed by 2030 to compensate for the withdrawal of coal-fired generation, the delays in new nuclear construction and the intermittency of wind power. With competing demands worldwide on their limited resources, the Government cannot rely on the “Big Six” to fund all the new investment required. Therefore independents and new entrants have a vital role to play in both keeping the lights on and increasing competition.
– The Government has now confirmed that the first capacity auction will take place at the end of 2014. However, if independents are to be able to participate in this and subsequent auctions, the Government needs to use the Energy Bill to introduce a robust capacity framework that enables independents and new entrants to finance the essential new generation of gas projects.
FOR FURTHER INFORMATION
Stag Energy’s George Grant – 0131 550 3380
Clive Moffatt – 07831 571776
Notes to Editors
Stag Energy (www.stagenergy.com) has a long history of power station and related energy infrastructure project developments in the UK and overseas. The team has been involved in the creation and delivery of more than 10,000MW of power generation projects, including the Rocksavage gas-fired power station in Cheshire, the Coryton gas-fired power station in Essex and the Spalding gas-fired power station in Lincolnshire. Stag Energy has also led the Gateway Gas Storage project which was consented by the UK Government and the local authority (Barrow-in-Furness, Cumbria) in 2008.
Stag has established Watt Power to develop small-scale flexible gas-fired plant (up to 299MW capacity) in the UK. Two projects, Eye Airfield in Suffolk and Hirwaun in South Wales, are at the first stage of the planning and consenting process. Subject to the outcome of the Energy Bill and the proposed capacity mechanism process (as well as planning), both projects could enter operation in late-2018.