The government’s move to bring forward the capacity market could add up to 5% to business energy bills according to energy brokers and third party intermediaries (TPIs). They say suppliers, while uncertain of exact costs, are unlikely to underprice the charge in energy contracts.
It is “highly unlikely” suppliers will be able to absorb the cost, said Bobby Collinson, managing director at Noveus Energy.
“Assuming it outturns at £20/kW, that is a couple of percent [on bills]. They might not have it in their margins.” Suppliers will therefore pass on the charges even on fixed contracts, he said.
“Not many fixed contracts are actually fixed. They always have a clause that allows them to pass through charges from any changes to government legislation. I am sure a number of suppliers will exercise that right,” said Collinson. “A quarter of a percent they could absorb. But I think it will be 1-2% of the bill.”
Jon Ferris, strategy director at Utilitywise said the cost could be as much as 5%. That is because the clearing price may be significantly higher than previous auctions as government tries to incentivise new gas plant. At present support rates, new gas plant is unlikely to be built. Decc and Defra are working up plans to create tough emissions laws for diesel plants which would effectively lock them out of auctions, potentially driving up support rates.
“The expectation is that [the auction] will clear at a higher rate,” Ferris told The Energyst. The first capacity auction cleared at £19.40/kW with last winter’s market clearing at around £18/kW.
“Essentially the first auction cost about £1bn,” which he said equated to around 3% on bills. Perhaps double the clearing price, close to £40/kW might be required to incentivise new gas, he added. “That would equate to a 5% increase on the total bill overall.”
Ferris said that “in theory” higher support rates from capacity contracts should reduce wholesale costs, as generators require less margin from wholesale prices to achieve profit. But “in practice, I don’t think that will happen. You won’t get a full offset from the capacity market in the wholesale price.”
Magnus Walker, director of trade and risk at Inprova Energy, said revised capacity market costs have been built into contracts issued since the announcement was made earlier this month. However, the additional costs for existing contracts was “a grey area”.
“As far as we are aware, suppliers have not declared what the additional charges will be. But they do have clauses in contracts to recover third party costs if they chose to do so – and we expect that they will,” he said. “Otherwise they will have to swallow those costs. It is a very competitive market, especially with a bunch of new suppliers coming into market. Margins are very competitive, therefore the ability of suppliers to take it onboard is unlikely.”
Walker said that estimates of how much the capacity market would add to bills on a per kilowatt basis varied hugely, with suppliers likely to ensure they do not sell themselves short.
“Given the variable estimates of the cost of the earlier capacity market, if you are a supplier, you are sure as heck not going to put lower estimate on,” he said.
The government outlined plans to bring forward the capacity market by a year earlier this month. See the policy announcement here.
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This is something we’ve been warning about for months and priced it into our fixed price contracts since December. Here’s our latest view on the Capacity Market change and what it means for businesses looking for a fixed price contract. https://www.edfenergy.com/large-business/talk-power/blogs/how-more-coal-power-station-closures-are-affecting-electricity-costs