Labour's Price Freeze Could Undermine Low-Carbon Initiatives and Building New Generation, ICIS Data Shows

LONDON, September 25, 2013 /PRNewswire/ --

Responding to reports that the Labour Party would freeze consumer energy prices from 2015 to 2017, ICIS data highlights shrinking profit margins for power plants at a time when the UK faces a supply shortfall and needs new plants to be built.

ICIS data shows that on average, UK gas-fired power plants are making much less money now than in 2010, and the government's carbon price floor policy, which aims to reduce emissions, has sliced generation margins further.

Together, the carbon floor policy and a freeze on energy prices may mean power companies cannot afford to run many of their plants.

"Prices in the forward electricity market are not high enough for companies to invest in new sources of generation right now, despite predictions that the UK faces a supply shortage from 2015. Any attempt to cap consumer prices could squeeze these margins even further," Zoe Double, editor of European Daily Electricity Markets at ICIS, says.

"Labour has been a long-time champion of the low-carbon energy transition, but one of the cornerstone policies designed to encourage the shift - the carbon price support mechanism - may undermine its price-freeze plan. This is because the incrementally increasing carbon floor means wholesale electricity prices will undoubtedly go up, while retail prices will be capped, potentially wiping out utility profits and sending investors running scared," Jamie Stewart, editor of European Clean Energy Markets at ICIS, says.

ICIS data shows that companies have not made any profit at all this summer from running gas-fired generation as baseload - continuous generation 24 hours a day, seven days a week.

And by 2015, when Labour has suggested a price freeze for consumers, even the margins from coal-fired plants, which so far have held up better, are expected to be squeezed to just a third of where they are now.

The drop in margins also mean power companies are less likely to build new generation, as the return on investment from existing power plants is already falling.

                             Gas-fired profit margins Coal-fired profit
                             (GBP/MWh)                margins (GBP/MWh)
    Summer 2010              GBP7.30/MWh              GBP3.90/MWh
    Summer 2012              GBP1.17/MWh              GBP14.21/MWh*
    Summer 2013 to date
    (including CPS)          GBP0.00/MWh              GBP18.84/MWh*
    Expected profit margins
    for Summer 2015** (when
    price freezes would
    start)                   GBP1.02/MWh              GBP6.55/MWh

* Profit margins for coal-fired generation have risen over recent years, because costs have fallen. Coal is cheaper with global oversupply, and there is similar oversupply for emissions certificates, pushing the price of both fuel and certificates down.

** Based on current forward market prices.

Background information for editors:

The UK uses gas-fired and coal-fired generation in particular because these are flexible, and able to respond to changes in supply from other types of generation, particularly wind.

UK regulator Ofgem warned in October 2012 that the UK faces a shortage of generation in late 2015, with more than 3 gigawatts (GW) expected to be removed from the market by 2016.

ICIS covered the report here: http://www.icis.com/heren/articles/2012/10/05/9601634/power/edem,esgm/uk-electricity-sector-faces-pinch-point-in-2015--ofgem.html

In April 2013, the UK government introduced an additional tax on fuels used for electricity generation, called the carbon price support, which increases over the coming years.

Forward market prices allow the likely profit margins for electricity generation to be calculated, although this figure is theoretical as each electricity plant is different. Electricity generators follow price signals from market values to determine whether to generate, as burning fuel for electricity generation is a cost.

In practice, gas-fired generation is only profitable during times of peak demand, and the amount of time that gas-fired generators can make a profit has become smaller as more renewable generation has been added.

ICIS data only shows the wholesale profit margins for each type of generation based on forward market prices, and does not take into account any additional costs of doing business for energy companies, such as taxes, staff salaries or interest payments.

About ICIS

ICIS is the world's largest petrochemical market information provider and has fast-growing energy and fertilizer divisions. Our aim is to give companies in global commodities markets a competitive advantage by delivering trusted pricing data, high-value news, analysis and independent consulting, enabling our customers to make better-informed trading and planning decisions. We have more than 30 years' experience in providing pricing information, news, analysis and consulting to buyers, sellers and analysts.

With a global staff of more than 800, ICIS has employees based in Houston, Washington, New York, London, Montpellier, Dusseldorf, Karlsruhe, Milan, Mumbai, Singapore, Guangzhou, Beijing, Shanghai, Yantai, Tokyo and Perth. ICIS is a division of Reed Business Information, part of Reed Elsevier Plc.

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For further information please contact:

Zoe Double
ICIS
t: +44(0)20-7911-1875
e: zoe.double@icis.com

Jamie Stewart
ICIS
T: +44(0)20-7911-1933
e: jamie.stewart@icis.com
http://www.icis.com/energy