Brexit to add £350m to energy bills

Brexit uncertainty will increase by a sixth the costs of a Government scheme to keep the lights on, adding more than £350 million to consumer energy bills, leading analysts have forecast.

Doubts over the future operation of the British energy market and increased financing costs will lead energy companies to demand greater subsidies to build and operate power plants, consultancy Cornwall Energy claimed in a report.

Under the Government’s “capacity market” scheme, energy companies are offered subsidies to guarantee their power stations will generate electricity when needed in future winters.

The policy is intended to encourage the construction of new gas plants to replace Britain’s ageing coal and nuclear power stations.

Earlier this month, ministers set out detailed plans for the amount of power plant capacity they would recruit through the scheme for winter 2020-21, via a reverse auction process to be held this December.

Cornwall Energy said it estimated that securing sufficient power plants would previously have cost £2.1 billion in subsidies – but that “increased uncertainty caused by Brexit” would add £364m to the bill.

This extra premium reflected growing doubts over the future profitability of gas plants, levels of electricity demand, and the future of interconnector cables that import power from the continent.

As yet there is no clarity over whether Britain will remain in the EU’s single energy market, which facilitates the trading of gas and electricity, making it easier to build interconnectors, and also involves paying carbon taxes through the Emissions Trading System.

If Brexit triggers an economic downturn, this could also reduce energy demand, so affecting the likely profitability of a power station.

So far, subsidies have been awarded through the capacity market scheme for winters 2018-19 and 2019-20, with each year’s auction costing close to £1 billion. Subsidies awarded were worth less than £20 per kilowatt of capacity, or £20 million a year for a typical 1GW gas power plant.

Proposed big new gas plant projects have generally failed to secure subsidies in the auctions, losing out to alternatives that require lower levels of support, including existing old-style coal and nuclear plants, and new, highly polluting small diesel generators.

Only one proposed big new gas plant secured a subsidy contract, and that has since struggled to find financing.

Ministers revised the design of this year’s auction to try to secure more new gas plants with changes that analysts said would effectively push up the subsidy price awarded, helping the viability of new gas plants.

Cornwall Energy said it had anticipated a price of £42 per kilowatt being awarded this year, but in light of Brexit had increased that to £49 per kilowatt.

“Throughout the period of the Brexit negotiations, we can reasonably anticipate a risk premium being priced into all forward capacity market auctions, the cost of which will ultimately flow through to consumers’ bills,” it warned.

Responding to the report, a Government spokesman said: “There will be no immediate changes following the result of the European Referendum and the Government will continue to deliver its agenda, including ensuring secure, affordable and clean energy.

“The Capacity Market acts as competition, so it’s not possible to predict exact costs. It aims to secure the lowest possible rate for consumers.”

Original article written by Emily Gosden, published in The Telegraph. 

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