A fall in energy demand as a result of a Brexit-related economic downturn will see businesses paying more for their energy. Meanwhile, even a 150% increase in capacity market payments, which will weigh heavy on bills, may not be enough to incentivise new gas plants, according to Cornwall Energy.
Managing director Jo Butlin said that while the consultancy did not expect “huge changes” in wholesale energy costs over the short term, longer-term affects may be material, given the UK imports around half of its fuel and the impact of Brexit on Sterling.
However, wholesale costs now represent only half of energy bills. The remainder comes from network charges, subsidies and levies which are smeared across power users.
“If there is a downturn, and a reduction in demand, we are likely to see bills going the other way – and that is a difficult situation for consumers” she warned.
Cornwall Energy has also revised up its outturn estimate for the T-4 (winter 2020-21) capacity auction to £49/kW, around two-and-a-half times the outturn of the first T-4 auction. However, the consultancy remains skeptical whether even that kind of increase, which would add £364m to energy bills, will be sufficient incentive for investors in large-scale gas generation
Peter Atherton, the firm’s new associate, said £49/kW “sounds a little bit low” for investors.
“They are willing to take some kind of exposure to wholesale markets, but in today’s world, with today’s policies, they will want [the capacity mechanism] to cover 85%-90% of their economics. Will £49/kW get them there? It sounds a little bit low,” he said. “But it’s not a million miles away.”
Post-Brexit however, the government may no longer have to try and incentivise new gas under the straightjacket of State Aid rules. It may now simply devise a contract for difference (CfD) for gas, according to the consultancy.
As the department of energy and climate change is subsumed, Atherton urged policymakers to take stock of the policy landscape and take the opportunity “to stop doing stupid things.” However, he said current market chatter suggests that it will plough on with Hinkley C and the smart meter programme.
“It doesn’t look like we are going to see much change [on nuclear and smart meters], at least as far as this particular parliament is concerned,” he said.
Since the government agreed the strike price with EDF in 2013 for its new reactor at Hinkley Point, the cost to consumers has risen from £6bn to almost £30bn according to the National Audit Office, due to its guarantee to make up the difference between the wholesale market price and the guaranteed ‘strike price’ of £92.50. Since then, wholesale power prices have slumped.
Atherton has previously described the contract as “an abomination that will blow up in the nation’s face.” However, he thinks the French-owned firm will commit to building the project next week.