October 31, 2012 / 5:10 PM / 7 years ago

Tight market, regulation to benefit UK gas power plants - Liberum

LONDON (Reuters) - British utilities will seek to raise money for big investments in gas-powered plants over the next decade to cope with a tightening power market and new regulation, UK investment bank Liberum Capital said on Wednesday.

As Britain’s electricity infrastructure ages, an estimated 30 to 50 percent of nuclear and fossil-fired stations will retire by 2020, which will require billions of pounds of investment in new capacity to avoid a supply squeeze.

“In the next 10 years we need to invest 150 billion pounds ($241.2 billion) to build 30 to 35 gigawatt (GW) of power stations, and in our view gas is going to be the winner with some 20 GW in this,” Dominic Nash, Liberum’s utilities analyst, said at a briefing in London.

Electricity generation from gas is currently not profitable because power prices are low and coal is cheap by comparison.

But new environmental regulation combined with a contraction in power generation capacity will tip margins in favour of gas, Nash said.

“We’re losing a third of our baseload power supplies ... this will make the UK a tight power market, and the forward (power price) curve isn’t reflecting this,” he said.

In a government drive to make gas more competitive relative to coal-fired electricity generation, Britain will introduce a carbon price floor next April to counter the volatility and a fall of 20 percent year-on-year in the price of European Union carbon permits.

It works by topping up the EU carbon price when it falls below the UK floor price target. The UK price floor is meant to rise from 15.70 pounds ($25.29) per tonne of CO2 emissions in 2013 to 30 pounds in 2020.

“Because the UK carbon floor price will be a massive punitive measure on coal-fired power generation, we will see price parity between coal and gas margins by 2017, and after that the cost of coal will be so high that coal is absolutely dead under this policy, and gas profitability can only go up in a tighter power market,” Nash said.

RISING RETAIL BILLS

Gas also is more attractive than nuclear newbuilds because building nuclear power stations will be costly and attached to high investment risks, he said.

“Putting your money into nuclear I think is crazy as there is an asymmetric risk: If you get good returns, there will be a government tax on your windfalls as a result of public anger and utility bashing in the face of rising prices. If the returns are low, you’ll have to ask the government for better tariffs, which you may or may not get.”

Nash said nuclear power generation would probably have a cost of market entry of 140 pounds per megawatt-hour (MWh), comparable to offshore wind, which relies largely on government subsidies to be introduced to the market.

The same factors that favour gas plants will also drive up retail energy bills.

“The power market will tighten, which is good news for investors but bad news for UK plc.”

Liberum Capital expects retail power tariff bills to rise by 6 percent to an annual average of 702 pounds in 2016 from an average of 535 pounds in 2011.

Additional reporting by Nina Chestney; editing by Jane Baird

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