Utility Week

Utility Week 8th November 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Finance & Investment This week GAs New gas-fired power stations are not bankable under the government's proposed capacity market Only two plants apply for last biomass subsidy Capacity market not conducive to new gas New gas-fired power stations are not bankable under the government's proposed capacity market, industry figures have warned. Independent generators say they will struggle to compete with the strong balance sheets of the big six unless terms become Out of the picture?: gas-fired power stations more attractive. Intergen, Carlton Power and Stag Energy have joined forces to call for contracts of 15 years or longer, rather than the proposed ten years, which they say is too short term to interest institutional investors. They also raised concerns over the penalties for failing to be available to generate, which one financier described as "a very draconian element" that could wipe out 150 per cent of a generator's annual capacity market income "in a matter of hours". George Grant, managing director of Stag Energy, said: "We want to ensure that as many people as possible are focused on what is required to enable new entrants to compete with the big six, because if that is not forthcoming we think [Electricity Market Reform] will have failed." Energy under-secretary Baroness Verma assured the House of Lords last week that the government was listening to independent generators' concerns. "We have indicated our willingness to look at the length of capacity agreements for new plant to ensure that we allow a long enough period to provide certainty to investors," she said. On penalties, she was more cautious, saying: "It is crucial to balance investability against protection for consumers." MD Stock watch The market value of Drax is unlikely to be affected by the House of Lords vote on Monday to impose a tighter carbon emissions limit under the emissions performance standard, according to a market report. Deutsche Bank said the vote on the amendment to the Energy Bill, which was passed by 237 to 193, "does not undermine the basic investment case for Drax in our view". Just two biomass power projects have so far applied for funds in the last tranche of guaranteed subsidy to be made available, a guidance note from the Department of Energy and Climate Change (Decc) has revealed. When Decc announced in December that only 400MW of capacity would be allocated funds, it also estimated that there was up to 1,000MW-worth of projects in the pipeline. In May, Gaynor Hartnell, former chief executive of the Renewable Energy Association, warned that "more than 400MW could apply on the same day". In the event, the two schemes to apply, Eco2's Brigg plant in North Lincolnshire and Eon's Blackburn Meadows plant near Sheffield, total 73.5MW. However, at least one 300MW project, MGT Power's Tees plant, is believed to still be under active development. If it is allocated support, that will leave little for anybody else. REA head of policy Paul Thompson said Decc's 1,000MW estimate had always been at the higher end of what was possible and the cap had created uncertainty that put off investors. "Decc has gone to a huge amount of effort to ensure they won't exceed what they probably Drax share price, 28 October - 1 November would have got at the high end if they had done nothing," he said. It is the last chance for power-only dedicated biomass plants to secure a subsidy because the government has confirmed that Electricity Market Reform will support only converted coal plants and biomass combined heat and power. Energy 'Lose-lose' political storm sees two majors downgraded With political guns trained on them, the six major energy players in the UK are trapped in a "lose-lose situation", according to Investec. The specialist banking group downgraded Centrica and SSE from "add" to "reduce". Labour's proposal for a return to wholesale power traded through a pool "is likely to lead to a more competitive supply market" and will "add greater transparency to the profitability of the main UK energy generators and suppliers", said Investec. "For the main vertically integrated players, that is not necessarily good news." According to analyst Harold Hutchinson, it will be "very hard" for major energy companies to maintain their profitability without increasing the risk of a windfall tax. "It is a 'lose-lose' situation, with no easy escape route," he said. Drax share price, 12 August - 31 October 720 690 680 670 700 660 680 650 660 640 630 620 640 620 Date Oct 28 29 30 31 Nov 1 Date Aug 12 Sep 6 Oct 7 Oct 31 UTILITY WEEK | 8th - 14th November 2013 | 19

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