The UK will continue to subsidize fossil-fuelled power plants into the second half of this decade with operators paid a record fee to stay open.
The capacity auction, that ensures Britain has sufficient back-up power, cleared at an all-time high of £65 per kilowatt per year for 2027-28. Around 67% of the 43.4 gigawatts of awarded capacity went to gas plants, highlighting the challenge to find a clean replacement.
The aim of the auction is to ensure there is enough generating capacity available to meet future demand. Power plants receive payments to help cover financing or fixed costs even if they’re not needed all the time. Gas will increasingly only generate when the sun isn’t shining and the wind isn’t blowing but Britain is aiming for a clean power grid by 2035 when emission-abatement technology like carbon capture will need to rolled out.
© Supplied by BloombergThe clearing price is paid to individual generators each year and eventually trickles down to consumers in higher bills. The contracts will cost £2.7 billion for 2027-28, followed by an additional £1.7 billion spread annually over 14 years, according to Sam Hollister, Head of Energy Economics and Finance, LCP Delta.
Two gas plants previously owned by Calon Energy, that went into administration, will be revived after each winning a contract. The Severn Power and Sutton Bridge stations are both dormant after undergoing maintenance. The current owners had been exploring options to sell the units. German giant RWE AG (FWB:RWE) was the biggest winner from the auction with 6.4 gigawatts of contracts alongside SSE Plc (LSE:SSE) with 5.7 gigawatts, according to Citigroup Inc.
“The expectation of tighter power markets alongside a growing share of intermittent renewable generation, is leading to continuously increasing capacity market clearing prices,” said Deepa Venkateswaran, an analyst at Bernstein.
Existing power plants get a contract for one year while new-build or refurbished capacity is awarded longer 15-year contracts. Battery storage received more than 1 gigawatt of these longer deals, with 2-hour units winning more than half the awards.
© Supplied by BloombergDrax Group Plc. (LSE:DRX) was another beneficiary, receiving 15-year contracts for 226 MW of refurbished pumped hydro storage plus more for existing capacity. National Grid also received subsidies for more than 5 gigawatts of interconnector capacity.
The Department for Energy Security and Net Zero raised the target capacity last month for the auction to reflect increasing demand as heating and transport sectors decarbonize. This was the first time the target wasn’t met, with too few generators entering the auction.
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