Analysts at the firm expect increased procurement targets and reduced competition from existing generation to drive up prices.
The main four-year-ahead (T-4) auction for 2020/21 is projected to clear at a price of £34/kW and the early auction (EA) for 2017/18 at £38/kW. By comparison the two T-4 auctions which have already taken place for 2018/19 and 2019/20 cleared at £19.40/kW and £18/kW respectively. Uniper, RWE and SSE are set to be the main beneficiaries if higher prices do materialise.
National Grid recently confirmed that the procurement targets for the T-4 auction and EA will be 51.7GW and 53.6GW, making them 5GW and 7GW higher than the target buy in last year’s T-4 auction. The additional capacity which will be secured as result of the higher targets is a “key factor” behind the predicted price increases.
Macquarie also noted that more than 3.7GW of existing capacity dropped out of last year’s auction due to the low price. It expects this capacity to once again bow out of both the T-4 auction and EA which are due to place in December and January.
Eggborough coal plant, which did not participate in last year’s auction, has prequalified for the EA. However, the analysts do not anticipate the 1.8GW plant securing a contract. They therefore expect a total of 5.5GW of existing capacity to miss out on contracts in the EA – the equivalent of more than 10 per cent of the target capacity.
In July, EDF revealed that it had withdrawn from the three-year refurbishment contracts it secured beginning in 2018/19 for its Cottam and West Burton coal plants. The contracts were contingent on investments of around £385 million.
Macquarie said it expects the plants, which have a combined capacity of around 3GW, to secure contracts in the EA, but not the T-4 auction as “these stations are likely to choose not to bid aggressively”.
On this basis, they predicted that a total of 6.8GW of existing capacity will fail to secure contracts in the T-4 auction – the equivalent of more than 13 per cent of the procurement target.
Macquarie said new combined cycle gas turbines (CCGTs) are likely to make up the marginal capacity in the T-4 auction. The market fundamentals therefore suggest a clearing price of £49/kW.
However, the low prices in the first two auctions were partly the result of “aggressive bidding both by existing power stations and new entrants”. Analysts said it was therefore “sensible to reflect potential aggressive bidding of thermal stations” in their projections: “We have assumed that the clearing price in such an ‘irrational’ auction would be £20/kW.” They averaged the two figures to come up with the prediction of £34/kW.
In the EA, the market fundamentals indicate a clearing price of £56/kW, as open cycle gas turbines are instead likely to make up the marginal capacity. Analysts once again averaged the figure with the ‘irrational’ clearing price of £20/kW to reach their prediction of £38/kW.