Coal power station closures affecting electricity prices

Why more coal power station closures are affecting business electricity prices

By Paul Sheffield - Business Sales Director | Posted May 11, 2016

Businesses face another rise in costs due to an unexpected change to the newest non-energy cost: the Capacity Market Supplier Charge (CMSC). The CMSC is what electricity suppliers charge their business customers to cover the cost of the Capacity Market (which is explained simply in this infographic).

What’s happening, why and when

Continued low wholesale power prices are leading to faster-than-expected closures of coal-fired power stations. This has led to the government taking more urgent action to:

Ensure enough reliable electricity generation capacity stays open to meet demand for the coming winter. National Grid has already forecast that demand will likely exceed electricity supply in Winter 2016/17. It recently ran new auctions for more demand-side response during critical times.
Strengthen the case for investors to back building new power generation projects. With power prices at their lowest level in 10 years many power stations are running at a loss. In these conditions, new power station projects make poor investment opportunities.

So DECC announced on 6 May that it intends to hold an extra Capacity Market auction this year. This effectively brings forward the Capacity Market by a year to shore up qualifying generators’ revenues sooner than originally planned.

Good idea? Well this option is the lesser of two evils. The alternative of power shortages would be far more disruptive and costly for businesses. A change in law? Technically yes. Although the Capacity Market mechanism exists in the statutes, this change to its schedule requires an update to these laws.

An uncertain cost for businesses

As it stands, the change will significantly affect customer costs. It could add between £97/MWh in a low cost scenario and £250/MWh in a high cost scenario to electricity used during the chargeable periods: 4pm to 7pm from 1 Nov 2017 through 28 Feb 2018.

That equates to anywhere between 4 – 10% of current electricity prices when spread over a year. A pretty big deal.

Unfortunately the cost won’t be known until:

The volume of generating capacity the government secures in the auction is known.
The costs achieved in the auction are known.
The volume of electricity that customers actually use in the chargeable periods is known.

We’ll have answers to the first two uncertainties once the results of the auction are published in Q1 2017.

If you log in to Market Insight and read our Monitor report, you’ll see we’re able to forecast the CMSC with much greater accuracy for the winters of 2018/19 and 2019/20. That’s because most of the generation capacity required for those periods (taking care of uncertainties 1 and 2) was secured in the Capacity Market auctions held last year.

How to make sense of a range of prices from different suppliers

Thanks to all this uncertainty, chances are you’ll see a wider than normal range of fixed price offers from different suppliers. For example at the cheapest end of the scale you’ll find offers from suppliers that haven’t yet included this new cost in their prices but will recover the cost once it is known.

So remember to double check you’re making like for like comparisons. Ask each supplier whether the CMSC is included in the unit rate or treated as an extra charge outside of the unit rate. And if a price looks too good to be true, it probably doesn’t take the extra CMSC into account, meaning you could face an extra charge for this cost later on.

Need more help? Check out this white paper on modern energy purchasing.

Can you trust our fixed prices?

We believe our non-energy cost forecasts have proved to be among the best in the industry. In our latest survey of energy consultants, 7 out of 10 respondents agree that EDF Energy provides “customers with the most trusted fixed price contract available.”*

Our popular Fixed + Peace of Mind contract gives businesses a fully fixed price option that includes a balanced view of this new cost. We think it strikes the right balance of:

not under-pricing this cost to the extent that we’d be certain to have to go back on our commitment to fully fixed prices should the CMSC outturn anywhere above the lowest estimate, and
not charging too much.

But for customers who want to take a different approach, we have another option.

Introducing a new contract for this Capacity Market change

We now offer a new variation of our popular Fixed + Peace of Mind contract which strips out the troublesome CMSC from November 2017 onwards, but includes all the others. It’s called Fixed + Peace of Mind excluding CM 17+.

The name won’t win any marketing awards, but we hope the idea is a win for our customers.

It works like this:

We remove CMSC costs after November 2017 from the fixed price we quote you
We charge it separately based on the latest forecast CMSC cost at the time of consumption.

Simple really. But this makes it easier to compare quotes correctly today, and ensures our customers are charged fairly for this new cost if and when the new CMSC takes effect next year.

It’s the next best thing to a fully fixed price. And it’s so new, you won’t find it on our website yet. So if you’re interested, please call us on 0800 328 0404 for a quote.