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New Market Research Report: United Kingdom Power Report Q1 2014

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2013-12-09 09:07:51 - Fast Market Research recommends "United Kingdom Power Report Q1 2014" from Business Monitor International, now available

Investment in the UK power sector continues to stall, with little new capacity being brought online - even at a time when large amounts of thermal capacity are being shuttered to comply with EU emissions criteria. Besides significant developments in the nuclear segment, the freeze in investment is being reinforced by ambiguity with regards to the country's Energy Bill, unfavourable economics for gas-fired power generators, and policy uncertainty as the debate about rising electricity prices thrusts the 'big six' energy companies into the spotlight. With around one-fifth of existing installed generating capacity due to be taken offline over the next decade, there are fears the UK could suffer supply disruptions from around 2015/2016 unless the government addresses the issue and

encourages utilities to invest in new capacity.

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Despite the government having agreed a strike price that it hopes will lead to the construction of two new nuclear reactors, investment in the traditional (thermal) areas of the UK power generation sector is stalling. This problem has been brought sharply into focus in recent months, as a vast amount of coal-fired baseload capacity has been shutdown or mothballed at an alarming pace without being replaced - so as to comply with European emissions reduction policies. With the Department of Energy and Climate Change (DECC) having stated that around a fifth of existing installed electricity generating capacity is due to be taken offline over the next 10 years, while electricity consumption is set to rise (albeit slightly), the UK is threatened by a capacity deficit that could result in supply disruptions from around 2015/2016 unless the government addresses the issue and encourages utilities to invest in new capacity.

As such, we have highlighted previously that the country's Energy Bill, which should be signed into law in 2013, will be crucial in establishing a policy that can secure the UK's energy future. Yet, while the bill includes provisions for decarbonisation, Electricity Market Reform (EMR) and nuclear regulation that would go some way towards ending speculation and outlining a strategy for replacing power capacity, we emphasise that establishing the UK's energy security and securing such investment will certainly be more complex than simply signing the bill into law. Indeed, the bill itself has been criticised for being very complex and opaque. Objectives such as moving to 'a more efficient, low-carbon energy system in a cost-effective way' are generally agreeable but lack detail - and will not inspire much confidence in investors who want greater certainty with regards to the long-term investment climate.

Furthermore, investors in the power sector are growing increasingly wary about the broader political climate, as energy companies have come under attack for hiking prices. Ed Miliband, the leader of the opposition Labour Party, has outlined a policy to freeze electricity prices if he wins the 2015 general election, which has raised concerns amongst some energy companies about profitability and policy continuity. Meanwhile, in an effort to quell public anger at rising prices and allegations of profiteering, Energy Secretary Ed Davey has mooted reforms that would encourage greater competition and has said the DECC will launch a consultation on introducing criminal sanctions covering manipulation of the energy markets. Whatever the merits of such policies, they once again create a degree of uncertainty that might deter energy companies from investing in the UK.

Key trends and developments in the British electricity market:

* In October 2013, the UK's Royal Academy of Engineering (RAE) delivered a report to Prime Minister David Cameron highlighting the urgent need for investment in new generation capacity so as to avoid electricity shortages - as well as the difficulties involved in delivering a 'modern, sustainable and secure service that will be the foundation of economic growth'. The report followed regulator Ofgem's June 2013 warning that the UK's risk of blackouts by 2015 was higher than previously thought.
* The British government and an international consortium led by French Utility EDF have agreed a strike price that it is hoped will lead to the construction of two new EPR reactors at Hinkley Point in Somerset. As such, while we expect EDF to make a final investment decision (FID), and will include the reactors when we extend our forecasts to 2023, we highlight that the strike price of GBP92.5 has been criticised as it is double current wholesale electricity prices, is inflation linked and is guaranteed for 35 years. That said, even if the price is contentious, the deal might at the very least set a precedent that will incentivise investment in UK nuclear sector. Notably, China General Nuclear Corporation (CGN) and China National Nuclear Corporation (CNNC) will jointly own 30-40% of the project
* Leader of the opposition Labour Party, Ed Miliband, announced that if his party win the 2015 general election, it would freeze electricity bills for 20 months while it moved to better regulate the electricity market. While the announcement will certainly prove popular with the electorate in the current economic climate, it will once again do little to encourage investment in the UK's power sector - with many big power companies now likely to wait to see who wins the election before making any significant investment decisions. Indicative of the strength of feeling within the industry, RWE Npower's CEO Paul Massara was quoted by the BBC as saying, . unless the UK can create a politically stable environment to attract new capital, that new capital will not come in'.

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