Gas‐fired power generation provided by independents and new market entrants has a vital role to play
in attracting new investment capital into the industry, securing electricity supplies and minimizing the
overall cost of electricity market reform to industrial and residential customers.


However, independent gas power station developers and operators as well as leading financial
institutions are concerned that the Energy Bill makes no reference to competition in the electricity
market. The guidelines issued last week by the Government relating to the operation of the proposed
capacity market would make it impossible for independents and new entrants to raise finance in order
to participate in the capacity auction and compete effectively with the “Big Six” dominant market
incumbents.

‐ In a meeting with DECC’s Michael Fallon on 13 June, independent gas power station developers and
operators (Stag Energy, Intergen and Carlton Power), supported by senior representatives from leading
financial institutions and investors in the UK energy infrastructure sector, called on the Government to
make explicit reference in the Energy Bill to the need to use the capacity mechanism to promote
competition. This would be consistent with obligations contained in the Electricity Act 1989 and the EU’s
Third Energy Directive.


‐ The explicit recognition in the Bill of the need to encourage competition will help ensure that the
capacity mechanism is designed in such a way that allows independents and new entrants to (a) secure
the funding (equity and debt) for new investment, and (b) compete effectively with the “Big Six” in the
proposed capacity auction.


‐ In particular, independents require (a) contract lengths for new build of at least 15 years (10 years is
currently proposed by DECC) to allow operators to spread capital repayments over a longer period and
thereby reduce the annual capacity payment, and (b) contract terms which increase revenue certainty
and reduce financial risk eg specific allowance for planned maintenance, a broad definition of force
majeure and most important of all, a substantial reduction in the rate at which penalties are incurred and
in the level of the proposed penalty cap.


‐ Penalties are to be imposed for non‐delivery of energy at times of stress to ensure generators have an
incentive to be available when needed. However, under current proposals generators could lose twice
the value of the capacity payment each and every year which places an unknown and uncontrollable risk
on generators and their financiers. Independents support the principle of penalties such as those that
apply to offshore‐wind and transmission developers but a penalty cap for non‐delivery of energy of no
more than 25% of annual revenues would be both more equitable and “fundable”.

 

‐ These changes in the design of the capacity mechanism would mean that independents
can finance projects at a lower cost and require less support from the capacity auctions. This in turn
would (a) lower the cost of delivering new capacity and reduce the windfall gain to existing plant bidding
into the auction, and (b) reduce the overall cost of the capacity mechanism to all consumers.


‐ The “Big Six” dominate the market in both electricity production and supply. This vertical integration
means that the incumbents have a captive market for their output while independents find it extremely
difficult to secure long‐term sales contracts to underpin the financing of new generation. Furthermore,
the “Big Six” are less dependent on external project finance because they can finance on balance sheet
and spread investments over a portfolio of assets.


‐ The Government has charged OFGEM with the task of increasing market competition. But short of
formally unbundling generation and supply, which would be a costly and time consuming process, there is
very little OFGEM can do. Proposals to force the “Big Six” to trade more of their power in the market may
increase short term liquidity but will not lead to more competition in electricity generation and supply.


‐ Last week (27 June) OFGEM highlighted the increasing risks to security of electricity supply and the
Government itself has accepted that as much as 41GW of new gas plant will be needed by 2030 to
compensate for the withdrawal of coal‐fired generation, the delays in new nuclear construction and the
intermittency of wind power. With competing demands worldwide on their limited resources, the
Government cannot rely on the “Big Six” to fund all the new investment required. Therefore
independents and new entrants have a vital role to play in both keeping the lights on and increasing
competition.


‐ The Government has now confirmed that the first capacity auction will take place at the end of 2014.
However, if independents are to be able to participate in this and subsequent auctions, the Government
needs to use the Energy Bill to introduce a robust capacity framework that enables independents and
new entrants to finance the essential new generation of gas projects.

 

FOR FURTHER INFORMATION
Stag Energy
For comment/interviews:
Stag Energy’s George Grant – 0131 550 3380
Or
Clive Moffatt ‐ 07831 571776


Notes to Editors
Stag Energy (www.stagenergy.com) has a long history of power station and related energy infrastructure
project developments in the UK and overseas. The team has been involved in the creation and delivery of
more than 10,000MW of power generation projects, including the Rocksavage gas‐fired power station in
Cheshire, the Coryton gas‐fired power station in Essex and the Spalding gas‐fired power station in
Lincolnshire. Stag Energy has also led the Gateway Gas Storage project which was consented by the UK
Government and the local authority (Barrow‐in‐Furness, Cumbria) in 2008.


Stag has established Watt Power to develop small‐scale flexible gas‐fired plant (up to 299MW capacity) in
the UK. Two projects, Eye Airfield in Suffolk and Hirwaun in South Wales, are at the first stage of the
planning and consenting process. Subject to the outcome of the Energy Bill and the proposed capacity
mechanism process (as well as planning), both projects could enter operation in late‐2018.

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