Energy payers would have to bare the price of winter schemes for zero black-outs in the next winter

It would be a terrible sight to see the UK in darkness as apart from the inconvenience for households, it would also cost a lot of money to businesses and other commercial sectors. To combat this, the government has announced a new subsidy scheme in which it would be paying the supporting energy companies to keep their power plants open during the winter period.

To choose the companies that are ready to offer their power plants at minimum charges, the government has planned capacity auctions, which are supposed to take place in the first week of February 2017. This method would suffice the need for power in the next winter as the National Grid would pay to a limited number of power plants, which are chosen to supply power to meet winter energy demands of the next year. It is a focused approach that supplies resources wherever needed instead of supporting plants that are on the verge of closing. The scheme would further reduce closures of power plants.

The scheme is beneficial for low-cost coal-fired power plants as they can be the best backups and receive subsidy instead of shutting down by 2025. The 53.6GW power auction would cost between £1.5bn and £2bn, around four times more than £650m, the estimated lowest cost paid to secure electricity supply this year. Although, the scheme seems to be the best alternative for minimising the chances of black-outs, many experts feel that it would put more weight on the customers paying the bills. According to Phil Grant, a partner at advisory Baringa, customers would be at the receiving end of this and need to pay much higher energy prices for little benefits.

He spoke on the topic and conveyed that “The unnecessary cost to consumers cannot be trivialised. This auction is asking consumers to pay to secure 100pc of the capacity needed next winter when we only need to secure 10pc. The other 90pc would be running anyway.” However, the government says that the scheme would be beneficial for the customers as it would reduce energy bills by £46 per customer a year. Without the scheme, they would pay more as market prices are unpredictable and may change any time.

Energy market traders consider this as a positive step as the scheme would zero down the £3,000 a megawatt price spikes seen in recent months. Besides this, they even bring awareness to the fact that there is no guarantee that with the scheme the prices would be lower across the winter next year. Mr Grant added on this by saying that “We could still have price spikes similar to the ones we’ve seen because even with capacity secured supply margins are still tighter than we’ve seen historically.”

The scheme would require all power suppliers to bid in the auction with the starting price of £75 a kilowatt for pre-approved power. This would fall on regular intervals and expensive power plants would lose out on the deal. The second day of the auction recorded a price fall between £30-£35 a kilowatt and is expected to settle £20-£25 a kilowatt. To this, Baringa has said that any price above £5 a kilowatt would mean that bill payers are at the losing end and need to pay higher charges next winter when compared to this year.

Mr Grant also gave a warning by saying that “The outcome is very finely balanced but more sensitive to generators looking to game the auction by removing some power units earlier than expected. By doing this the auction could result in a higher price that would benefit the rest of their portfolio.” People who spoke in favour of the auctions include Tony Ward, a partner with EY, who said that “the economic cost consequences of blackouts and brownouts next winter is sufficiently large that this seems the best way to secure our supply”.

Shay Ramani, founder of FreePriceCompare.com, said that “Capacity auctions are a good idea to deal with black-outs but may weigh heavy on the customers. However, the losses due to black-outs may be worse than this and so the government should go ahead with the scheme but try to minimise the overheads so that energy payers don’t have to suffer.”

To sum up, you can expect higher energy prices next year owing to the winter schemes that have pledged no black-outs in the UK. To ensure that you do not suffer, compare energy prices online and make a switch to the one offering cheaper tariffs and better discounts. To simplify this for you, we offer our professional energy comparison services and suggest quotes that minimise your energy bills.