Losses in the value of sterling related to Britain’s impending exit from the EU have significantly dented the profitability of UK gas-fired power plants.
Generators are having to fork out more British pounds to secure the same volume of euro-denominated European emissions allowances (EUAs) than when the currency was stronger. This has further tightened profit margins that had already been cut by a rally in the carbon market.
With the odds of a no-deal Brexit increasing almost daily, generators may come under further financial pressure in the coming weeks as the 31 October leave date approaches.
The British currency has come under significant pressure in recent weeks because of the looming possibility that the UK will leave the EU without a withdrawal agreement.
Prime minister Boris Johnson has repeatedly said that he is committed to taking the country out of the union on 31 October regardless of whether a deal has been reached.
Fears of potential economic upheaval in the aftermath of a disorganised Brexit have weighed heavily on the value of the pound relative to the euro.
This has meant that European carbon, which is priced in the single currency, has become more expensive to UK companies dealing primarily in sterling.
Fossil fuel generators must purchase one EUA for each tonne of carbon dioxide that they emit. This is in addition to the UK carbon price support (CPS), which is currently set at £18/tCO2e.
BRITISH CARBON PREMIUM
With European carbon becoming relatively more expensive for UK generators, winter clean spark spreads, which indicate the notional profitability of gas-fired generation, have fallen sharply having peaked in early July.
This is despite contracts on the wholesale NBP gas and UK power markets tracking each other closely due to the marginal role of gas in the generation mix.
The Winter ’19 clean spark spread for a 49.13% efficiency plant shed almost a quarter of its value from 9 July to 14 August to close around its lowest value since January 2019.
The outright value of UK power relative to NBP gas, typically called the dirty spark spread, has risen markedly from the start of the year.
Its clean counterpart, excluding the CPS, has fallen over the same period – demonstrating the increasing costs of the carbon market to generators.
While utilities in mainland Europe also have to deal with increasingly expensive carbon permits, a lack of exposure to sterling leaves them better placed relative to their British competitors.
An implied Winter ‘19 German clean spark spread in August has outturned close to its highest value in 2019 to date.
With the odds of a no-deal Brexit increasing as the government ramps up its rhetoric, sterling is likely to remain under significant pressure in the coming months.
Increasing carbon costs, both due to strength in the EUA market and a weak sterling, will acutely affect margins for less-efficient UK gas plants. Lower-efficiency units need to pay for more emission permits per unit of generation.
Conversely, any improvement in the value of the British currency relative to the euro could undo some of the recent losses in clean spark spreads.
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