The prospect of electricity prices doubling in the UK became very real after the government suspended the system for ensuring there is a back-up power supply.
Experts warned that the wholesale power price could reach £121 per megawatt hour (MWh) by next winter unless the government finds a way to re-establish the so-called capacity market, The Times reports.
On Friday 16 November, the power price was £55. Analysts at the think-tank Aurora Energy Research forecast power prices next winter of about £60 per MWh if the capacity market is reinstated, but they could be much higher if the government fails to find a workaround.
The UK government was forced to put the capacity market on hold after the European Court of Justice (ECJ) ruled that it was in breach of state-aid rules.
The system, which was originally given the green light by the European Commission, places power stations on standby, under subsidy, to provide immediate extra capacity for the UK’s main network, when required. However, following a legal challenge from the Australia-focused Tempus Energy, the mechanism was deemed unfair on companies that could help reduce energy demand.
As well as the threat of a hike in electricity prices, there is a risk that projects could be paused or even pulled on the basis of them no longer being economically viable.
If no resolution is found, there is an expectation that energy suppliers will pass the higher price of power onto customers. Many suppliers are already running on low margins and analysts estimate the industry has been relying on about £3.5bn of underlying profits to come from the capacity market.
Energy companies fear that the capacity market suspension could see them incur penalties for not being ready to supply power if needed.
In light of the ECJ ruling, the government said it is planning to seek approval to run a new auction for back-up contracts for next winter.
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