U.K. Utility SSE Is Set to Earn a Windfall to Keep Britain’s Lights on Next Winter

(Bloomberg) -- SSE Plc is set to earn a windfall from the gas-fired power plants it will ensure are available to help keep U.K. lights on next winter.

The company could make as much as 172 million pounds ($233 million) in an auction starting on Tuesday, making it by far the biggest winner among utilities, according to calculations using National Grid Plc data. The auction could clear at the maximum price of 75 pounds a kilowatt because the pool of bidders is about the same size as the capacity target.

The capacity market -- a mechanism designed to guarantee there’s enough energy available for the country -- is paid for by consumers. In a sign of caution about security of supply, the government last month decided to increase the target capacity it wants to have available next winter. Under the system, Britain pays power stations to guarantee they will be available if needed.

The capacity target for next winter was raised after it became clear that some stations with a four-year contract were now unable to fulfill their obligations. SSE has put forward gas units for the auction starting Tuesday.

BloombergNEF’s central scenario is for an auction price of 43.38 pounds, but because SSE controls 42% of the capacity bidding, it has a “very strong hand” in setting the price, BNEF analyst analyst Andreas Gandolfo said. 

SSE declined to comment.

Britain is dealing with a confluence of energy-related issues, including aging power stations, soaring natural-gas prices and utilities that have gone bust. Consumers are facing ever-higher prices, with domestic energy bills set to jump 54% from April, putting more pressure on household budgets being stretched by rising inflation.

Power plants largely aren’t being replaced, partly due to a government push into renewables, particularly offshore wind. Capacity auction prices also haven’t been high enough to make it worthwhile building new stations. The stakes are high -- when it’s not windy, the U.K. relies heavily on gas, the price of which has quadrupled in the past year.

SSE has entered its brand new Keadby-2 gas-fired plant into the auction. The station is still in its testing period and will need to be commercial by Oct. 1 when the capacity contract starts. The company is also putting forward its Keadby-1 and Medway gas stations.

Also, Uniper SE entered its Ratcliffe coal-fed plant into the auction and is in line to get as much as 30 million pounds to keep it available.

The year-ahead auction is a top up to supplement the main auction held four years in advance, and starts at 9 a.m. London time on Tuesday. Conventional power stations can participate alongside producers of renewables, storage owners and operators on the demand side. 

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