A report by the International Energy Agency (IEA) published on October 30 could not be more enthusiastic in its praise of the UK's energy policy. The IEA enthuses that the UK's ?pioneering role in energy market reform has allowed it to reap the benefits of free and open markets.? UK consumers would certainly not dispute that and the introduction of the NETA system has achieved exactly what it set out to do ? retail prices have dropped 30% since 1990 and the market is now truly competitive. But the report will make bitter reading for many investors who have financed this transition and are now on the receiving end of its establishment. ?Such price changes affect the financial viability of existing and new generating capacity of all kinds,? notes the IEA, in what many will see as something of an understatement.
The problems for banks exposed to the sector boil down to one thing: overcapacity. There is calculated to be roughly 22% overcapacity in the UK generating sector and it is therefore not surprising that prices have slumped so spectacularly. Prices are now around £17 to £18 per MW/hour, down 40% from their levels prior to NETA's introduction as generators, desperate to avoid mothballing capacity, have continued to run their operations in a negative spark spread environment. There are now growing calls for forced closures of capacity in order to enable prices to recover to a level at which power generation can become a viable activity for IPPs. At the...
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