Moody's: In Britain's electricity market, falling demand and new capacity will squeeze coal and gas generators

Power prices in Great Britain will remain low through 2020, driven by ongoing demand reduction and growth in interconnectors and renewables. Moody's expects year-average wholesale electricity prices of GBP42-46/MWh if gas prices remain stable.

"We expect new interconnectors with mainland Europe, combined with underlying demand reduction, to drive GB power prices down to European levels in periods of low demand", said Graham Taylor, Moody's Vice President and Senior Analyst. "Dramatic growth in solar will create challenges for electricity networks and thermal generators, but we see it having a smaller impact on average prices."

Moody's expects average power prices to remain significantly above those in mainland Europe, largely as a result of UK carbon taxes. However, this differential will drive significant growth in interconnection, with capacity increasing from 3GW to 7.4GW, and by 2020 Moody's expects interconnectors to set lower overnight prices in GB.

The agency also expects that electricity demand will fall at 325MW/year, a slower pace than the 2007-14 trend. However, the rapid growth of distribution-connected solar, including 1.3GW in the first quarter of 2015 alone, will lead to a larger fall in transmission demand.

The rating agency expects that headline reserve margins will fall to 10% in 2015 before gradually recovering to over 15% if the capacity market develops as anticipated. While this is low by historical standards, interconnectors and the low-cost nature of reserve plant make price spikes unlikely.

Moody's notes that low electricity prices mean SSE plc and Centrica plc are likely to continue to close thermal plants, which already make little or no contribution to earnings. Low power prices will also be negative for many renewable generators. Continuing large UK/Europe price differentials will be positive for National Grid's growing interconnection business.

Moody's estimated power prices could be too low if commodity prices rise, in particular if gas prices are higher than the rating agency's assumption of 45-47p/therm. The slower rollout of interconnectors, or higher European power prices, would also increase Moody's estimate of average prices over the period. Slower deployment of solar and wind would also put upwards pressure on the rating agency's forecasts. However, the effect of slower renewables deployment would be modest given the shape of the merit order.