Whilst the new Capacity Market will add costs into the power supply chain in 2018, it is having the welcome effect of helping to reduce wholesale prices.

This is because generators are seeing the Capacity Market as providing additional secure revenue which reduces the wholesale market price they will accept accordingly.

Capacity Market support amounts to over £19/kW for Winter 18 (in return for guaranteeing availability of power stations), and with the scheme potentially being brought forward 12 months, there is further scope for softening of wholesale prices for Winter 17.

Add this to the already weak demand for seasons beyond the current year (due to utilities wanting to avoid holding stranded retail volumes in a soft market, and general trends towards lower demands) and we now have a power curve in backwardation and the opposite effect in gas.

Action Points:

Flex Clients: Increase power hedges for Winter 18 and monitor for Winter 17 is Capacity Market is bought forward.

Fixed price clients: Monitor prices and prepare to fix contracts spanning Winter 17 and 18.