UK households to pay $1.6 bln for backup power plants

(Adds context, comments from Deutsche Bank (Xetra: 514000 - news) , E&Y, InterGen)

By Karolin Schaps

LONDON, Dec 19 (Reuters) - British households will pay nearly 1 billion pounds ($1.6 billion) to help guarantee the country's electricity supply in 2018/19, after a government auction determined who will provide backup power capacity.

Britain is the first country in Europe to set up a backup capacity market and governments pushing for renewable energy production are looking to London to prove it can work for generators as well as consumers.

The market is designed to ensure backup power is available when intermittent renewable energy sources fail to produce electricity.

The auction, held by network operator National Grid (LSE: NG.L - news) , set the price to be paid to capacity holders at 19.40 pounds per kilowatt, lower than market experts had expected.

Deutsche Bank analysts said this could reduce their earnings forecasts for utilities SSE (LSE: SSE.L - news) and Drax by more than 5 percent as they had assumed a price of 35 pounds/kW.

Shares (Berlin: DI6.BE - news) in SSE were down 1.7 percent, while Drax fell 2 percent by 1025 GMT.

The capacity payments are added on to consumers bills and each British household is expected to pay around 11 pounds more in 2018/19 to pay for the new mechanism.

The affordability of energy bills is a contentious issue as prices have risen substantially over past years, partially due to payments for green energy and social schemes. The opposition Labour party has promised to freeze household energy prices if it wins May's election.

"We are guaranteeing security at the lowest cost for consumers," said British energy minister Ed Davey.

Germany and France will be watching the auction outcome closely as they are considering introducing the same mechanism.

"I would suspect there's an even greater degree of confidence now that this is something that can work," said Tony Ward, head of power and utilities at advisory E&Y.

"The auction shows there is appetite from a whole range of different types of capacity and that it's not a mechanism which is necessarily going to push up the overall system price."

Some proposed new power plants missed out in the auction, putting their future in doubt.

One of those is SSE's Welsh Abernedd plant. SSE said on Friday it was now unable to make a final investment decision to take the project forward.

Power generator InterGen also said it would be unable to sign off on investments in two new gas-fired power plants after they failed to secure contracts.

The auction results are subject to verification by National Grid, due on Jan. 2.

($1 = 0.6380 pounds) (Editing by Dale Hudson and Pravin Char)