Falling gas prices, low-cost imports and stable carbon prices will see wholesale power prices in the UK decline steadily through to 2022, according to new research.
In a note to its clients, ratings agency Moody's said it expects that prices will fall from around £45/MWh today to £40/MWh in 2022.
Graham W Taylor, senior credit officer at Moody's, said: "The forecast is driven in large part by our expectation that gas prices will fall in sterling terms. Sliding demand and low-cost European power imports will also pressure prices."
However, the ratings agency noted that changes to the UK carbon tax, a renewed commitment to carbon pricing in Europe, or reforms to the tax and regulatory treatment of interconnectors following Brexit could significantly change the outlook for British power prices.
The UK has reduced power sector carbon emissions much faster than its European peers, largely as a result of an 85% fall in coal output since 2010. Significant growth in renewables, particularly offshore wind, will drive further reductions, and by 2022 Moody's expects the UK to have the highest contribution from non-hydro renewables of any large European country.
However, these positive environmental steps have come at a high cost. Explicit and implicit UK subsidies for existing renewables run at more than £9bn annually, making them among the most costly in Europe.
According to Moody's, stable-to-declining power prices and moderating growth in renewable subsidies may ease pressure on energy suppliers and networks, which have faced a number of regulatory and political interventions in recent years, including Prime Minister Theresa May's recent proposal to impose energy price caps.