Britain brings forward electricity supply auction to avoid power crunch

(Adds share prices of utilities; amount of capacity expected to be procured in auction)

By Nina Chestney

LONDON, March 1 (Reuters) - Britain will bring forward a scheme to encourage power companies to supply electricity at peak times by a year in a bid to avert a looming electricity supply crunch, the government said on Tuesday.

Britain may face electricity supply shortages over the next few winters as coal plants close due to weak economic conditions and investors say there is little incentive to build new power plants.

Under the government's capacity market scheme, the owners of power plants are paid to provide electricity at short notice.

Power generators who are successful in the auctions get a steady, predictable revenue stream in the form of capacity payments which encourage them to invest in new plants or keep existing ones running. They have to be able to deliver energy when it is needed, or face penalties.

The government said it had launched a consultation to conduct an early capacity auction in January 2017 for delivery in the winter of 2017/18.

It (Other OTC: ITGL - news) expects the auction to purchase significantly more capacity, perhaps 3 gigawatts on top of what would otherwise have been the case, it added.

The government has already held two capacity market auctions, for delivery of supply in 2018/19 and 2019/20. The next scheduled auction will be held in December this year.

The consultation also proposes tougher penalties for companies that fail to deliver their capacity market contracts and will close on April 1, 2016.

"We need to buy more capacity, and buy it earlier, in order to manage the increased risks we face in the next decade as we transition away from coal and as older plant close," the government said.

Analysts at investment bank Jefferies said the changes should be positive for companies participating in the UK capacity market, such as utilities Drax and SSE (LSE: SSE.L - news) , as they will receive revenues from the scheme earlier than expected.

Drax shares rose 3.5 percent higher to 240.9 pence by 0856 GMT, while SSE inched up by nearly 0.4 percent to 1,390 pence.

Due to environmental concerns about the inclusion of diesel generators in capacity auctions, the government also said on it expects the fuel to play a smaller role in future auctions.

Government data published last week showed electricity generation in Britain fell to its lowest level in more than 20 years last year.

The consultation can be viewed here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504047/March_2016_Consultation_Document.pdf (Reporting by Nina Chestney and Simon Falush; Editing by Mark Potter and Louise Heavens)