DECC Announce Changes To Capacity Market
By Paul Homewood
As promised, DECC have made a series of changes to the way that the Capacity Market works.
This is the system whereby the government contracts for back up generation capacity, to cover for intermittent renewable operations. So far, auctions have been held for 2018/19 and 2019/20, but the main problem is that the reverse auction system naturally favours existing plant, as they only need to cover variable costs.
Whilst this has enabled DECC to buy in capacity relatively cheaply, it has failed to encourage the building of new plant, particularly CCGT, which is so desperately needed to replace the closure of ageing coal and other power stations.
In the recent auction in December 2015, for instance, 45.3GW was contracted at a price of £18.00/kW/year - a cost of £815 million for 2019/20. The only major new build contracted in these first two auctions, ie excluding diesel generators etc, are the CCGT plants at Carrington (which was already under construction) and Trafford (which so far has been unable to raise finance).
DECC’s new announcement covers two main issues:
1) There be be an extra capacity auction to be held next January, to cover 2017/18. (Don’t mention panic!!)
The purpose of this is to persuade any plants considering imminent closure to keep going a year or two longer. Presumably it is too late for the coal plants who have already announced closures this year, but it may help waverers such as Drax.
2) There is an acknowledgement that extra capacity needs to be bought in the long term.
In theory, this will bring on board more new CCGT, as existing capacity can only supply so much. The problem is that, under the terms of the reverse auction, the rate paid to all successful applicants will be higher, probably a good deal more.
To give a clue, we have the summary provided by the National Grid for the latest auction.
Most of the exited capacity went out at bids way above the £18 finally agreed. Although DECC have not yet given any idea of how much extra capacity will be needed, an extra 10GW would imply an increase to around £50. This would equate to £2.7 bn/year, a big increase from £815 million.
Peter Atherton, an analyst at Jefferies, thinks the price was likely to need to rise to £35/kW to meet the Government’s stated aim of securing new gas plants, but even this may be optimistic.
Meanwhile, dear little Emily Gosden falls for the old trick and says household bills may rise by £10 a year as a result. However, even a cost of £2.0 bn would equate to £77 per household, whether via energy bills, higher taxes, higher prices and fares. If we all got a bill through our letter box for £77 every year, I suspect people would not be very happy.
It is also worth bearing in mind that the OBR, as I showed yesterday, have budgeted for £1.3 bn in 2020/21 for capacity payments.
As if to prove that there is always someone dafter, Labour’s shadow, the nonentity Lisa Nandy, complains that ministers now need to come clean over how much energy bills will rise next year to pay for the consequence of their failure to get new power stations built. She has clearly forgotten that her erstwhile leader, Ed Miliband, had promised to totally decarbonise our electric supply by 2030!
And WWF call it a sticking plaster solution!
Perhaps one day our energy policy might be run by people who know what they are doing.