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DECC Announce Changes To Capacity Market

March 1, 2016

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.

  1. March 1, 2016 6:29 pm

    £35/kw is only £35 million per GW, so it would take 30 years to recover a typical construction cost of £1 billion for a new 1GW gas-fired plant, and that would depend on the new plant winning that amount every year for 30 years, a period likely to have some years of loony-green govt, and who knows what the price of gas will do over the next 30 years, it could easily make the plant too expensive to operate.

    The UK used to be able to build power stations after WW2, now it seems to be impossible to achieve.

    • March 1, 2016 6:39 pm

      Very good point. The Capacity Market auctions only run out up to 15 yrs. Given the potty policies, there is no guarantee CCGT will even be allowed to run come 2040.

      The only other income they will earn is the electricity they can actually sell. Whether this will do much more than cover variable cost is an unknown

    • RogerJC permalink
      March 1, 2016 7:05 pm

      The capacity to build power stations still exists. Doosan Power Systems, based in Crawley still has the capabilities within the group to design and build everything from fossil fuelled to Nuclear plant. They have been keeping going with overseas orders and maintaintenance of UK plants but with their group companies can do just about any of the requirements for a power station except civil engineering.

  2. Joe Public permalink
    March 1, 2016 6:41 pm

    This sounds like an excellent opportunity for an entrepreneurial investment – perhaps in the east of England?

    East Anglian farmers produce much waste straw, so if a suitable site existed in say, Norwich, then it should be a doddle to make heaps of money, especially if tax-payers funds could be diverted from their original objective.

    Maybe a local seat of learning could advise on the viability of such a scheme?

    • David Richardson permalink
      March 1, 2016 7:15 pm

      Good heavens Joe, you are right – it’s a wonder nobody has thought of it before.

  3. David Richardson permalink
    March 1, 2016 7:31 pm

    Without getting too political about it – after all, they are all useless.

    Ms Nandy’s comments are just another example of how Labour in opposition mostly “demand” solutions to problems they created in the first place. Ed Miliband must hold top billing with the famous 2013/14 revelation that rising energy prices were creating “a cost of living crisis” in Britain.

    Was that obfuscation, total incompetence – or did he just think that nobody realised that he was largely responsible for it. I must admit that I forced myself to watch him saying it a few times, and I don’t think he had a clue which it was himself.

    As for Cameron and the other bloke? – don’t get me started.

  4. ottokring permalink
    March 1, 2016 7:38 pm

    Lisa Nandy may be useless and stupid, but she has nice legs.

  5. AndyG55 permalink
    March 1, 2016 7:45 pm

    Its the intermittency that is the killer. Having to take a back seat to anti-power supplies.

    No-one in their right mind is going to build coal or gas power stations unless they have a contract that allows them to operate 24/365 at near full power for the life of the plant (some 50 years +)

    Being at the whim of the wind, and just operating part time is not a commercially viable venture.

    This anti CO2 nonsense has to stop.

    Co2 is an absolute requirement for life on the planet.

    • AndyG55 permalink
      March 1, 2016 7:46 pm

      Typo last line……. CO2 not Co2 !!

  6. AndyG55 permalink
    March 1, 2016 7:49 pm

    “This is the system whereby the government contracts for back up generation capacity, ”

    Coal and gas should NOT be the back up.

    they should be the back bone of the generation capacity.

  7. Graeme No.3 permalink
    March 1, 2016 8:11 pm

    If Cameron were king he would go down in history as Dave the Disaster.

  8. Bloke down the pub permalink
    March 1, 2016 8:14 pm

    This is a self fulfilling prophecy. For years the greens have been saying that renewables would be cheaper than fossil fuel, and with this system, it soon will be.

  9. john in cheshire permalink
    March 2, 2016 10:52 am

    Paul, you mention Carrington and Trafford as two separate locations, or that’s how it reads to me. I believe that the second power plant was due to be constructed alongside the new Carrington plant, both of which are in the Trafford area. I have relatives who live nearby; my brother is a welder and repeatedly applied for work on the plant but it appears that the vast majority of the work force was brought in from European countries despite a commitment to give job opportunities to the local community. They seem to have got around that commitment by giving many of these foreigners Council housing so they can be classified as local. The whole recruitment process seems to stink to high heaven and not a peep from the unions. No doubt if the second plant goes ahead they’ll use the same deceit. One major reason to exit the EU; British jobs for British workers, indeed.

  10. It doesn't add up... permalink
    March 2, 2016 9:23 pm

    This mechanism is crazy. Consider a firm with a generation portfolio with N GW of Nuclear and C GW of CCGT. The nuclear is “must run”, and therefore its capacity payment is just bunce – or can be regarded as a contribution towards the CCGT. A firm with just coal must survive on the payment alone, knowing it is lowest in the green merit order, and taxed to the point where it runs at a marginal loss at other than peak power prices. A firm with just CCGT is at a disadvantage to a firm with nuclear, yet it is probably the one that DECC would like to see invest. The clearing price is guaranteed to be lower than required to justify investment in new capacity when there is old capacity that might exit the market if it got no funding for more expensive maintenance (e.g. boiler refurbishment).

    The proper way to deal with this is to require non-dispatchable capacity to contract to provide firm supply with other generators. This would ensure that the costs are borne where they are incurred, and would also set a limit on the amount of viable intermittent capacity.

  11. tom0mason permalink
    March 3, 2016 2:00 am

    The EU will soon demanding more from the UK…

    The next phase of the EU Emissions Trading System (ETS) will nearly quadruple European refiners’ carbon costs to around 23 euro cents per barrel, up from six cents now, the head of the European refiners’ industry body said on Tuesday.

    He added to calls from other energy intensive industries for free allowances to cover their emissions until there is a global carbon price.

    “A carbon market is fundamentally the right approach,” John Cooper, director general FuelsEurope, said at a forum attended by the European Commission and representatives from the refining industry.


  12. tom0mason permalink
    March 3, 2016 3:04 am

    Meanwhile after 22 years of generating electricity the Killingholme Gas Power Station has now closed.

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