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Capacity Market Footnotes

March 4, 2016

By Paul Homewood 





There are a few loose ends to tidy up from yesterday’s post, Capacity Market Auction For 2019/20.


Small Scale Peakers

I mentioned that there is about 2.0 GW capacity of new build small scale peakers, mainly diesel units, small gas turbines etc, which have submitted successful bids in the first two auction rounds.

Nearly all of these have contracts for the full fifteen years permitted.

In addition, there is also about 660 MW of existing small scale units, below 20 MW, which have successful bids for just a single year. In other words, we are looking at around 2.6 GW of capacity, which should be available for 2019/20.

As I mentioned before, this may well come in handy for very short term balancing of the grid, but will do little to make up the shortfall when ageing coal and other plants are shut down.

We sometimes hear about sky high prices paid to diesel and other small generators under the Capacity Market, but it is slightly more complicated. All units receive a retainer, in this auction £18/KW/Year, so the price per unit that this represents depends on how much power is actually generated.

As an example, a 10 MW unit would receive an annual payment of £180,000. (15 year contracts are index linked). If only 10 MWh is generated, the cost would be £18000/MWh, but if 100 MWh was produced, the cost would drop to £1800/MWh. (This would be in addition to whatever price the generator managed to get for the electricity itself in the market place).




There are two interconnectors listed as having successful bids, the French and Dutch ones, with 1033 and 828 MW respectively. As I have mentioned before, it is debatable just how much we can rely on these. One term I have seen sums the problem up well – they are not controllable.

But leaving that aside, what is interesting is that the National Grid jointly owns both interconnectors. This mean that they will receive £33 million a year (jointly with their co-owners), which will then be added to consumers’ electricity bills.

They already, of course, receive payment in the normal run of things for every unit of power transmitted either way down the cable on a day to day basis.

This sounds to me very much like a case of double dipping by a monopoly operator, whose primary task is to be responsible for our energy infrastructure.



Implicit Cost of Renewables

The need for the Capacity Market is solely due to the intermittent nature of wind and solar output. It has therefore been suggested that  wind and solar operators be made to bear the cost of providing back up.

We can do a few back of the fag packet calculations to see what this might all cost.


We know that the cost of the latest auction for 2019/20 is £834 million, but that this figure could easily double in years to come. So, let’s assume £1.5 billion for 2020/21.


Wind and solar output is currently running at 45 TWh/year, and let’s assume this rises to 60 TWh by 2020.


That means that the cost of capacity payments would equal £25/MWh, for each unit of electricity produced by wind/solar.

Quite a startling figure, I think you would agree.

  1. March 4, 2016 2:06 pm

    ISO NE, the equivalent of National Grid in Northeast USA, is a not-for-profit organisation in the land of free enterprise. Can anyone defend the privatisation of the UK electricity industry?

    Here is the ISO NE mission statement:

    “We are the independent, not-for-profit corporation responsible for keeping electricity flowing across the six New England states and ensuring that the region has reliable, competitively priced wholesale electricity today and into the future.”

    Compare that with the worship of low-carbon that you get from National Grid, Ofgem and the BBC, to name but a few.

  2. March 4, 2016 3:04 pm

    At the Examination of the proposed Navitus Bay offshore wind farm I suggested that the wind farm owner should also provide a despatchable power station of the same capacity so that the two together could operate as baseload and/or load follow and maintain grid stability. My suggestion was met with stony silence.

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