New Capacity Market Parameters Could Triple Cost Of Auction
By Paul Homewood
DECC have now announced the parameters for the next Capacity Market auction, for 2017/18 and 2020/21. (They originally did not plan on one for 2017/18, but have been panicked into it by the rapid shutdown of coal capacity.)
This is their Press Release:
The Government has today set out how much electricity capacity it intends to buy in the forthcoming Capacity Market auctions.
The Capacity Market is our main tool for ensuring that electricity remains available during times of high demand, such as dark winter evenings. It enables us to buy capacity in advance for use from 2017/18. It is the most cost effective way to guarantee that we have the full range of electricity infrastructure available to cope with unexpected peaks in demand.
Earlier this year, a package of reforms to the Capacity Market was confirmed, ensuring that it continues to deliver energy security for families and businesses.
This winter two Capacity Market auctions and the second Transitional Arrangements auction (which supports the Capacity Market) will take place, securing our electricity supply for the winters of 2020/21 and 2017/18. The auction parameters set out the amount of capacity we are looking to secure in these auctions.
Energy and Climate Change Secretary Amber Rudd said:
“We are taking the action needed to tackle the legacy of under-investment in our energy infrastructure, build a system fit for the 21st century and ensure our country’s long-term energy security.
“As part of this, the Capacity Market drives down costs and ensures we can meet our energy demand at the lowest possible price for bill payers.”
The Government intends to buy:
- 53.8GW in the early capacity auction for delivery in 2017/18
- 300MW of turn-down Demand Side Response in the Transitional Arrangements auction for delivery in 2017/18
- 52GW in the T-4 auction for delivery in 2020/21
Notes to editors
- The Capacity Market was introduced in 2014 to ensure that there is sufficient electricity capacity available at all times to meet projected levels of demand.
- Energy suppliers who are successful in the Capacity Market auctions will be required to provide capacity when the system needs it or face financial penalties. This will help to secure our energy supply while also delivering value for money for bill payers.
- Three Capacity Market auctions will take place this winter:
- The third T-4 auction, for the delivery year 2020/2021, will take place in December 2016.
- Earlier this year, the Government announced that it will hold an early auction for the delivery year 2017/2018. This auction is due to take place in January 2017.
- The second Capacity Market Transitional Arrangements auction, for delivery of capacity in 2017/18 will take place in March 2017. The auction is ring-fenced for turn-down Demand Side Response.
They have had to totally rethink their strategy, because the first two auctions failed to attract much in the way of new capacity. Instead, most successful applicants were existing operators of coal, CCGT and nuclear.
For instance, the most recent auction, for winter 2019/20, included 4.6 GW of coal/biomass. Much of the existing CCGT capacity that successfully bid is also struggling to operate profitably, and may not be around in the next decade.
Given the closures anticipated, a large chunk of new capacity is needed quickly. Unfortunately, DECC so far only have one new CCGT plant on board with a long term, 15-year contract, and that is Carrington, which has been planned since 2008 and under construction since 2013. In other words, DECC are paying capacity payments for a plant which would have been working anyway.
The only other new CCGT plant contracted was Trafford, but despite winning the contract its owners have so far failed to convince investors to provide funding.
DECC have therefore realised that they need to pay much more if they are to incentivise new CCGT build. To do this, they have been forced to increase the capacity to be bid for, from 46.3 GW to 53.8 GW in 2017/18, and 52.0 GW in 2020/21.
If we look at the Demand and Supply Curve, provided by the National Grid for the 2019/20 auction, we can see that the bid price could rise alarmingly:
Eyeballing is difficult, but it appears that even the 2020/21 figure of 52.0 GW could force the price up to £50/KW/Yr. (As a guide, the auction attracted total bids of 57.7 GW in Round 1). All successful bidders receive that bid price, and not the one they have actually offered.
That would put the cost of the auction up to around £2.6bn, from £834 million in 2019/20. In contrast, the OBR currently budget £1.1 bn for 2020/21. All, of course, to be paid for by you, me and everybody else who uses electricity.
The auction for 2017/18 won’t, of course, attract any significant new capacity, as it simply cannot be built in time. All it is designed to do is to bribe coal power stations into staying open a bit longer. Again, this looks coming at a high cost to the consumer.
Having done everything in their power to force the early shutdown of coal power stations, our leaders are now having to pay them to stay open. Tell me I’m dreaming!