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New Capacity Market Parameters Could Triple Cost Of Auction

July 9, 2016

By Paul Homewood

 

image

https://www.gov.uk/government/news/government-announces-capacity-market-auction-parameters

 

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:
    1. The third T-4 auction, for the delivery year 2020/2021, will take place in December 2016.
    2. 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.
    3. 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.

https://www.gov.uk/government/news/government-announces-capacity-market-auction-parameters

 

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.

 

image

https://www.emrdeliverybody.com/CM/T-4-Auction-2015.aspx

 

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:

 

image

https://www.emrdeliverybody.com/CM/T-4-Auction-2015.aspx

 

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!

17 Comments leave one →
  1. July 9, 2016 7:27 pm

    Sadly, you are not dreaming and the carbon obsession costs will continue upwards. The savings to the UK by scrapping the CCA are fantastic: how do the press & policicoes not see this –
    Answer = can’t manage to express in polite English.

    • Rowland Pantling permalink
      July 12, 2016 3:53 pm

      “Whenever Government legislates to force an economic outcome, the long term effect will be equal and opposite to that intended”. Newton’s Law of Government Regulations.

  2. TinyCO2 permalink
    July 9, 2016 8:56 pm

    They’re risking a catastrophic collapse of supply by relying on stations that are way past their sell by date and previously scheduled to close. They’re expecting businesses to provide new capacity while at the same time promising to shut them down over CO2 emissions. You can mess about with industry if you own it (ie state owned) or you can expect businesses to act like businesses, which includes pulling the plug… literally. You can’t have both. There could come a point where no amount of money will be able to keep stations running.

    • AlecM permalink
      July 10, 2016 10:32 am

      Agreed: with only minimal (if any) maintenance, the likelihood of permanent failure increases significantly.

  3. July 9, 2016 9:58 pm

    Times today has article on the National Grid Capacity
    “The utility, which runs the high-voltage network and is in charge of balancing supply and demand, forecasts a buffer of 5.5 per cent this winter, similar to last year. “

    • AlecM permalink
      July 10, 2016 8:35 am

      Only because of demand management; paying large commercial users to turn off their lights and machines, another cost to the rest of the consumers.

  4. July 9, 2016 10:05 pm

    Guardian and Progleft media often shill for Green subsidy mafia. Yesterday Bloomberg ran this Why Brexit May Be Good News for World’s First Tidal Lagoons

    Their entire concrete evidence for that headline : a quote from the owner
    >>Plans for the world’s first tidal lagoons off the coast of South Wales could be bolstered by Britain’s exit from the European Union, according to the developer pledging thousands of new jobs if the project is built.
    “Brexit doesn’t do any harm,” said Mark Shorrock, head of Gloucester-based Tidal Lagoon Power Ltd. “There’s a bunch of Brexiteers that said, ‘You’re in the front rank of projects that we want to see happen.”<<

  5. July 10, 2016 6:26 am

    Just wait and see the French and Dutch interconnectors mysteriously become unavailable due to “technical problems”.

    • It doesn't add up... permalink
      July 10, 2016 11:34 pm

      Worse still is when they become a net demand, as we’ve seen on several occasions in the past. Here’s a case from last winter:

  6. tom0mason permalink
    July 10, 2016 6:32 am

    Thankfully the promised Mediterranean climate for the UK should kick in soon, easing the nation’s energy requirement. Hot dry summers and warmer wet winters will help even out the seasonal peak demand variation, making the system more efficient. The efficiency is further boosted by the free energy from solar during the summer and wind during the winter.

    Now, as I sit here shivering, tell me I’m really dreaming!

  7. CheshireRed permalink
    July 10, 2016 1:26 pm

    “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.”
    .
    That’s what gets me. What a f*****g nerve she (they) have by claiming their policies reduce prices, keep them lower and all at ‘the lowest possible price’. Complete fabrication and inversion of reality, as Ms Ruud must know full well.

  8. It doesn't add up... permalink
    July 10, 2016 11:41 pm

    If May becomes PM, Rudd will stay and make a mess of energy. If Leadsom becomes PM, she will ensure that someone else makes a mess of energy, while sacking Rudd. Is there any escape?

    • Alan permalink
      July 11, 2016 12:47 pm

      Sadly, May has effectively become PM. Having said sadly, I’m not sure whether the alternative would have been better or worse. May has a proven track record of being a rubbish Minister. Leadsom was still to prove her inadequacy.

  9. July 11, 2016 3:21 am

    World-wide, lock-step “consensus science” has produced a crisis to be addressed at the London GeoEthics Conference on 8-9 September 2016:

    https://geoethic.com/london-conference-2016/

    The organizer is Professor Nils-Axel Mörner.

    With kind regards,

    Oliver K. Manuel

  10. Coeur de Lion permalink
    July 11, 2016 7:24 am

    Where is wind in all this?

    • July 11, 2016 10:05 am

      The Capacity Market is for generators that can guarantee to supply at any time when it is needed. That lets wind out!

  11. July 11, 2016 2:12 pm

    Important news from National Grid : “We launched our 2016 scenarios on Tuesday 5 July at our annual conference in London” FES : Future Energy Scenarios

    Important Webinairs are coming up starting on Thu 14th July 10-11 am Demand overview,
    19th Electricity, 27th Gas, 29th Pathways : carbon reduction target etc.

    h/t not banned yet

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