Latest Capacity Market auction criticised as “unnecessary expense”

Latest Capacity Market auction criticised as “unnecessary expense”

The 2017/18 Capacity Market auction has cleared at a record low price of £6.95 per kilowatt per year. The results of this auction have raised questions over the purpose of the Capacity Market and if it is worth what it costs consumers.

Paying for unnecessary capacity

Over 54 GW of power capacity was secured as part of the Capacity Market auction, the largest of all the auctions delivered so far. The capacity would be required in only the most extreme high demand case. 54 GW is significantly higher than peak system demand from last winter (2015/16) which was just 50.5 GW. Power demand has been falling since 2011 and peak consumption hasn’t reached 54 GW since January 2013, bringing further into question the necessity of the auction.

Peak system power demand chart

Furthermore, at £378m, the final cost – which will be levied on to consumer bills – is more than three times the cost of the Supplementary Balancing Reserve (SBR). The SBR scheme has provided 3 GW of back-up generation for the current winter season.

Gas and coal plant dominate

The large proportion of capacity secured by existing coal-fired power stations was also criticised by some as potentially indicating a contradiction in Government policy. On the one hand, the results of the auction will see coal plant paid to provide back-up power next winter. While on the other hand, the same plant has been ordered to close by 2025.

The Capacity Market was only expected to come into force from 2018/19. However, a supplementary auction was announced in March 2016, securing generation capacity for the upcoming 2017/18 winter.

Lack of large-scale new-build generation

Nearly 92% of all bidding projects in this latest auction received a Capacity Agreement. This was despite the price falling to a record low, over £15 lower than the previous auction held in December last year. Given the short-term nature of the early auction, winning projects heavily favoured existing generation, a fact expected from the outset. Large-scale new-build developments could not be built and operational in time to provide supply in less than eight months’ time.

As such, just 3% of awarded units were classed as “new-build generating”, with 96% of capacity from existing power stations or Interconnectors. Gas plants were awarded nearly 40% of contracts, while coal and biomass plant were awarded 20%. Outside of larger-scale generation assets, storage facilities will provide 2.7 GW (5% of that secured) of capacity, marginally down on the previous auction in December. Meanwhile, projects designed to alter peak usage through the use of Demand Side Response (DSR) were awarded contracts equating to less than 0.5% of the auction capacity. Over 60% of the capacity which did exit the auction, considering the price to be too low to take part, came from gas and coal-fired power plant.

Volume of capacity

Sledgehammer trying to crack a nut

Jon Ferris added: “The implications [of the low clearing price] are that is has been an unnecessary expense for business consumers when the greater problem with the system is not capacity, but flexibility.”

“Peak demand has been around 50 GW for the last couple of winters. Government was buying around 54 GW in the auction. So excess generation, and everything that had already secured a contract for future years, was looking to bid in, take the subsidy and make sure it got the clearing price to ensure it did not miss out,” he said.

“Government should instead incentivise demand reduction or flexibility at peak times to help consumers and the businesses that depend on a well-functioning energy market particularly at a time of economic uncertainty,” he added.

 

Ross Moffat

Posted by on Wednesday, the 8. February at 13.44

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.