Capacity Market closes at record lows – are bills going down too?

Capacity Market closes at record lows – are bills going down too?

Last week, the Capacity Market (CM) auction cleared at its lowest ever price for a four-year ahead (T-4) auction. Clearing prices at the last few auctions have been lower than previously seen, meaning the cost to consumers will be less towards the end of the decade than in the near future.

The T-4 Capacity Market (CM) auction cleared on Thursday 8 February 2018 at £8.40/kW a year. Over 50.4GW of capacity won an agreement for delivery year 2021/22 at an estimated cost for the consumer of £430 million. This was the lowest ever clearing price for a four-year ahead (T-4) auction. Existing plant account for over 90% of capacity bought. However, there was some new, smaller-scale generation supported, as well as a growing indication of a move towards grid flexibility.

The nominal annual average price impact for consumers, when the capacity is to be delivered, is expected to be around £1.50/MWh over the year. However, as consumers face the cost on their winter (November to February) volume alone, the price is actually set to be closer to £36/MWh.

Auction results so far

Three such T-4 Capacity Market auctions have already occurred, securing available generation capacity for winters from 2018/19 to 2020/21. Supplementary T-1 auctions also took place in January 2017 and January 2018 – providing capacity for the upcoming winter season.

clearing prices

Flexible generation secures support

As with the auction which took place last week (T-1), there was similar level of oversupply before the T-4 started – 74.6GW of capacity had prequalified and entered the auction. 99% of the capacity awarded was for one-year deals. However, there was still over 650 MW of new build technologies which secured multi-year contracts, with most of these on a 15-year agreements. This is made up of many small units, mixed between battery storage and small fossil-fuel generators.

In the previous T-4 auction, held in December 2016, battery storage was able to secure 500MW on 15-year contracts. It was the first time the technology was allowed to enter Capacity Market auction. However, this time, only 153MW of battery storage was awarded contracts.

At the same time, over 7.6GW of coal or biomass capacity failed to win a subsidy contract. This includes SSE’s Fiddler’s Ferry, which the company has now stated may close in the latter half of 2019 as a result. Last week, the coal-fired power station, Eggborough, announced its closure following a failure to secure any agreements in the T-1 auction. However, Eggborough intends to replace the coal fired units with a 2.5GW CCGT which will enter in the upcoming T-4 auction for delivery in 2022/23.

The UK faces a significant challenge as it navigates through a shutdown of its coal-fired power stations and transitions towards more wind and solar generation as a means to meet future climate targets.

The Capacity Market, when it was first presented, was planned to provide an incentive for investment in new large-scale generation. Though this hasn’t happened, there has been more small-scale generation developed, as well as further investment in storage technologies.

Impact to customers

The Capacity Market is a means to improve system security, but consumers will have to pay for this service. The annual auctions are designed to provide the capacity at the most cost-effective level.

The last few auctions have cleared at much lower levels than had been previously seen, meaning the cost to consumers for the Capacity Market will be less towards the end of the decade than for the next few years. Consumers still have to pay for this auction, and it’s expected to add around £1.50/MWh to your annual bill.

How Utilitywise can help

How costs will be reflected on your bill will vary from supplier to supplier. You can find out about the many ways suppliers can pass on these charges to you in our FAQ.

We can help you control and reduce your Capacity Market charges and other non-commodity costs (NCCs) that are paid in addition to the wholesale price of energy. Such charges have risen significantly in recent years and are increasing still. Within the next three years, NCCs will account for the largest portion of your bill at 66%.

We hosted a webinar (in Feb 2018) to explain how you can cut and control your NCCs. To listen, you can download the recording here.

 

Ross Moffat

Posted by on Monday, the 12. February at 13.43

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.