Skip to content

Brought to you by

Dentons logo

Global Energy Blog

A blog on the latest developments in global energy law and policy.

open menu close menu

Global Energy Blog

  • Home
  • About Us

UK “early” Capacity Market auction produces cheapest prices yet

By Adam Brown
February 6, 2017
  • Electricity Market Reform
  • Fossil Fuel Generation
  • United Kingdom
Share on Facebook Share on Twitter Share via email Share on LinkedIn

The provisional results of the “early” Capacity Market auction held last week have now been published.

This was an auction exclusively of 1-year capacity agreements, primarily to cover Winter 2017/18, after the UK Government decided that it did not want National Grid to carry on ensuring security of supply during Winter periods by means of a Contingency Balancing Reserve (CBR).  The CBR involved auctions open to generators who would not otherwise be operating in a given Winter period and to demand side response providers.  A Government consultation in March 2016 noted that the prices National Grid were paying under the CBR were increasing and that it introduced distortions into the market.

From Winter 2018/19, of course, the Capacity Market itself will ensure security of supply.  Those with capacity agreements beginning in 2018 will be the capacity providers who bid successfully in a four year ahead auction held in 2014, supplemented by those who win capacity agreements in any subsequent one year ahead auction for delivery in 2018.  Last week’s “early” auction was a one-off bridge between the CBR (now operating for the last time to cover Winter 2016/17) and the fully-fledged Capacity Market regime.  The key difference between the CBR and the Capacity Market is that the CBR (or at least the major part of it) focuses on securing capacity that would otherwise not be in the market, to fill the potential gap between existing generation and projected peak demand, whereas the Capacity Market provides a reliability incentive to all eligible generators and demand side response providers on the market.

Commentary on previous Capacity Market auctions (such as this post from December 2016) has tended to focus on the failure of the four year ahead auctions to result in the award of 15 year agreements to meaningful amounts of large-scale new gas-fired generation projects.  With new projects competing against almost all existing thermal generation, and new reciprocating engine projects able to bear much lower Capacity Market clearing prices than a CCGT project, the auctions have produced low clearing prices, but no obvious successors to the existing big coal-fired plants that the Government wants to close by 2025.

How to evaluate the results of the “early” auction, then?  The provisional results indicate capacity agreements going to 54.43 GW of capacity, at £6.95 kW / year, suggesting total costs to bill payers of around £378 million.  This might look like spectacularly good value compared with the results of the last four year ahead auction (for delivery starting in 2020), where the clearing price was £22.50 kW / year for 52.43 GW of capacity.  But that isn’t really a fair comparison, since about a quarter of the capacity that was awarded agreements for 2020 was new build, whereas less than 4 percent of the capacity awarded agreements in the “early” auction falls into this category.  All the rest will be paid £6.95 for just continuing to operate – which presumably most of them would have done anyway. 

An alternative point of comparison might be with the costs of the CBR.  The most recent Winter for which these are available is 2015/16, when National Grid spent just over £31 million on procuring, testing and utilising less than 3 GW of CBR capacity.  Obviously a much inferior system. 

 

Share on Facebook Share on Twitter Share via email Share on LinkedIn
Subscribe and stay updated
Receive our latest blog posts by email.
Stay in Touch
Capacity Market, CCGT, coal, EMR, gas, National Grid
Adam Brown

About Adam Brown

Adam is a senior associate in the Energy practice. He has extensive experience in energy, planning, environmental and general public law, much of it gained over a decade spent working for the UK Government in a variety of legal and policy-making roles.

All posts Full bio

RELATED POSTS

  • Hydrogen
  • United Kingdom

UK hydrogen policy takes shape (1): publication of the UK Hydrogen Strategy

By Adam Brown
  • Electricity Market Reform
  • Renewables
  • United Kingdom

UK renewable Contracts for Difference – now only for offshore wind?

By Adam Brown
  • Electricity Market Reform
  • Latin America
  • Power Networks
  • Renewables

Chile – a clean energy powerhouse

By Enrique Benítez, Marisol Ceballos, and Enrique Benítez

About Dentons

Dentons is designed to be different. As the world’s largest law firm with 20,000 professionals in over 200 locations in more than 80 countries, we can help you grow, protect, operate and finance your business. Our polycentric and purpose-driven approach, together with our commitment to inclusion, diversity, equity and ESG, ensures we challenge the status quo to stay focused on what matters most to you. www.dentons.com

Dentons boilerplate image

Twitter

Categories

  • Africa
  • Canada
  • Consumers and Communities
  • Efficiency
  • Electricity Market Reform
  • Energy Bill 2022
  • Environment, Health and Safety
  • Europe
  • Fossil Fuel Generation
  • General
  • Heat and Transport
  • Hydrogen
  • Italy
  • Latin America
  • Middle East
  • Nigeria
  • Nuclear
  • Oil and Gas
  • Poland
  • Power Networks
  • Renewables
  • United Kingdom
  • United States

Subscribe and stay updated

Receive our latest blog posts by email.

Stay in Touch

Dentons logo

© 2023 Dentons

  • Legal notices
  • Privacy policy
  • Terms of use
  • Cookies on this site