This week, existing and prospective energy generators in the UK have been participating in the first capacity market auction for the right to supply electricity to the market from 2018.
48.6GW
The scheme, designed to secure the UK’s electricity supplies beyond 2030, is aimed at procuring 48.6 GW of capacity from 64.4GW of qualifying plant.
National Grid, who are running the auction, expect that the ‘run-off’ of this reverse auction over its four rounds will see the opening price of £75/KW reduce by £5 over each round. The concept being that participant generators will need to amend their bids lower to secure a place in the final 48GW and to deliver at their and the market’s most balanced and economic level.
The auction promises subsidies for both existing plant, such as coal plants who are seeking short subsidy periods of under three-years through to anything up to 15-year contracts to finance the building of new gas-powered stations to help plug the gap created by the UK’s growing commitment to unpredictable renewable energy sources.
Analysts at RBC Capital forecast that the auction could break the £40/kW point whilst others believe it will fall further still. Indeed financial modelling by DECC suggesting the subsidy could vary widely, between £18kW/year and £42kW/year.
£2bn
Auction success is lucrative as the bidders, whether new-build or existing plant and whether coal, nuclear or gas-powered will compete for annual subsidies approaching £2bn a year (at today’s prices).
Critics however claim that the auction will inherently favour existing coal-fired and nuclear power plants rather than bring forward investment in new, cleaner gas-fired projects which are currently hindered by uneconomic market conditions. As the bid price lowers, the available incentives to take commercial risk also lessen, reducing the development of new tech.
Philip Grant, an analyst at Baringa, the energy management consultancy business said:
“It will be interesting to see how the auction dynamics work between plant that is planning refurbishments and new plant. The auction could prove to be more competitive than previously thought as these types of plant will be critical in determining the level of capacity payments”
The latest impact assessment by the DECC suggests that based upon 2012 prices, the cost of delivering the payments to the successful generators will add £14 a year to domestic electricity bills from 2016 to 2030.
DECC’s impact assessment report ahead of the auction claimed:
“The UK faces very rapid closure of existing capacity as older, more polluting, plants go offline and we will see a significant rise in intermittent and less flexible generation to support our climate change objectives.
“We also expect overall demand for electricity to increase in the long term as a result of the electrification of our transport and heating systems.”
Keeping the lights on
The overall intent of the 48.6GW scheme however is actually far more prosaic.
To keep the lights on.
With Britain’s peak winter demand estimated at 53.6GW based on normal weather conditions and a narrow capacity margin, exacerbated by further plant closure over the coming years, the auction is an essential conduit to ensuring enough generation to cover demand in the coming years.
Much rides on this first auction with rare cross bench support in the commons with Tom Greatrex, Shadow Energy Minister, saying the “broad framework of the policy is right”.
Whether it is enough remains to be seen.