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
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.
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