Has the recent electricity capacity market auction succeeded?

The first auction can be considered a qualified success as the required capacity was secured and the clearing price is relatively low but:

  • Little new capacity has been secured. The new capacity is almost all gas-fired and includes just one major CCGT and many smaller gas-fired plants.
  • Existing plants may achieve windfall gains. In particular, the energy cost savings purported to arise in 2018/19 because of greater available capacity may not materialise as:
    • Market price spikes may not be controlled (as most of the contracted plants are part of larger portfolios owned by the big 6 suppliers which is likely to create gaming opportunities);
    • The plants may have been kept available anyway.
  • Demand side reduction (DSR) has been ineffective. More than 70% of interested DSR schemes did not get through pre-qualification or failed to bid presumably because of difficulties with demonstrating credible demand reductions or with financing.

The recent electricity capacity auction secured some 49GW of capacity to be available in 2018/19 at a cost of some £960M (in 2012 prices) in 2018/19 – an average cost of £19.4/kW – and a total cost some £1730M. The capacity under term contracts comprises:

  • Some 68% existing plant, with 1 year contracts.
  • Some 25% existing plants which require refurbishment, with 3 year contracts.
  • Only some 7% new plants with 15 year contracts.
  • A trivial amount 0.35% demand side response.

The Government claims that the net effect of capacity auctions (over the period from 2016 to 2030) on electricity bills will be an annual average increase of 0.3% or £2/household being the difference between the upfront costs of the auctions of some £14/household and estimated cost savings from reduced wholesale power prices of £12/household. If these estimates prove correct, the auctions will have been a success.

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