First Capacity Market auction guarantees security of supply at low cost

22 Dec 2014 02:51 PM

The first ever Capacity Market auction concluded recently and provisional results have been released recently.

The outcome is great news for consumers as fierce competition between participants has driven down costs below expected levels. The result will ensure that enough of our existing capacity will remain open at the end of the decade as well as unlocking new investment, including a large independent gas plant at Trafford.

Ed Davey, Secretary of State for Energy and Climate Change, said:

‘This is fantastic news for bill-payers and businesses. We are guaranteeing security at the lowest cost for consumers. We’ve done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plant.’

The Capacity Market is a bit like an energy guarantee. It works by making sure that there is enough capacity available to meet peak electricity demand in the future. The first stage of this process has been to estimate how much capacity will be needed in 2018/19, which is the first year the Capacity Market will be running. Electricity providers have then bid into this capacity auction, promising if they win a contract that they will be available to provide electricity when needed. In return, they will receive a steady payment on top of the electricity that they sell. This reverse auction ensures consumers get the best deal possible as it drives bids down to the lowest level possible.

Through the auction, Government has procured 49.26GW of capacity at a clearing price of £19.40kW. This will cost a total of £0.96bn (in 2012 prices), which works out at around £11 for the average household. Nothing will be paid by consumers before 2018/19. Auction results are provisional until confirmed by an independent auction monitor.

The Capacity Market auction is just one part of the Government’s strategy to drive new investment and secure energy supplies in the short, medium and long-term. We estimate that more than £45bn was invested in electricity generation and networks between 2010 and 2013. And National Grid has already bought three additional power stations to keep in reserve for this winter and has begun buying extra capacity for next winter.

Notes for editors

• The results remain provisional until the Secretary of State has considered the report of the auction monitor. Presuming the auction monitor does not find any irregularities which could lead the Secretary of State to decide to annul the auction, National Grid will publish final auction results on 2 January.

• All capacity figures quoted are for de-rated capacity.

• DECC has published the provisional auction results

• In 2014 prices, the gross cost of this auction is £0.99bn and will result in gross costs of £11.40 on the average household bill in 2018/19.

• DECC will update its estimates for the impact on bills between 2016 and 2030 early in the New Year. Our best estimate for the upfront costs of the Capacity Market auctions between 2016 and 2030 remains an average annual gross figure of £14 (2012 prices) for a typical household – in some years the cost will be lower, in some years the cost will be higher. However, these figures overstate the costs borne by consumers as it does not take into account the wholesale electricity price reduction that will be brought about by the Capacity Market. This reduction is caused by avoiding very high price spikes that would have occurred had the Capacity Market not been there. Our best estimate for the average annual net on domestic electricity bills over the period 2016 to 2030 remains an estimated £2 (in 2012 prices). This is equivalent to a 0.3% average increase in domestic bills.