An update on the electricity capacity auction parameters

Energy Secretary Amber Rudd has set out the parameters for:

  • the second, four year ahead, main capacity auction, which will take place in December 2015, and
  • the first "Transitional Arrangements" auction in January 2016, designed as a pathfinder for "Demand Side Response" (DSR) and small scale generation participation in the Capacity Market and which will (for a transitional period) exist in parallel with the main capacity auctions.

As part of Electricity Market Reform, there is a capacity auction each year in which generators of electricity can bid for a steady payment from the Government in return for guaranteeing capacity during times of peak demand. This element of the Electricity Market Reform aims to ensure "the lights are kept on" during a period where ageing coal and nuclear is decommissioned/mothballed and where inherently unreliable intermittent renewable generation is becoming increasingly common.

The auctions take place four years and one year ahead of when capacity will be needed, as forecast by National Grid. The first auction took place last year, for capacity to be delivered from 2018/19. In that auction, 49.3GW of capacity was procured at a clearing price of £19.40/kW/year; below many forecasters' expectations. This low price is a double-edged sword - representing unexpectedly low prices for the consumer but at the same time representing prices that are by and large too low to encourage new build generation. As a result, it has been argued that last year's Capacity Market may be supporting gas/coal/nuclear generation that would have been generating anyway rather than acting as a catalyst for the development of new capacity.

The four year ahead auctions are supplemented by one year ahead auctions, which will take place annually commencing in 2017. In addition, the "Transitional Arrangements" auctions will be separate one year ahead auctions operating for a transitional period and limited to DSR (DSR being where consumers adjust the amount of electricity they use, as opposed to generation) and small scale generation.

T-4 auction

The next four year ahead auction (for capacity to be delivered from 2019/20 (T-4)) will take place in December 2015. The target capacity to be auctioned is 45.4GW – lower than last year, but taking into account there being a one year ahead (T-1) auction in January 2016 for additional capacity. The price cap of £75/kW/year and price taker threshold of £25/kW/year are the same as last year, but the 15-year and 3-year minimum £/kW thresholds have each increased by £5 from last year.

Also for the first time, interconnectors (for the time being in the form of interconnector owners as opposed to the owners of overseas generators) are now eligible to participate in the auction, as mentioned in our previous article. Each interconnector has been given a de-rating factor, ranging from 6% for Moyle and EWIC (Ireland) to 69% for BritNED (Netherlands) and an Annex to the letter sets out DECC's approach to de-rating interconnectors.

T-1 auction

The first "Transitional Arrangements" auction will take place in January 2016, with a target capacity of 1.5GW and a price cap of £40/kW and price taker threshold of £15/kW. This is for capacity needed in 2016/17 and it is expected that Demand Side Response (DSR), which did not participate in last year's auction to the extent anticipated, will figure strongly in this, as the auction is ring-fenced for DSR and small-scale flexible generation (sub 50MW).