The government has welcomed the outcome of its third “capacity market auction”: a key component of its plan for ensuring that the UK’s electricity supplies remain secure over the coming winters.
Keeping the lights on
The auctions see providers of electricity capacity – whether they be traditional power generators or businesses able to vary their demand – bidding for contracts that provide them with revenues for being available to the system when there are concerns that supplies might be too low to meet demand.
Auctions have already been held for capacity contracts covering the winters of 2018-19 and 2019-20. In both cases, the overall cost of the contracts – which is recovered from energy users through their bills – was lower than had generally been expected. Consequently, ministers claimed that they had successfully ensured the lights would stay on at a low cost to the consumer.
New power plants
In holding the auctions, the government is hoping not only to address fears over the possibility of supply shortages as old fossil fuel plants continue to close, but to incentivise the development of new sources of power generation – and particularly new gas plants. It regards these as a critical part of the UK’s low-carbon transition, believing that they will serve as an important source of flexibility as increasing levels of intermittent renewables come onto the system.
However, in the first two auctions only one new large-scale gas project won a contract. This is because the prices at which the auctions “cleared” – that is, the value of the contracts on offer – was lower than was needed to make it economic to build this type of power station.
As a consequence, before this latest auction, the government implemented rule changes intended to boost the prospects for new gas. A key concern in doing so was the competitiveness of so-called “embedded generation”: small-scale projects connected to the grid at the local distribution level. This source of capacity has expanded significantly over the recent years, but policy and regulatory interventions made ahead of the auction reflected the government’s desire to ensure that it was not able to crowd out new large-scale gas projects.
Once again, however, the auction – covering winter 2020-21 – cleared at a lower price than had been expected, at £22.50/kW. Including the cost committed in previous years, the capacity market will therefore cost consumers £1.2bn in total over the delivery period.
Nearly 90% of the successful capacity in the auction came from existing power plants – including 24GW of gas plants, nearly 8GW of nuclear power and almost 6GW of coal. The relative success of coal surprised many commentators as the government is seeking to phase the source out of the power mix by 2025 to support the UK’s efforts to meet its long-term environmental targets. Amid dwindling profit margins, which have been negative for much of 2016, revenues from the capacity market are an important source of future income for coal plants.
Success for batteries
Despite the government’s moves ahead of the auction, the most successful source of new capacity was embedded generation, of which over 2.5GW was awarded contracts.
Energy storage projects landed more than 3.2GW of contracts, around 500MW of which has been allocated to new-build battery storage.
By contrast, the auction again delivered underwhelming levels of new large-scale gas. The only successes on this front came from medium-sized projects: Centrica’s 333MW plant at King’s Lynn and Intergen’s 298MW project at Spalding.
Business and energy secretary Greg Clark said: “Our homes and businesses need an electricity supply they can rely on all year round. We’ve provided them with that certainty, at a low cost to bill payers, years in advance.
“Technological innovation, as part of our low-carbon future, will create jobs and opportunities across the UK. We are rebuilding an archaic energy system, bringing forward brand new gas power and innovative low-carbon capacity like battery storage to upgrade our energy mix.”
Analysts, meanwhile, suggested that the auction underlined the market’s preference for developing small-scale projects, rather than the big plants that the government is seeking to encourage.
ut it remains to be seen whether policy-makers risk jeopardising investors’ confidence through further interventions to deliver their desired outcome in future auctions.
Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, said the low clearing price suggested that the market considered there to be “more than enough capacity” in the system already.
“Making small changes in the system, mirroring policies in both the US and across Europe to prioritise low-carbon flexibility tools such as demand side response and storage could not only keep bills down, but would increase the ease of the ongoing transition to a low-carbon system with renewables at the core”, he said.
A further auction will be held this month to secure supplies for the coming winter. This is expected to deliver an even lower price, as almost all the capacity competing will be existing power stations. This will help to drive down the price.