The latest Capacity Market Auction has taken place under the Government’s ‘sticking plaster’ approach to maintaining security of supply, but has failed to encourage investment in gas-fired generation. Further, the Capacity Market Auction policy has received extensive criticism for purchasing back-up power at extortionately high prices rather than manage use through demand response and energy efficiency.
The UK secured backup electricity capacity for 2020/21 within a £20 to £25 per kilowatt per year range, according to National Grid data but it may not be enough to stimulate a new wave of gas-fired power plants. Analysts had predicted £35 to £45 prior to the result, so the eventual price is less than expected which may affect the development of gas-fired power at this time. Contracts for around 52GW of electricity were awarded but the range was below many analysts’ expectations, who forecast the price would be significantly higher than previous auctions, since it sought to procure around 5GW more capacity. This price was over £2 higher than the previous year which settled at £18 /kilowatt/Year.
The capacity market auction endeavours to prevent future power shortages as coal plants close and low power prices dissuade investors from building new ones. Power plant owners are paid to make available back-up electricity at short notice. The level of capacity being sought for delivery in 2020/21 totalled 51.1GW. This was an increase of nearly 2GW from the first Capacity Market auction for 2018/19 delivery and 5GW more than secured last year for delivery in 2019/20.
In a review following the previous auction, the Government was clear that a higher clearing price was needed to provide sufficient incentives to the market to generate new gas-fired capacity. The importance of new-build gas-fired generation has increased in recent years. This follows the recent decline in base load capacity of coal-fired power plant and the well-documented Governmental plans to close the industry entirely by 2025.
The nature of the capacity that obtained a Capacity Market contract will be confirmed by the Electricity Market Reform delivery body. The nominal annual average price impact for consumers is expected to be between £3.80 and £4.75/MWh – or around 0.4p/kWh added to each unit of electricity used – which will represent around a 4% uplift on annual costs. This increase comes at a time when the wholesale market price is rising and other non-commodity costs are increasing, pushing prices higher and putting pressure on budgets.
What is frustrating is that despite rising costs and growing concerns over security of supply, the Government continues to ignore the third element of the energy trilemma. Efficiency is vital if businesses are to keep energy costs under control over the coming years. We simply must find ways of reducing energy use if we are to keep the lights on notwithstanding the need to protect our planet from the harmful impact of climate change.