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1st Capacity Auction Ends in Chaos

decc logoThe UK’s first capacity auction has ended.

The opening bid price for the 48.6GW had been set at £75/kW/year and with four auction ‘rounds’ scheduled, the forecast out-turn price was £42/kW/year area according to DECC.

The reality is however that the final clearing price of £19.40/kW/year, a level that was significantly lower than expectations, sits significantly below the price that would allow essential new build fossil fuel and renewable generation to enter the market.

DECC had claimed that:

“This [the capacity auction] will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low-carbon generation sources”

That however seems a forlorn hope with £19.40/kW/year unable to justify the development for the hoped for new super-efficient gas-fired plants.

But the provisional report of the auction’s results admits that 68% (33GW) of the awards went to existing plant and a further 27% (13GW) to refurbished plant with just 5% or 2.6GW being awarded to new-build projects.

In addition of the total capacity 45% is gas-fired while coal and nuclear capacity make up 19% and 16% respectively.

One analyst commented that at the clearing price the lack of any incentive to build new plant effectively rewarded plant for just being connected to the network. With 95% of successful plant being pre-existing that argument is difficult to challenge. The analyst said:

“This low price is better for consumers but it looks like it is being used just to keep existing coal, nuclear and gas-fired plants running. You have to wonder whether these plants would have remained open anyway and really need these capacity payments”

However the corollary is that some of the existing plant may now be at risk of closure where they have missed out on the bidding and whilst there is little of the promised incentive to embark on new-build plant the size of the capacity constraint could actually be worsened by the auction.

Gareth Miller of consultants Cornwall Energy said:

“It’s not necessarily all good news because clearing at a low price will prompt some of the older CCGT [gas] fleet to consider mothballing between now and 2018-19.

“At a price of less than £20 I would absolutely expect there not to be any new large-scale CCGT [gas] new-build. That’s the plant we really need in the 2020s.”

Peter Atherton, Energy Analyst at Liberum Capital, added:

“There is a risk now that people will start to take plants off.

“99 out of 100 people would tell you we need to start building some additional gas capacity pretty soon. The capacity market was due to deliver that. If the auction comes in at £20 it’s just going to reward existing plant that was going to be there anyway.”

Baringa partner Phil Grant agreed saying:

“The challenge for asset owners and project developers is that this capacity auction has not provided the cure to the challenging economics.

“A clearing price of £19.40/kW is below the annual fixed costs (e.g. salaries, connection costs, insurance, on-going maintenance) of the majority of generating plant. This implies that to remain economically viable in 2018/19, generators must be looking to make money elsewhere”

An unmitigated and costly disaster?

Right now it’s difficult to see it as anything else.