UK Capacity Market Auction Results
The publication of auction results for the latest round of the Capacity Market in the UK for 2020/21 have been released. The market cleared at a price of £22.50/kW, somewhat up on the last round’s £18/kW, implying total consumer costs in this round amounting to approximately £2bn.
It was long a criticism of the UK’s New Electricity Trading Arrangements (NETA, introduced in March 2001) and its successor the British Electricity Trading and Transmission Arrangements (BETTA, which began in April 2005) that these were markets in energy (MWh) only, and made no specific provision to give value to capacity (MW). Whether those ingenious market structures could in fact have delivered reliable supplies in normal economic conditions rapidly became an academic matter, since that market was quickly distorted by environmental regulations, the Renewables Obligation (2002), the EU Large Combustion Plant Directive ( 2001), the EU Renewables Target of 2009, and the Feed-in Tariff for smaller generators in 2010, to name but a few. In combination, these regulations encouraged a substantial part of the existing conventional fleet to close down, caused an overheating in the wind and then solar markets, which provide little or no reliable capacity, while at the same destroying investment signals for new firm, conventional generation.
This remarkable history should be borne in mind when reviewing the just-published results of the Capacity Market auction for the years 2020/21. This governmental measure is, and this must be emphasised, not correcting a market failure, but rather it is attempting to clear up the unintended consequences of its own environmental policies. To be blunt, having made a mess of the new markets with subsidies and regulations, government finds itself in the undignified position of having to regulate and subsidise a remedy, for which of course the consumer pays.
In the present auction just concluded, some 52,425 MW of capacity has been offered a contract, at a price of £22.50/kW/year. BEIS notes with relief that this is “a lower cost than most forecasts” (some had predicted levels as high as £46/kW), but it is still a significant increase on the last round, 2019/20, which cleared at £18/kW/yr.
These new contracts add over £1.1 billion a year to consumer costs. Most of the contracts, 49.8 GW’s worth, are for a year only, but some, 2.6 GW, last for fifteen years (with a cumulative cost of about £880 million). The total consumer cost of this auction round is therefore approximately £2 billion, as widely predicted. In passing it seems worth noting that a fifteen year capacity contract seems extremely generous, even if it is awarded to new, and innovative projects with higher technology risk. This might be a future topic of investigation for the National Audit Office.
Roughly three quarters of the bids were accepted, and some 483 contracts have been issued to generators, storage, and Demand Side Response units (consumers who agree to modulate demand in response to National Grid’s instructions). The bulk of the 52.4 GW is made up of conventional generators, with the heavy lifting done by Combined Cycle Gas Turbines (22.6 GW), Coal/Biomass (6 GW), and nuclear (7.9 GW). Amongst the others are smaller generators at industrial sites generating electricity and process heat (4.4 GW), while Interconnectors and hydro add a further 3 GW. Some 3,201 MW of electricity storage has also received contracts. The vast majority of this, nearly 2.7 GW, is existing pumped storage, Dinorwig (1.6 GW), Ffestiniog (350 MW), Cruachan (424 MW), and Foy (294 MW). The innovative aspect, the battery storage about which BEIS boasts in the headline of its press statement, is only a minority component. However, it is genuinely interesting, and given that interest and the fact that these projects are in effect in receipt of public subsidy to offset investment risk, government should make readily available full performance data from these sites to facilitate market learning.
Open Cycle Gas Turbines and reciprocating (piston) engines fuelled either by gas or diesel add in total a further 3.8 GW, of which 679 MW is fuelled by diesel. The Department of Business, Energy and Industrial Strategy (BEIS) congratulates itself on the fact that there is less diesel in this round than in previous years, but 679 MW is still a substantial quantity.
Importantly, the average size of the units offered by those in the auction is small (100 MW). Indeed, of the 483 contracts awarded, only about 90 are to units with a capacity of more than the mean of 100 MW, many of these being individual generating sets within larger power stations. The total of these larger units is about 45.6 GW, so it would be mistaken to think that the Capacity Market is dominated by small generators, car park generators as some dismissively call them. However, it is true that there are a very large number of these smaller generators, and it is also true that their total capacity of 6.8 GW is far from trivial. Furthermore, most of the larger generators are existing stations, with only two being new projects, gas power stations at Kings Lynn and Spalding. This has already led to some industry commentators to claim that the Capacity Market is failing to encourage the construction of sufficient new power stations. There is clearly some substance to this suggestion, and it would seem that incentives may well have to rise. Indeed canny market participants are probably biding their time, allowing the situation to develop a little further, with a view to benefitting in future auctions.
However, and whatever the producing industry thinks, £22.50/kW and £2 billion in total additional cost is a lot for the consumer. BEIS remarks that “Homes and businesses in Britain have been given the certainty they need that their electricity demands will be met in the winter of 2020/21.” At such a price one would certainly hope so.