Capacity Market auctions safeguard electricity supply for Britain’s businesses, following a 12-month hiatus.
The Capacity Market is the Government’s main mechanism to ensure the GB electricity system remains secure, with sufficient reliable capacity to meet demand. As we transition to a net zero future, the Capacity Market will continue to be a crucial tool for keeping the lights on.
Capacity providers, including new and existing power stations, storage and demand side response providers, bid for Capacity Market agreements in two annual auctions – one held four years in advance of the delivery date, and another held one year in advance. Holders of Capacity Market agreements are expected to provide their agreed generation volumes, or load reductions, at times of system stress in return for a Capacity Payment. These payments incentivise investment in new and existing capacity.
The Capacity Market is funded by a supplier levy, which comprises two elements: an operational cost levy, which covers the cost of running the scheme, and a supplier obligation levy, which covers payments to generators.
A supplier’s share of the levy is calculated based on their market share during periods of high demand over the winter period.
At the end of January an auction was held to secure capacity three years in advance of the winter for which it will be needed. While we’re used to seeing four-year ahead and one-year auctions, this three-year ahead auction was needed because the Capacity Market was in a standstill period last year, when the auction was originally scheduled.
The hiatus to the scheme followed a ruling by the General Court of the Court of Justice of the European Union which annulled the Capacity Market’s State aid approval, on the grounds that the European Commission should have carried out a second-stage investigation into the scheme.
This second-stage investigation took place during 2019, to ensure the scheme complied with State aid rules, and in October last year the Capacity Market was reinstated.
The three-year ahead auction cleared at £6.44/kW and secured 45.1GW of capacity for delivery from 1 October 2022 to 31 September 2023.
The one-year ahead auction, for delivery from 1 October 2020 to 31 September 2021, has also now cleared at a price of £1.00/kW securing just over 1GW of capacity.
The business as usual four-year ahead auction returns at the beginning of March, to secure capacity for 2023/24. We’ll be watching to see what happens to the clearing price in this auction.
As part of the State aid reapproval, the European Commission set out a number of changes which should be made to the mechanism to ensure it remains fit for purpose. The UK Government is consulting on these changes, which include lowering the minimum capacity threshold for participating in auctions and allowing demand side response to access longer contracts, like its traditional power generation counterparts. Demand side response rewards businesses that can shift, reduce or increase electricity usage and/or generate power.
We’ve already seen the introduction of wind and solar power into the Capacity Market, and an emissions limit has been applied to the mechanism for the first time. We’ll also see some changes to enable foreign capacity to participate in our auctions, and vice versa, but this will be later down the line. I’ll keep you posted on these changes and what the upcoming auction means for energy customers.
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