The story so far...
The capacity market is designed to encourage investment in new generation projects and innovative technologies, as well as incentivise existing generators to maintain generation capacity. It is hoped that such investment will ensure security of supply during times of high demand, as well as provide back up for increased generation from intermittent low-carbon sources. Successful bidders receive a steady and predictable revenue stream in the form of capacity payments and, in return, are required to deliver power as and when required or face penalties. The first capacity auction was held in December 2014.
Following confirmation from the Department of Energy and Climate Change (DECC) earlier this month that a T-4 auction (i.e. one covering delivery 4 years ahead and commencing in October 2019) will take place in December this year, DECC confirmed the auction parameters earlier this week (Monday 29 June), along with the parameters for a Demand Side Response (DSR) transitional auction to take place in January 2016.
T-4 Auction Parameters
- Target capacity (the amount of capacity to be procured to meet the set reliability standard) = 45.4GW
- Net Cone (the level of revenue from a capacity market agreement which is projected to permit investment in new generation stations) = £49/kW/year
- Price cap (the maximum auction bid price) = £75/kW/year.
- 15 year minimum threshold (minimum capital expenditure to be granted a 15 year contract) = £255/kW
- 3 year minimum threshold (minimum capital expenditure to be granted a 3 year contract) = £130/kW
- Price taker threshold (the maximum bid of price takers – see below) = £25/kW/year.
- Bidders will be classified as either price takers (who cannot set the price) or price makers (who can). Price makers include generators which require a capacity market contract to finance a new build asset (or a major refurbishment) whilst price takers generally comprise generators with existing assets. Price makers will be free to bid up to the price cap whilst price takers will be limited by the set threshold).
DECC has previously confirmed that interconnectors are to be included in the T-4 auction for the first time, providing a boost for both existing and planned interconnection capacity and increasing competitive pressure amongst bidders. Increased interconnection is vital to Britain on a number of fronts, it will allow Britain to source low carbon power from the continent, it will ensure greater security of supply and, by sourcing cheaper energy from abroad, could help reduce consumers’ energy bills (DECC estimates a £9 billion saving by 2040).
DECC’s release on 29 June has confirmed the respective de rating factors (this is used to estimate import capacity at times of system stress) of Britain’s existing interconnectors.
DSR Transitional Auction Parameters
- Target capacity = 1.5GW
- Net cone proxy = £25/kW
- Price cap = £40/kW
- Price taker threshold = £15/kW
It should be noted that the above parameters may yet be amended. DECC is required to publish any final updates to the parameters in November 2015 in respect of the T-4 auction and in January 2016 for the DSR transitional auction.
On a general note, given the first auction’s clearing price of just £19.40 per kW, the capacity market seems unlikely to offer the returns necessary to fund much needed investment in new grid scale storage (such as pumped hydro). However, the capacity market nonetheless poses a great opportunity to participants with existing generation assets and interconnector operators.