Capacity Market Early Auction begins

The Early Auction for the Capacity Market to procure backup capacity for next winter (2017/18) has begun.

The extra auction was proposed by ministers in March last year as part of an overhaul of the mechanism to allow it come on stream a year ahead of schedule and for the Contingency Balancing Reserve (CBR) to be closed early.

The “Dutch style” descending clock auction sees bidders either staying in or dropping out as the asking price is incrementally reduced until the procurement target is met and the auction clears. All those remaining will receive an agreement at the “clearing price”. The first round of the auction began at 9.00am and will see the price gradually reduced from £75/kW/yr to £70/kW/yr.

The procurement target was confirmed at 53.6GW by delivery body National Grid in November. In practice it actually it varies slightly according to the clearing price – extra capacity will be bought at lower prices. Around 59.3GW has entered the auction leaving roughly 5.7GW of surplus capacity to drop out before it clears.

Setting out his expectations of the Early Auction, Robert Owens, vice president for demand side management at Smartest Energy told Utility Week: “This is an additional auction. We’re only talking one-year contracts so the dynamics are obviously going to be slightly different in this early auction to the T-4 [four-year-ahead] auction which we had in December.

“Actually, when you look at it, quite a few of the participants in this auction are the same. We’ve already seen indications as to where those people are willing to close their capacity.”

He concluded: “We’re not expecting to see prices that much different from the most recent – so less than £25/kW/yr. There’s always room for surprises. People drop out when you’re not expecting them to but generally speaking there doesn’t seem to be any particular driver that give a higher price than previous auctions.”