Decc confirms capacity market details to reassure gas investors

Incentives to build gas-fired power stations were confirmed by government on Wednesday, alongside a Budget that favoured coal generation.

The Department of Energy and Climate Change (Decc) unveiled the final details of the capacity market as the Treasury announced a freeze on the carbon floor price. The freeze boosts the case for keeping old coal power stations open, potentially at the expense of investment in gas and low carbon generation.

However, the capacity market design provides some reassurance to would-be investors in new gas plant. Market participants secure payments for having capacity available. That guarantees some revenue even if, as expected, they increasingly run only part time to back up intermittent renewable generation.

Gas power developers will be able to bid for capacity payments in December 2014, Decc said, for delivery by winter 2018. The first auction date is subject to the Electricity Market Reform package receiving state aid approval from Brussels.

Participants in the capacity market will be eligible for 15-year capacity contracts, increased from 10 years under earlier proposals. “This will provide sufficient certainty to unlock investment in new gas plant,” Decc said.

While there will be penalties for failing to deliver power when needed, these will not exceed annual income from the mechanism. Penalties will be capped at 100 per cent of annual income and 200 per cent of monthly income.

Existing capacity will be eligible for one-year agreements to stay open, or three years if the plant needs significant refurbishment. That could apply to coal generators upgrading to meet European legislation.

Payments available under the auction will be capped at £75/kW, “to protect consumers from excessive costs.”

The capacity market is also open to providers of demand response, who undertake to cut demand when needed. The first demand-side auctions will be held in 2015 and 2016.