Capacity auction begins amid interconnector concerns

The UK government’s second capacity market auction is set to begin today amid mounting concerns that the inclusion of interconnector capacity could undermine the government’s bid to bring forward new investment.

This year’s auction will see 2.4GW of additional capacity eligible for the supply contracts through the reverse auction, but concerns have grown that the existing power links might drive the clearing price below the level needed by new generators.

Baringa Partners’ Phil Grant said that the inclusion of interconnectors in this year’s auction for power supply in four years’ time could have the unintended consequence of undermining security of supply.

“These are not new interconnectors so don’t add anything to the underlying security of supply for GB; conversely the award of a contract to an interconnector means that the same volume of domestic capacity missed out on a capacity contract… perversely worsening the security of supply,” he said in a blog post on Tuesday morning.

The capacity market auctions were expected to bring forward investment in new gas-fired power generation to replace the UK’s closing coal-fired power fleet but the competitive auction and low clearing price has posed a challenge to new investment.

Now, the UK’s burgeoning distributed generation market could also undermine investment in large-scale centralised generation assets.

Grant notes that the volume of these plant, including diesel generators, that are successful in the auction is one of the main swing factors in determining the final price.

“Our analysis is suggesting an outcome similar to last year’s auction at around 20 £/kW, but when combining the uncertainty of market conditions with the bidding behaviour of players, the range of possible outcomes is wide,” he said.

“Should some of the small scale diesel and gas plant leave the auction early, prices could be higher than that, but equally the fear of missing out on a contract altogether could drives prices much lower,” he added.

The auction aims to secure 45.4GW for delivery in the winter of 2019-20 by running a reverse auction over four days next week.

To remain in the auction generators will need to keep dropping their bids until only the most economically competitive plants are left to make up only as much capacity as is needed.

Last year the auction cleared at significantly lower levels than expected by the market, and Grant says similarly low prices could come forward this year too.

The auction cleared after three days of steadily declining bids from participants, falling far below the £25-40/kW predicted by analysts to £19.40 per kilowatt per year to secure 49.3GW of power supply for 2018/19.

Critics warned at the time that the low clearing price of the auction would needlessly reward existing power plant – which would have been available to the market even without a contract – and fail to bring forward investment in much needed new power capacity.