Capacity auction to pay out over half a billion pounds to existing plant

The UK government finalised the results of its first capacity market auction on Friday, confirming that more than 60 per cent of the £1 billion guaranteed payment mechanism will be paid to operators of existing generation units over those investing in new plants or demand side response.

The bulk of the auction contracts totaling 49.3GW of power supply for 2018/19, which will pay generators £19.70/kW per year, will be given to those operating existing gas-fired power generators which have lower costs.

As a result the auction closed lower than expected, reducing the amount saddled on the average household to £11/year but also undercutting higher bids from developers of new plant and demand-side response technologies.

Around 43 per cent of pre-qualified new build capacity failed to secure a contract through the auction to make up just 5 per cent of the end result, while 37 per cent of existing capacity dropped out during the four day auction process to make up 63 per cent of the auctioned market.

By technology type the biggest loser at auction was demand-side response (DSR) technology which saw more than 70 per cent of pre-qualified capacity fail to secure a contract.

DSR will make up less than half a per cent of the capacity market while gas-fired power stands at 45 per cent and with coal and nuclear capacity at 18.7 per cent and 16 per cent respectively.

The government’s decision not to offer contracts longer than one year to DSR was criticised by the burgeoning industry, with market newcomer Tempus Energy launching legal action against the government late last year. 

But analysts have warned that even though existing plants have dominated the auction, the low clearing price means the current uneconomic market environment will remain difficult for many generators.

“A clearing price of £19.40/kW is below the annual fixed costs (e.g. salaries, connection costs, insurance, ongoing maintenance) of the majority of generating plant. This implies that to remain economically viable in 2018/19, generators must be looking to make money elsewhere,” said Baringa partner Philip Grant.

Grant said that the low price level means generators may need additional support – either from further capacity payments or higher wholesale prices – to avoid having to shut down capacity.

“The challenge for asset owners and project developers is that this capacity auction has not provided the cure to the challenging economics,” said Grant.

The auction was designed to provide the UK’s beleaguered conventional generators a guaranteed return for their plants in exchange for security of supply as the power sector transitions to a low carbon future.