Capacity market auction: coal, nuclear and diesel to fill the void

The government predictably hailed a ‘successful’ result for the capacity market auction last week, with ministers stating that future capacity has been secured at a low price and that consumers will benefit. However, the claim that the final clearing price represented a positive outcome should be taken with more than just a pinch of salt.

Prior to the capacity market auction, JBP Energy Associate David Lewis said he expected a clearing price of around £15–18, and so it proved to be as the auction secured 46.35GW of power at a price of £18/KW. Good for consumers? Well, yes – in the short term at least. The price fell further than the first capacity auction last year, when it cleared at £19.60 (which at the time was considered far lower than expected). However, good for the market? Not if the UK is to get the new build that it needs to ensure future stability and sustainability.

The ‘winners’ from last week’s auction were the existing plants that received contracts – gas and nuclear suppliers, for example, that already have plants in use across the country. More controversial was the £80 million that will be paid to subsidise old coal power stations, despite Amber Rudd’s commitment to phase coal out completely by 2025.

Worryingly, no contracts were given to new build, though this came as no real surprise to anyone. Cornwall Energy reported that five proposed new CCGT plants, with a combined capacity of 4GW, did enter the auction but withdrew as the subsidy on offer fell to £18/KW.
The clearing price, as Lewis expected, was simply too low for new build to be financially viable.

This is a clear and well-documented flaw of the auction price. Whilst a ‘race to the bottom’ may have short term benefits for consumers, the key question remains unanswered, which is how the government is going to ensure new build gas to replace coal as it is phased out.

For the time being, quick fixes are the order of the day. Dozens of controversial new diesel generators are to be built in the UK after being handed consumer-funded subsidies worth £175 million over 15 years. Ed Davey, the former energy secretary who oversaw the creation of the scheme, has said that the capacity market auction was never intended to encourage new diesel generators but that EU rules have prevented the government from excluding them.

The other quick fix is that for the first time operators of interconnectors carrying power between the UK and mainland Europe also won contracts. Importing energy from our continental neighbours therefore looks set to become an increasingly common means of filling the void as the UK’s domestic supply wanes, with critics rightly pointing out that this will leave the country at the mercy of continental prices.

In a statement following the auction, the Department of Energy and Climate Change has confirmed that it will “reflect on the results of the first two auctions to check the framework still commands the confidence of industry and investors to deliver world-class energy security and investment in new capacity”.

For many, however, this confidence was lost long ago.