The Capacity Market is a mechanism that forms part of the Government’s Electricity Market Reforms (EMR) package and was introduced with the purpose of ensuring there is enough electricity to meet demand when the system is “under stress”. The Capacity Market procures a commitment from generators to provide additional generation capacity, up to four years in advance, which can be called upon to meet demand when capacity is tight. The mechanism uses a range of generation plants, as well as storage, interconnector capacity, and demand side response (DSR). Under DSR, large energy users are paid to reduce their consumption.
National Grid says that the goal of EMR is “to ensure adequate capacity within an electricity system that in future will rely increasingly on intermittent wind and inflexible nuclear generation”. This is in addition to the ongoing closure of coal-fired plants as a result of low-carbon policies.
Capacity Agreements of between 1 and 15 years duration are awarded to generators via an auction process. The first auction took place in 2014 for delivery in 2018/19 and the second was held in December 2015 for 2019/20 delivery, which awarded 46.35 GW of capacity at £18 per kW. The auction was criticised by renewables groups because it failed to significantly support energy storage, which is crucial to addressing the problem of intermittency from wind and solar generation. Subsequent calls were made for a carbon intensity limit to be introduced to the Capacity Market. A report from National Grid showed that the majority of agreements awarded for 2019/20, by capacity, were to CCGT components, as can be seen in the chart:
Top-up auctions are also held for the delivery of capacity in the following year. These are specifically designed for DSR. The first of these was due to be for 2018 delivery, but the closure of coal plants has resulted in DECC arranging an additional auction in January 2017 for delivery in winter 2017/18.
Transitional auctions also encourage DSR, which award capacity not more than 12 months before delivery. National Grid held a transitional capacity auction on 26 January 2016, for delivery in 2016/17, with a higher than expected clearing price of £27.50 per kW.
The costs of the Capacity Market will be passed through to consumers as a non-energy cost on their electricity bills. Depending on the structure of the procurement contract, charges could be included in a fixed price or, if non-energy costs are passed through separately, applied as a unit charge. There is an admin element as well as a flexible element that is applied to consumption during the winter peak periods. This means that the total cost would vary according to energy consumption and cannot be finalised until the end of the year. Charges could be made throughout the year or as a charge at the end, depending on your contract.
DECC has recently decided that the December 2016 auction will be open to greater capacity than originally planned, possibly procuring up to an additional 3GW of capacity. This could allow for “new sensitivities” for more extreme weather scenarios and could also allow for nondelivery risks. The exact target for the auction will be set this summer.
