9 December 2016

The provisional results of the Capacity Market Auction have now been released and can be found here. This is now perhaps the key government intervention in the energy market and, as such, has implications for all renewables as well as demand side response and storage.
Two types of contracts are awarded: 1 year contracts aimed at providing security of supply in 2020/21 and 15 year contracts from 2020/21-2034/35.

Source: National Grid, National Auction Results, T-4 Capacity Market Auction 2020/21

Lots of interesting data sets to pore over and we will send you a full analysis next week but as a bite size analysis we can say that:

  • The closing auction price was £22.50. Slightly higher than 2015 but a lot less than had been anticipated.
  • Batteries look like they picked up 500MW of 15 year capacity market contracts. The winners of these contracts include Green Hedge, Low Carbon, RES, Limejump and Kiwi. A big well done to them.
  • Demand Side Response also did very well, picking up over 1.4GW of 1 year capacity market contracts.
  • The government’s efforts to knock out diesel has had an impact. Of the 4GW of diesel initially looking to bid there was a high drop rate and it looks like a relatively small success rate for 15 year contracts.
  • Smaller gas reciprocating engines look like the largest winners of 15 year contracts.
  • Two large scale new build CCGT gas plant have received contracts.
  • Over 9GW of large scale CCGT gas plant exited the auction before the clearing price was reached 
  • Overall the results look like a step forward for a decentralised flexible and low carbon energy system.

Demand side response and batteries have now entered the market seriously. Smaller gas generators have higher marginal costs and will therefore not compete against renewable generators in the wholesale market, they could also be easier to get rid of as low carbon technologies take hold. However, the fact that we are again subsidising some diesel, the most inefficient and polluting of the fossil fuel technologies, does pain me.
There will be a lot of soul-searching in government as they pore over the results of the auction. The good news is that it has been a success in terms of achieving a low price and bringing forward demand side response, battery storage and flexible gas. As a subsidy regime that was intended to underpin the next generation of large scale gas plants the Capacity Market mechanism is just not working. Perhaps it never will, and it simply means that the days of building very large gas generators is coming to an end.
 Author: Johnny Gowdy

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