Capacity market closes with no new gas as aggregators warn of £75 per MWh price spikes

Richard Croft/Creative Commons
Richard Croft/Creative Commons

The latest capacity auction has delivered a lower premium for keeping the UK’s lights on over winter 2019, but has once again largely failed to bring forward investment in large new gas plant, bar the Carrington CCGT, which is almost complete.

The auction secured 46GW of capacity at £18 per kW, most for existing thermal plant. Around 600MW went to small diesel generators.

The energy secretary declared it a success, but the truth is that the mechanism will be reviewed after this year. Changes will need to be made – and potentially approved in Brussels – if the capacity mechanism is to deliver investment in new gas plant. Currently, existing power stations and smaller generators are able to win the reverse auctions because building new gas power stations is expensive, particularly when their economic model has been eroded by the effect of intermittent renewables.

However, aggregators of back-up power systems, as well as other embedded assets and industrial process inertia, have urged businesses to put them to work in the capacity market and broader demand side response programmes or face punitive price spikes over winter peak periods.

Flexitricity said businesses will in coming years face a hike in bills of £75 per MWh during working-day winter peaks. It said that represents an average of £20,000 per megawatt of average consumption.

While the government has promised to spare the most energy intensive businesses from the cost of energy policies, that means everyone else must pick up the tab. The firm hopes resulting price shocks will spur industrial and commercial businesses into action.

“A typical cold store, large supermarket or medium-sized office could turn a £20,000 charge into a £60,000 revenue,” said Flexitricity founder and strategy chief Dr Alastair Martin.

While further ‘transitional’ arrangement auctions are set to commence in January, Martin believes the capacity market proper offers better long-term value for demand response providers. Martin said the firm had committed 277MW into yesterday’s auction.

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