Out-Law / Your Daily Need-To-Know

First UK energy supply capacity market auction to take place in December, says DECC, as details confirmed

Out-Law News | 21 Mar 2014 | 10:45 am | 2 min. read

The first auction of UK energy capacity, through which regular payments will be made to energy generators to ensure that they are able to provide back-up power, will take place in December 2014, subject to EU approval, the Department of Energy and Climate Change (DECC) has confirmed.

The 'capacity market' forms part of the UK government's electricity market reform (EMR) programme, and is expected to be in place by the winter of 2018, according to the finalised programme design. In advance of this, DECC has announced that it will also run two transitional auctions for demand side projects, which would reduce demand for energy rather then increase the supply of it, in 2015 and 2016.

"The capacity market will help keep the lights on by driving new investment in gas and demand side capacity, as well as getting the best out of our existing generation fleet as we transition to a low carbon electricity future," DECC said in a statement. "[It] will ensure the future security of our electricity supply by ensuring that sufficient reliable capacity is in place to meet demand."

Among the details of the capacity market confirmed by DECC are the length of the agreements that will be made available to both new and existing providers, as well as cost caps and confirmation of the maximum penalties for those suppliers that bid to supply capacity but then do not meet their commitments.

EMR, which will be implemented through the Energy Act, forms the UK government's plans for attracting the estimated £110 billion investment needed over the next decade to replace the country's aging energy infrastructure and match increasing demand, while still meeting international climate change commitments. The reforms will implement a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed by a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

Under the capacity market, all providers of generating capacity would be able to bid for a share of a steady, predictable revenue stream four years in advance of that capacity being needed. In return for these capacity payments, they would have to deliver energy when needed or face penalties. The auction will be open to new and existing power stations, electricity storage and capacity provided through voluntary demand reductions.

DECC has now confirmed that 15-year capacity agreements would be available to new capacity; longer than the 10 year agreements set out in its consultation in October. DECC said that these longer agreements would provide "sufficient certainty to unlock investment in new gas plant", particularly from new, independent providers. Existing capacity would be able to bid for rolling one-year agreements, with three-year agreements available to plant which needs to invest in "significant" refurbishment.

Penalties for capacity providers that do not meet their commitments would be capped at 200% of a provider's monthly income and 100% of their annual income in order to "provide a strong incentive for capacity to be there when we need it", according to DECC. Prices available under the auction would be capped at £75/kW, in order to "protect consumers from excessive costs", DECC said.

Energy market regulator Ofgem, together with the National Grid, is currently developing two new 'balancing services' which could operate from as early as this winter in order to ensure that there will be enough energy supply to meet demand before the capacity market gets underway. It is currently consulting on the funding arrangements that will be used to support these services. They include a Supplemental Balancing Reserve (SBR), made up of reserve power plants; and a Demand Side Balancing Reserve (DSBR), which would provide capacity through voluntary demand reductions.

Full details of the design of the capacity market will be published as part of the government's response to the EMR implementation consultation in late spring, as secondary legislation is put before parliament, DECC said.