Energy Security could come at a steep price

Our recent Informer Series webinars provided the latest insight on energy prices, charges and benefits. Our pricing expert Gavin Baker, looks at the impact of the introduction of the Capacity Market.

A key element of Electricity Market Reform (EMR), the Capacity Market aims to ensure security of supply by providing a payment for reliable sources of capacity to deliver energy when needed during peak times.

Last month the Government published the amount of capacity it intends to buy for 2017/18 and 2020/21 to ensure in advance that we have the electricity infrastructure to cope with peak-time demand on the grid.

For the two auctions coming up this winter the Government have set out to buy:

  • 53.8GW in the early Capacity Market auction (January 2017), for delivery in 2017/18.
  • 52GW in the T-4 auction (December 2016), for delivery 2020/21.

They have also announced that they intend to secure 300MW of the turn-down Demand Side Response (DSR) capacity for 2017/18 in the Transitional Arrangements auction in March 2017.

While the maximum clearing prices of these auctions are known, how much consumers will actually pay towards the cost of the scheme depends upon the clearing price achieved in the auctions held by National Grid and ultimately how much electricity is generated when system stress events occur.

Our early analysis suggests that although the charge will be relatively small this year as it only needs to cover the DSR capacity secured, it will however, rise quickly in the three or four years ahead as more capacity is needed and closures of aging inefficient generation sites subsequently reduce the number of participants in the auctions.

Current moves to change the Capacity Market rules to reduce the eligibility of diesel and gas-reciprocating engines in favour of Combined Cycle Gas Turbines (CCGT) will also see overall costs of the scheme rise as although it is more reliable and has lower emissions, the technology is more costly to deploy

In late September, a list of pre-qualified plants will be released which will allow us to complete a more thorough analysis and provide price forecasts which will feature in our next Non-energy charges webinar in November.