The first capacity market auction – which is the next stage in the Government’s plan to ensure the lights stay on at the least cost – both now and in the future – began yesterday and is set to run until Friday this week (19 December).
This is part of the Government’s Electricity Market Reform package designed to make sure that there is enough capacity available to meet peak electricity demand, to encourage investment, and to support the development of more active demand management in the electricity market.
The first stage of the process has been to estimate how much capacity will be needed in 2018-19 – the first year the Capacity Market will be running.
The auction started with bidding at £70-75/kW. The price will drop by £5 each round and the auction will finish when there are enough bids to meet the target capacity of 48.6 GW. This is the point at which the auction clears.
Electricity providers bid into this capacity auction, pledging that if they win a contract that they will be available to provide electricity when needed. In return, they receive a steady payment on top of the electricity that they sell.
The National Grid is running the auction and has allocated 48.6GW of capacity. There has been a very high level of interest from large and small generators. Both established and emerging players in the market are bidding, representing more than 64GW of capacity.
This means that it is likely to be a competitive process which should help keep costs down for consumers.
A further auction will be held in late 2017. This is expected to contract a further 2.5GW of capacity for delivery in 2018/19. All capacity has to be available from October 2018 for one year. Further auctions will be held for future delivery years on a rolling basis.