Electricity reform: final aspects of Capacity Market design confirmed ahead of first auction

 DECC 1DECC has confirmed final aspects of the Capacity Market design ahead of the first auction being held later this year. 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.

It’s part of the Electricity Market Reform programme, which is being introduced to deliver green, reliable electricity for the future, at the lowest possible cost. New Contracts for Difference will incentivise investment in a diverse range of low carbon electricity, including new nuclear, wind, solar and biomass.

The Capacity Market will ensure the future security of our electricity supply by ensuring that sufficient reliable capacity is in place to meet demand. This will include the new gas capacity which DECC’s Gas Generation Strategy identified as critical for ensuring future security of supply.

Government consulted on the final design of the Capacity Market in October 2013. DECC can now confirm that:

  • 15 year capacity agreements will be available to new capacity. This will provide sufficient certainty to unlock investment in new gas plant, which we expect will include a range of new independent providers;
  • Existing capacity will be able to access rolling one year agreements – although three year agreements will also be on offer to plant which needs to undertake significant refurbishment. This will ensure we get the best out of our existing assets for the consumer;
  • Penalties for unreliable capacity will be capped at 200% of a provider’s monthly income and 100% of their annual income. This will provide a strong incentive for capacity to be there when we need it; and
  • The capacity auction will be capped at £75/kW to protect consumers from excessive costs.

The first auction will take place in December 2014, subject to state aid clearance being received. Capacity will be in place by the winter of 2018. In advance of this, the Government has already announced that it will also run two transitional auctions for demand side capacity in 2015 and 2016. This will help grow the demand side industry and ensure effective competition between traditional power plants and new forms of capacity; driving down future costs for consumers.

National Grid and Ofgem have also already taken action to make certain the lights stay on before the Capacity Market begins to deliver the investment we need. National Grid is in the process of contracting new balancing services – either reserve power plants or capacity provided by voluntary demand reductions – to ensure there is enough supply to meet demand at any given point. These services will, if needed, be in place by the winter of 2014.


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