Earlier capacity market auction could cost home-owners

Responding to the consultation on potential CM reforms in March, the DECC will hold the next auction in 2017/18 in an effort to “deliver energy security,” while also stating that it will go ahead with other core proposals in the consultation in order to “give both bill-payers and the energy industry more certainty for the coming winters.”

The DECC report, which claims the country faces a “legacy of years of underinvestment which has left us more open to the risk of any quickening in the pace of plant closures,” comes after the department received responses from over 150 energy stakeholders, with the DECC stating that there is currently not enough capacity in development to replace the supply gap created by recent closures to coal plants, which in turn could put the UK’s overall capacity at risk.

The government has also set out its intentions to buy more electricity earlier in its report, along with toughening sanctions for firms which go back on their Capacity Market agreements, while another auction is also scheduled for 2019/20, with the DECC claiming that this action will save £46 per household in 2018.

The DECC argues that delivering energy security is the department’s “number one priority” in the report, while also emphasising that maintaining the secure electricity supplies that hard-working families and businesses across the country can rely on is its primary objective.

“We need to ensure the right incentives are in place to bring on new capacity as it is needed, largely expected to be gas, to guarantee our energy security in the 2020s,” the DECC states in the report.

“The clear message from industry and investors that we heard as part of the review was that the CM mechanism retains their confidence; is the best available approach to our long-term security of supply; that regulatory stability is of crucial importance; and that the government should remove distortions and interventions, such as the Contingency Balancing Reserve (CBR), from the market.

“At the same time, we heard concerns that we must do more to protect against delivery risks; that we need to tighten the incentives on those with agreements to honour those agreements; and ensure that the full range of delivery risks are accounted for in our procurement decisions.

“We must also avoid the risk of under-buying or buying too late, which would mean that new plant had insufficient incentive to come forward and get built in time.”

Shadow Energy and Climate Change Secretary, Lisa Nandy, argues that the Tories are trying to “bury this bad news,” claiming that “every family’s energy bill is to shoot up to pay for these gross new handouts to the big energy companies.”

“The worst part is that this scheme is a massive waste of money. It has been so badly designed it isn't getting new power stations built but instead is just lining the pockets of the Big Six and investors in highly-polluting diesel generators,” she said.

David Oliver, senior energy consultant at Inenco, believes that although the changes to the capacity market announced today will be good news for security of supply, it comes at a cost.

“Bringing forward the auctions and securing more capacity will ensure more generation is guaranteed when demand is at its highest, allaying some concerns that the system could struggle to meet demand in coming years.

“However, securing more capacity comes at a cost. More contracts will mean higher costs, and charges will hit consumer bills a year earlier than planned. The higher penalties for failure to deliver will mean generators factor in risk premiums in their bids, which will also push up prices.

“We could also see older plants choosing not to participate because of the potential liabilities of failing to deliver contracted capacity. It remains to be seen whether these changes will ultimately help secure the much-needed investment in new generation to justify the additional cost to homes and businesses.”

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