Ed Davey, Secretary of State for Energy and Climate Change, has now officially confirmed the results of the first ever Capacity Market Auction, which is great news for consumers as fierce competition drove costs down below expected levels.
The result from the auction that closed late on Thursday 18 December ensures that enough of our existing capacity will remain open at the end of the decade, as well as unlocking new investment, including a large independent gas plant at Trafford.
Ed Davey said:
“This is fantastic news for bill-payers and businesses. We are guaranteeing security at the lowest cost for consumers. We’ve done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plant.”
The Capacity Market is a bit like an energy guarantee. It works by making sure that there is enough capacity available to meet peak electricity demand in the future. The first stage of this process has been to estimate how much capacity will be needed in 2018/19, which is the first year the Capacity Market will be running. Electricity providers have then bid into this capacity auction, promising if they win a contract that they will be available to provide electricity when needed. In return, they will receive a steady payment on top of the electricity that they sell. This reverse auction ensures consumers get the best deal possible as it drives bids down to the lowest level possible.
Through the auction, government has procured 49.26GW of capacity at a clearing price of £19.40kW. This will cost a total of £0.96bn (in 2012 prices), which works out at around £11 for the average household. However, previous modelling shows us that if a bill payer looked back over their bill in 2030 for the last 15 years then the impact of the Capacity Market would average out at £2 on their annual bill (in 2012 prices). This is because we expect average wholesale prices to come down with the security of a capacity market, compared to a world without one. Nothing will be paid by consumers before 2018/19.
The Capacity Market auction is just one part of the government’s strategy to drive new investment and secure energy supplies in the short, medium and long-term. We estimate that more than £45bn was invested in electricity generation and networks between 2010 and 2013. And National Grid has already bought three additional power stations to keep in reserve for this winter and has begun buying extra capacity for next winter.
The official results have been published on National Grid’s website.
Notes for editors
- All capacity figures quoted are for de-rated capacity
- In 2014 prices, the gross cost of this auction is £0.99bn and will result in gross costs of £11.40 on the average household bill in 2018/19
- DECC will update its estimates for the impact on bills between 2016 and 2030 later in January. Our best estimate for the upfront costs of the Capacity Market auctions between 2016 and 2030 remains an average annual gross figure of £14 (2012 prices) for a typical household – in some years the cost will be lower, in some years the cost will be higher. However, these figures overstate the costs borne by consumers as it does not take into account the wholesale electricity price reduction that will be brought about by the Capacity Market. This reduction is caused by avoiding very high price spikes that would have occurred had the Capacity Market not been there. Our best estimate for the average annual net on domestic electricity bills over the period 2016 to 2030 remains an estimated £2 (in 2012 prices). This is equivalent to a 0.3% average increase in domestic bills.