Government holds first capacity market auction
Companies will today bid for government subsidies to ensure power plants are available at the flick of a switch, as part of the new capacity market. The market is designed to ensure the lights always stay on, even when demand is high and the weather means renewables aren’t generating electricity.
Under the scheme, power providers are paid to be available when the National Grid needs them. But it’s not yet clear which power stations will be included in the scheme. That’s important, as it will determine how much coal, gas, or oil gets burned for power generation, and what the impact on the UK’s emissions will be.
The capacity market’s first auction begins this morning. We explain how the market works, and how it fits with the government’s wider energy and climate change policy goals.
Making a market
Even though electricity demand is gradually reducing, the UK’s peak demand isn’t shrinking much, and is set to remain at around 53 gigawatts.
The UK has lots of old coal, gas and nuclear power plants. As they age, they get more prone to breaking, so if the power companies don’t want to invest millions in upgrading them they usually shut them down.
The government created the capacity market to ensure there will be enough power into the 2020s. It should ensure there’s always enough electricity to meet peak demand, even when the weather prevents renewables from generating any power.
Only non-renewable energy providers can participate in the capacity market as they are designed to provide power around the clock.
Today, the government will hold an auction to make sure there’s 48.6 gigawatts of capacity available. Power plants can bid to supply electricity, or energy intensive companies can offer to cut the amount of power they use, for a particular price.
The price is worked out using what’s known as a ‘descending auction’. It works like this: The auction takes place over four days, with four rounds of bidding each day. In the first round, the government will offer companies £75 for each kilowatt of capacity they will guarantee to provide.
It expects companies to offer much more power than it needs at this high price. So it will reduce its offer by £5 in the next round, and every subsequent round, until enough companies drop out to make the bids add up to the 48.6 gigawatts the government wants.
Whatever the price is at that stage will be the price companies still participating in the auction will get to provide power or reduce use. The government reckons that through the bidding system, the UK should get its demand covered for the cheapest possible amount.
The results from the first auction will be available on January 5th 2015, with provisional results due at some point the next five days. Another auction for a much smaller amount of capacity will be held in 2017.
Old coal
In October, National Grid released a provisional list of the projects that have qualified to bid in the scheme. The total capacity of all the projects adds up to more than 60 gigawatts, more than enough to meet the UK’s demand.
But campaign groups are concerned that the way the capacity market has been designed means the UK ends up with a more polluting energy mix throughout the 2020s than it otherwise could have.
About a quarter of the projects on the National Grid’s list are coal plants. About half are gas plants. The remaining quarter is a mix of nuclear, oil and diesel power plants, and demand reduction projects.
Controversially, four old coal fired power stations appear on the list. Campaign group Sandbag says that without the capacity market, these coal plants would probably have closed down. That’s because the scheme means companies can get cash up front to pay for upgrades to keep the plants running until 2018 and beyond.
The capacity market money will enable to the plants to stay open for a further 10 to 20 years, Sandbag suggests.
But National Grid tells Carbon Brief that while it expects some coal power to be included in the capacity market, it’s unlikely the plants will stay open this long. It expects the auction price to be too low to pay for the significant upgrades coal plants would need to make to add decades to their lifetimes.
Nonetheless, it’s likely that the coal plants would be kept open a bit longer at the expense of the newer, less polluting gas plants the capacity market was supposed to incentivise.
The government wanted the capacity market to encourage companies to build new, efficient, gas capacity. National Grid’s list suggests this has happened, to an extent: 13 yet-to-be-built gas power plants are included on the list.
But Sandbag says including the coal plants in the scheme means investment in those plants could get squeezed. Existing coal plants are likely to be able to bid to generate power at a lower price than the new gas plants. Smaller, less efficient, gas and diesel plants may also be able to undercut the planned plants.
Avoiding a power crunch
The government designed the capacity market above all to ensure the lights stay on. Early indications suggest the UK has more than enough capacity either already built, or planning to use capacity market money to get built, to make sure that happens.
But the UK’s climate change obligations also mean it has to have one eye on how polluting its energy mix will be. The way the capacity market has been designed shows the government has prioritised security of supply over its need to cut energy sector emissions, this time.
Once today’s auction is complete, it will be much clearer what the environmental cost of that decision will be.