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The UK capacity market auction designed to ensure adequate electricity supply is available in 2019-2020 were announced today.  Sandbag has produced a short briefing here, analysing the results.

Contracts worth over £1bn in total have been awarded with £255m awarded to polluting diesel generators and old coal power stations, despite a government commitment to cut emissions and phase out old coal plants. Meanwhile no new gas power stations, other than one already under construction, were contracted despite Government making it clear they want to see new gas coming on stream to replace closing capacity.

The capacity mechanism was introduced in the Energy Bill 2013 and this year’s auction is the second to take place. It was introduced to compensate for the effect of introducing new contracts for large scale nuclear and renewable projects which risked putting off investment in other forms of capacity. So far it will add around £942m to 2019 electricity bills.

What received a contract:

Coal: £139m worth of contracts will being paid to subsidise old coal power stations in 2019, despite the government announcing a coal phase-out. £80m will be paid to 3 coal power stations that received one-year contracts today: Drax (1280MW), EON’s Ratcliffe (2060MW), and RWE’s Aberthaw (1692MW) while an additional £59m will be paid in 2019 to EDF’s West Burton and Cottam (3500MW).

 

Diesel: Bids were successful for 650MW of new small (<20MW) embedded diesel gensets, costing £176m over the next 15 years.

420MW of the 650MW was contracted by just three companies – Peak Gen Power, Prime Energy Development, and UK Strategic Reserve Limited.

A tax loophole – the Enterprise Investment Scheme – is funding super-profitable new diesel plants to be built, which evade carbon pricing and strict emissions limits and, while cheap to build, are expensive and polluting to run.

Potentially, another 220MW of what we think is diesel has successfully bid for contracts. We suspect much of this was already built over the last few years, funded by STOR and triad avoidance payments.

 

And what didn’t:

Gas: No new gas power stations have been contracted. Although ESB’s Carrington (910MW), which is due for commissioning in 2016, was awarded a contract, a further 5.1GW unsuccessfully bid into the auction.

 

Only 1% of the capacity contracted was demand response, and only a very small amount of this is considered “proven” (8MW out of 456MW).

 

Interconnectors: The auction did not attract any successful bids for new interconnectors. Only one applied – a 1GW interconnector from England to Belgium – and that was unsuccessful.

 

Dave Jones, Coal and Power Analyst at Sandbag said:

"The capacity mechanism is having the perverse effect of slowing the modernisation and decarbonisation the UK electricity system. It has failed to attract any new efficient gas plant or interconnectors, and it is paying for filthy small diesel plant and old coal to stay open longer than it would have otherwise, despite a government pledge to phase-out coal by the early 2020’s..”

 

Amber Rudd has promised that after this year’s capacity auction, she will ‘take stock and ensure it delivers the gas [capacity] we need’. Meanwhile another DECC Minister, Angela Leadson, appears still to be praising the flawed scheme.

Sandbag believes an urgent capacity mechanism review is needed and that it should be as thorough as possible, including an independent investigation into how it has allowed bidders to secure 15 year contracts that also exploited generous tax avoidance schemes. The Government should then use the 2015 Energy Bill which will be going through the House of Commons in January to introduce changes.

 

* 2019 figure includes capacity procured under multi-year contracts covering 2019 in last year’s auction