The early capacity market has cleared well below market expectations, at £5-£10/kW. The exact amount paid to generators to ensure security of power supply next winter is yet to be published.
The auction was held this week to secure 53.7GW of generation capacity over winter 2017/18.
Most analysts predicted the auction would clear at somewhere between £13/kW and £25/kW. Previous auctions auctions cleared around £20/kW.
The result may be spun as good news for business consumers who have faced a barrage of warnings that the auction would add significant cost to next winter’s power bill. But market analysts believe it proves the government’s decision to hold an early auction was misguided.
“The implications [of the low clearing price] are that is has been an unnecessary expense for business consumers when the greater problem with the system is not capacity, but flexibility,” said Jon Ferris, strategy director at Utilitywise.
He suggested policymakers had “used a sledgehammer to crack a nut” and had sought to procure far more capacity than required, with “no time in any case” for any large new capacity to be built before next winter.
“Peak demand has been around 50GW for the last couple of winters. Government was buying around 54GW in the auction. So excess generation, and everything that had already secured a contract for future years, was looking to bid in, take the subsidy and make sure it got the clearing price to ensure it did not miss out,” he said.
Another industry analyst, EnAppSys, agreed, suggesting that “it appears that people are pricing themselves in the auction on the principle it is free money“.
Nevertheless, Ferris admitted the clearing price has taken the market by surprise.
While UK firms now face substantially less than anticipated charges for the capacity market next winter, Ferris said it was “still a few hundred million pounds loaded onto energy consumers that did not need to be spent”.
The key issue is that, as ever, policymakers are overestimating peak demand – and therefore adding quite unnecessarily to system costs. Yet again it all stems from incompetently exaggerated official forecasts of consumption levels. When will they ever learn ?