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Capacity Market: latest update for business energy users

Last week’s T-1 Capacity Market auction delivered a record low clearing price of £0.77/MW for the 3.6GW of capacity for delivery this winter. Our latest blog looks at the auction, the impact of Brexit and explains what it all means for business energy users.

Isn’t the Capacity Market suspended?

The Capacity Market is still suspended following last autumn’s decision by the European Court of Justice (ECJ), in which it ruled that plans were not effectively scrutinised to check compatibility with State Aid regulations before it was approved in 2014. However, the government hopes to reinstate the market by early 2020, well ahead of next winter’s delivery window.

This latest auction was the delayed T-1 auction for delivery in 2019/2020. The Government plans to hold T-4, T-1 and an additional T-3 auction early next year, when it hopes the Capacity Market will be reinstated.

Why was the clearing price so low?

Forecasts predict plenty of spare capacity for this winter, and the vast majority of the units awarded agreements will have already planned to run over the period. With such a small amount of capacity to acquire in the auction, this will have driven down prices: many generators, DSR participants and interconnectors already intending to run during winter are happy to bid in at low prices to ensure they receive a little extra for capacity they already intend to supply.

Why did so much DSR capacity drop out?

Only 29 Demand Side Response (DSR) agreements were awarded in the auction (around 200MW of capacity), with many units opting to drop out of the auction as the price dropped lower in each round, making participation commercially unviable (particularly for those organisations who would need to switch off production to participate). Over 1GW of DSR capacity exited the auction, but we should expect to see many of these units awarded capacity in future auctions if the clearing price is supported.

Does this mean the CM levy will go down?

This T-1 auction only procured 3.6GW, ‘topping up’ capacity secured in previous auctions. A low clearing price for such a small percentage of overall capacity will have a negligible impact on the total cost of the CM levy on business energy bills for the coming year.

All eyes will be on the results of the auctions currently scheduled for early 2020, where up to ten times as much capacity will be secured – the clearing prices for the T-4 and T-3 auctions will have a far greater impact on future costs.

What does this low clearing price mean for future security of supply?

The Capacity Market was established with the aim of ensuring security of supply, incentivising new investment and giving the market a four-year view of the market to identify (and fill) any generation gaps.

Prices have been low at recent auctions because favourable wholesale prices have enabled existing assets to bid in at low cost, but that may not continue for much longer. Last week, Fiddlers Ferry power station announced its closure by March 2020 – partly because of its limited success in Capacity Market auctions. As coal plants close and market conditions for other largescale CCGT plants also evolve, prices could rise in coming years to support the business case of new-build assets.

What will happen to the Capacity Market when the UK leaves the European Union?

The UK is currently scheduled to leave the European Union in October 2019, but the future of the Capacity Market depends on the terms of Brexit: the softest form of Brexit would see the UK still adhering to EU rules, so the ECJ’s review of the mechanism would remain. In the event of a hard Brexit (or No Deal), under UK rules the decision would need to be referred back to the UK’s competition and markets authority. This could potentially be a lengthier process than the current ECJ review, meaning the target timeline to reinstate it in early 2020 may be pushed back.

How can Inenco help?

Suppliers are continuing to collect the CM levy from businesses to ensure payments are made to all units once the scheme is reinstated. We know that businesses may have a lot of questions about how the ongoing suspension impacts them, so our energy experts are on hand to help. To discuss how your energy bills could be affected, give us a call on 08451 46 36 26 or email