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How Will the Capacity Market Auction Affect Energy Prices?

Written by Love Energy Savings at 10:53

The temperatures are only just starting to creep up as the winter of 2016/17 ends, and while it may signal the start of summer holiday planning for most of us, energy suppliers are already looking ahead to winter period of 2017/18.

It takes a lot of forward planning to keep the lights on and if prices are to remain stable, and supply is going to meet demand, it’s down to suppliers to begin laying the foundations now.

We’ve written about capacity market auctions before, back in 2014, when estimates were already being made about how much energy would be needed in 2018/19 – now that IS forward planning!

A lot has changed in two years, including our climate change commitments getting ever more stringent, the Department for Energy and Climate Change (DECC) being shut down and the UK deciding to leave the European Union – all factors which will make this year’s auction more interesting than previous years.

What is a Capacity Market auction?

A Capacity Market (CM) auction gives energy generators (also known as capacity providers) the chance to bid and secure supply for future demand. Usually, the annual T-4 capacity market auction, sees providers bid for contracts four-years in advance, allowing successful bidders to invest accordingly, build new power plants and plan ahead.

The Capacity Market itself was introduced by the Government to provide stability of energy prices and prevent the risk of blackouts.  It is the state’s main way of making sure electricity remains available, at an affordable price.

Back in March 2016, a consultation was held by the DECC to ensure that the Capacity Market was fit for purpose. It was concluded that “additional action was needed to ensure energy security in 2017/18” due to changing global prices and planned plant closures.

It was this consultation which set the date for the 2017/18 auction to be held in January 2017.

How does the Capacity Market auction work?

Once a Capacity Agreement has been agreed at auction, the provider is then contracted to supply the amount of energy agreed during the delivery year in question. Successful capacity providers will receive monthly payments for their agreed Capacity Market generation obligations, at the “clearing price” secured at auction.

In return, the provider is expected to respond when the National Grid requires assistance during times of peak demand, if they fail to do so they will be fined and participants that over-deliver, as long as they notify the National Grid, will be granted over-delivery payments to compensate for their peers’ failure.

How will the Capacity Market auction affect energy prices?

This auction, as mentioned above, is in addition to the annual T-4 auction and will take place over four days. It was decided that additional supply would be needed to meet demand in the winter of 2017/18 and therefore this requires additional guarantees of supply.

The supply margin has been narrowing over recent months and while the government has urged consumers not to worry about the possibility of blackouts, our energy security could be coming at our expense, and at the expense of the environment.

During times of peak demand, coal-fired power stations are sometimes still called upon to provide additional supply. Coal is far less efficient than newer forms of generation and therefore bidding by these archaic power stations could push up prices.

Furthermore, energy experts have accused Prime Minister Theresa May of sacrificing Britain’s climate change targets in a bid to keep the lights on, controversially extending the life of these polluting coal-fired power plants.

Enrico Chiorando, energy expert at Love Energy Savings, said:

“This is a backward step. Supply margin is now so tight during peak periods that the Government is having to extend the life of old-style, pollution-causing power plants to avoid blackouts in the UK.

“They’re trying to smokescreen the issue by claiming there is no real threat to security of supply.  But the reality is that there is and climate change targets are being cast aside in a bid to increase capacity.

“It will lead to higher energy prices, which will affect large and small businesses, especially those which aren’t able to hedge against rises.”

UPDATE 06/02/2017 : Fears were unfounded as the capactiy auction cleared as it's lowest price yet. However, the future remains uncertain and if coal power plants are not closed down sooner rather than later, this may be one of the last periods of lower prices that we see for some time.

If you’re concerned about your businesses energy prices, then it would be wise to lock in cheaper prices as soon as possible.

Call our expert team now on 0800 9888 375 to find out if you could switch to a cheaper tariff or click the button below to start saving today!

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