Energy suppliers are bidding against each other for government payments to keep their power plants open during peak energy times.
The capacity auction is the next stage of the government’s initiative to ensure that lights stay on across the country at minimum cost. Amid increasing concerns that the UK will be plunged into darkness due to power shortages, the government and energy companies have been working together to create contingency plans to ensure that a blackout will not occur now, or in the future.
The first stage of the capacity auction aims to estimate how much capacity will be needed in 2018/19, and it will be up to the successful bidder to provide the right amount of power.
Bidding Has Begun
Tuesday 16th December saw the beginning of the first round of auctions, there will be a further 4 auctions over the course of the week until enough bids have be made to reach the target capacity of 48.6 GW.
Electricity suppliers from E.ON to Electricite de France SA are competing against each other to secure contracts. If delivered, the companies will receive a payment on top of the electricity that they sell for delivering the power that they promised.
Bidding started at £70-75/kW, the price will then fall by £5 during each of the 4 rounds. Payments have been predicted to reach up to £3.6 billion during the auction, although Timera Energy, a London-based consultant, claims they will most likely sell for £1.5 to £2.5 billion under auction.
Will this be enough to prevent any shortages?
The auction is set to encourage companies to stay connected to the National Grid and stimulate the building of new plants, as pollution rules have forced some coal-fed facilities to shut down, leaving a greater gap in the power supply of the nation.
According to the nation’s energy regulator Ofgem, the UK’s spare capacity may fall below 2% next winter, Bloomberg reports. The capacity auction also aims to incentivise an extra 20 GW of new power generation by 2030 through the contracts offered to companies participating.
The auction result may be significant for utility share prices, Andy Kelly principal consultant at the consulting business of Poeyry Plc in Oxford, said. “Whether a unit is in or out and the level of the clearing price could make a big difference to most of the utilities,” he was quoted by Bloomberg as saying.
This week, Ofgem approved £1.1 billion funding for a new subsea link in the North of Scotland. This will connect 1.2 GW of renewable energy to either side of the Moray Firth following completion in 2018 and will further increase the safety of the UK’s energy infrastructure.
The consumer is at the forefront of Ofgem’s mind as the final sign off was for £105 million less than the funding request from Scottish Hydro Electricity Transmission, in an attempt to help decrease the amount the public has to pay.
High Level of Interest
Already the auction has generated a high level of interest from both established and emerging players in the market, constituting for over 64 GW of capacity. This ensures that it remains an incredibly competitive process which will help to keep prices down for bill payers of the future.
Energy suppliers are working hard to guarantee that fluctuations in our power supply will not occur, and we hope that the auction will give consumers greater peace of mind that their lights will stay on.