Capacity Market auction and the future energy mix
With the conclusion of the third Capacity Market auction, the recent announcement of a second Contracts for Difference allocation round and the promise of two more within this Parliament it is clear the Electricity Market Reform package is achieving a degree of maturity. Aiming to stimulate investment in the future energy mix of the UK, the reforms have been focused on delivering the intended generation mix at the lowest cost possible.
The changes underway in the market, the introduction of disruptive technologies and policy changes have meant the Capacity Market has matured in a previously unexpected way. Early indications and expectations were that the Capacity Market was most likely to incentivise the construction of large gas plant. Instead, we have seen an enormous growth in low-cost, highly efficient, distributed small-scale generation combined, in this most recent auction, with 500MW of new batteries and nearly 1.5GW of demand side response. The growth in these two areas and the well-established role of distributed, fast-reacting generation is reflective of a dynamic, flexible and investable energy system.
As with the Contracts for Difference regime, the Capacity Market is heavily focused on delivering the best value for the consumer - the clearing price of £22.50 is reflective of this. One factor in keeping this price so low, was the inclusion of coal plant in the mix of successful parties. Coal will remain a part of the UK’s energy mix until it is phased out in the middle of the next decade but until then it will continue to provide balancing within the system.
As with any policy, ongoing refinements are made in consultation with the industry. The Capacity Market benefits from an annual review of the rules which govern it. There are also periodic consultations addressing specific issues, such as the recent eligibility of Enterprise Investment scheme, funding parties bidding into the Capacity Market. Energy UK’s response is available here, for those interested.
It is essential that future policy developments and changes are delivered with plenty of foresight and certainty. The likely changes to charging and emissions legislation both have significant implications for business-cases and investment as do any amendments to the penalty regime. Whilst we and our members welcome any opportunity to refine and improve the Capacity Market further, there is a widespread cognoscence of the need for continued engagement and consultation with the industry.