UK government confirms 2017 introduction of backup energy ‘capacity market’

Respondents to a March consultation on the proposals were “highly supportive” of the government’s plans to hold an additional capacity market auction this winter, for delivery over the winter of 2017/18. The government has already secured backup generating capacity for the winters of 2018/19 and 2019/20, and the auction for winter 2020/21 is expected to take place later this year.

The government has also confirmed that it will increase the penalties on those who commit to provide additional capacity but then do not honour those commitments. It will introduce higher termination fees and disqualify those that back out from participating in future auctions for two years, according to its consultation response.

“We have evidence that, despite the termination fees already in place, there have been instances wherein capacity providers have viewed their obligations as low-cost options and contemplated reneging on their commitments,” it said in the paper.

“The government therefore needs to act to ensure the [capacity market] is effective at ensuring security of supply … In light of the feedback received, the government intends to proceed with its core proposals – raising termination fees, disqualifying failed units from two years’ of future capacity auctions, and increasing credit cover for most applicants already required to lodge credit cover,” it said.

The government said that it was important to ensure that the system was “not so punitive that legitimate projects are dissuaded from participating in the first place”.

The UK’s capacity market auction system is governed by the 2013 Energy Act, and is intended to boost energy security in the medium term until the government’s electricity market reform (EMR) infrastructure investment strategy begins to take effect. The auctions, which are generally held four years before any backup capacity should be delivered, allow energy sources and generators to bid to provide a share of capacity when the system needs it in exchange for a regular revenue stream.

The early introduction of the capacity market will offset the impact of historically oil prices on existing generating capacity. The government said that market fluctuations were “putting significant amounts of thermal generating capacity at risk of closure, with a number of plants announcing plans for early closure during 2016”.

Although consumer bills will have to increase to cover the cost of the early introduction, the government said that the changes meant “lower consumer bills than would otherwise have been the case” without the guarantee of additional capacity.