11th Jul 2016 10:31
LONDON (Alliance News) - The UK government has launched plans to buy the largest amount of standby power it has ever purchased from utility firms under the capacity market auction and there are expectations that the price it will pay to power generators will also be higher.
The capacity market was launched by the UK government back in 2014 to allow electricity generators to bid for the opportunity to supply standby power throughout the year, covering any unexpected power cuts or to cater for periods when electricity usage hits its peak, usually in winter.
Essentially, the government pays electricity generators to keep extra power on standby through the capacity market auctions, but the amount of extra energy that the UK has on standby has dwindled over recent years as plants, mainly running of coal, have shut quicker than expected.
Energy security has become a growing concern in the UK and back in May, the Department for Energy & Climate Change laid out reforms for the capacity market which would lead to the government purchasing energy earlier than it has previously and also buying more energy than it has in prior auctions.
The first capacity auction was held in 2014 and the government purchased energy to cover the period over 2018 to 2019. The second auction, the most recent to be held, covered the following year in 2019 to 2020.
The government purchased 49.26 gigawatts of capacity for 2018/2019 in the first capacity market auction at a clearing price of GBP19.40 per kilowatt, with the cost to the government totalling around GBP955.6 million.
The second auction for 2019/2020 saw the government purchase 46.35 gigawatts at an average clearing price of GBP18 per kilowatt, roughly totalling GBP834.0 million.
Although the next scheduled auction will cover the winter of 2020/2021, another auction will be held to purchase capacity for 2017/2018 after the government agreed to bring forward the auctions as part of the reforms introduced earlier this year.
On Monday, the Department for Energy & Climate Change said it plans to hold the auction for the delivery period 2017/2018 in January next year. The government plans to purchase the highest ever amount of capacity it has secured to date under the auction.
A total of 53.8 gigawatts of capacity will be purchased for 2017/2018 - between 9.0% to 16% higher than the two previous auctions which procured capacity for the years between 2018 to 2020.
The price the government will pay under that auction has not yet been revealed, but there is an expectation for the clearing price to rise compared to previous auctions following the reforms made earlier this year.
Overall, that means generators can bid to supply more energy than they have ever been able to before while the price they are paid is likely to also be higher than previous auctions. Good news for London-listed UK utility companies like Drax Group PLC, Centrica PLC and SSE PLC.
Drax shares were trading up 2.0% on Monday morning, Centrica shares were up 1.5% and SSE shares were trading 1.0% higher.
An auction will also be held in December this year for capacity that will need to be delivered for 2020 to 2021. The government Monday said it would purchase 52.0 gigawatts of capacity for that delivery period.
Energy suppliers who are successful in the capacity market auctions will be required to provide capacity when the system needs it or face financial penalties.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
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