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UK capacity payments to slice billions off wholesale electricity market

15 Dec 2011 17:00:13 | edem

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Around £2.8bn (€3.3bn) will be wiped from the value of the UK wholesale electricity market through to 2030 as a result of the planned capacity mechanism, government figures published on Thursday revealed.

The number was included in the Department of Energy and Climate Change's (DECC's) electricity market reform update. The figure, which does not take inflation into account, compares against a "business as usual" scenario.

DECC is introducing the capacity mechanism under its far-reaching electricity market reform package.

It is intended to ensure security of supply by offering a fixed revenue stream to power producers in return for them ensuring the availability of their generation capacity. Producers will bid into an auction overseen by system operator National Grid.

This means an adequate supply margin should be in place to guard against sudden losses of production capacity caused by having more intermittent generation such as wind power on the system.

According to DECC officials, payments to generators under the mechanism will total around £2.8bn through to 2030. The money will ultimately come from end-user bills.

But DECC said this will be offset by an accompanying fall in wholesale prices due to the removal of sustained price spikes under the capacity mechanism.

"If you leave this market as it is, you will see huge price hikes in the wholesale market," a DECC official said.

Government ministers will decide when the first auction will take place based on security of supply forecasts.

DECC said 2015 has been pencilled for the first auction, in line with the loss of 10.7GW of coal-fired capacity under the EU large combustion plant directive (see EDEM 10 November 2011).

The numbers

In 2010, power generation in the UK totalled 381TWh. ICIS Heren's Day-ahead Baseload index averaged £41.86/MWh throughout the year, which gave an approximate annual power market value of £15.9bn. The DECC figure equates to an annual loss in value of £140m.

DECC unveiled its electricity market reform white paper in July (see EDEM 12 July 2011).

The capacity mechanism will be market wide - open to generators, demand-side response and even storage. All capacity in the market will be able to bid into an auction.

Providers of capacity will be subject to penalties to ensure the capacity they have contracted to provide is available when required.

A further update will be provided by May 2012 in line with DECC's legislative timetable.

DECC also revealed that system operator National Grid has been selected as the "delivery body" for contractual aspects of market reform. It will have responsibility for administering long-term contracts for low-carbon generation - another facet of the reform process - as well as the market wide capacity contracts. JS

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