With more elements to electricity bills than ever there are continued industry processes taking place to fix these costs into the future. This is both in order to ensure security of supply and support growth in new generation sources. One such process takes place up to 4 years in advance where auctions are run to get generators using a variety of technologies to “bid-in” to the so called Capacity Market to ensure they deliver “standby” electricity in times of high demand or low output from renewable generation such as wind and solar.
For TEC flexible framework users these costs are passed through at the level at which they are set, but for electricity users seeking fixed price arrangements, they are included in prices at forecast levels, plus a premium for the privilege of fixing them.
The outcome of these latest auctions, for the 12 month period from April 2021 (T-4), should be of particular concern on fixed price contracts as achieved prices have ended up at least £14 per kw lower than even the most optimistic forecasts. It will be these higher forecast prices that will form the basis of Capacity Market prices paid on fixed price contracts. Suppliers will simply pocket the difference between their forecasts and the costs paid to the market for standby capacity.
The idea of the auctions is to provide cost reflective charges and strong investment signals to, in particular, new gas fired generation which is deemed to be the most flexible and efficient when called upon. However, as these auctions have been run for successive years, unintended consequences have emerged which have seen diesel standby generators and even coal fired plant being added to the list of successful bidders. Meanwhile changes in subsidies has seen other technologies fail to compete, including electricity storage, a developing and potentially significant technology.
So the achieved price for the 2021-22 period is just £8.40 per kW, while the make-up of the successful volume was also unexpected. Gas made up the vast majority but there will be a significant drop off in coal fired capacity available, perhaps hastening the closure of Britain’s last coal fired power stations even ahead of the targeted 2025 date. A significant increase has also been seen in a capacity bid via interconnectors, connections allowing import from other European countries. This is to be expected as 3 new interconnectors are currently under construction, two to France and one to Belgium and also because the UK electricity price is generally at a premium to European prices.
So what are the consequences?
The latest outcomes are good, especially when comparing to the 2020-21 levels. The cost of the Capacity Market is a pass-through cost to large end users, although not always clearly separated on the bill. These lower bid levels should see a discount against previously forecast levels of c£34,000 for an end user consuming 10,000,000 kWh per annum. These revised figures will of course be loaded to the platform which TEC members use to forecast their forward, fully delivered energy costs from 2021.
So for customers on contracts where these charges are billed on a pass-through basis, the outcome is good. On the other hand it gives good reason, if one were needed, to not be tempted to “fix at any cost”.
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