Capacity Market result a relief for energy buyers but costs still heading higher

The low clearing price achieved in the latest Capacity Market auction took the energy industry by surprise. In our latest Informer Series non-commodity charges webinar, Head of Pricing and Renewables Gavin Baker looked at the outcome in more detail and the implications for consumers.

As the volatility seen on wholesale markets this winter has underlined, these are challenging times for energy buyers.

But as regular followers of SmartestEnergy’s non-commodity cost webinars will be aware, the wholesale energy price is no longer the biggest factor in determining business energy bills.

The cost of funding environmental, system and network charges continues to rise apace and our latest webinar highlighted forecasts for non-commodity costs to rise by almost 10% next year – equivalent to an additional £45,000 on a £500,000 bill.

While the growing cost of funding environmental schemes is responsible for the bulk of the predicted rise, bill payers are also starting to see the impact of the Capacity Market which aims to ensure security of supply by providing a payment for reliable sources of energy when needed during peak periods.

At a time when pressure on budgets is higher than ever, the results of the latest Capacity Market auction provided at least some relief. The clearing price of £6.95kW/year was well below what most in the industry had been expecting and also much lower than the prices achieved in previous capacity auctions.

The auction was to provide one year of capacity from the start of winter 2017, and one of the key factors behind the lower price was that two sizeable coal-fired plants - Eggborough and Fiddler's Ferry power stations -  have extended their operations by a year despite muted non-viability and impending closure.

They secured chunky amounts of capacity as they were willing to accept low prices for their Capacity Market contracts at the expense of more demand side management. There was also some success for new build high flexibility gas and diesel engines, though less than had applied for contracts.

> Read our full analysis of the T-1 auction here

That contributed to the auction being significantly more competitive than expected, feeding through to lower scheme costs on bills than originally forecast.

We are now forecasting a Capacity Market customer rate of £41 per MW/h from October 2017 but then rising to over £110 per MW/h from Winter 2018. It’s important to note that these headline rates only apply to consumption across the winter peak period (weekdays 4-7pm from November to February).

Although the latest auction results will mean a lower than initially expected charge, the scale of increase we are still expecting means it is something businesses really need to start budgeting for.

To hear our latest insight on non-commodity costs in more detail - including our forecasts for environmental, system and network changes - watch a 10 minute wrap up of the webinar in the link below.

> Wrap up of supply customer non-commodity costs forecast webinar

> Wrap up of consultants non-commodity costs forecast webinar