Key conclusions:

GB capacity market background

• The GB capacity market was introduced as a part of bigger power market reform in order to solve the problem of falling capacity margins (4%), lack of investments in electricity generation and predicted capacity shortage between 2018 - 2019.
• Another part of the power market reform is contract for difference scheme which rewards low-carbon projects in line with energy mix strategy (and EU obligations).
• The GB capacity market is relevant because it is the first capacity market case approved by the European Commission according to the new state aid rules, and because lessons can be learnt from the first T4 auction that took place in December 2014.

Results of the first capacity auction

• Capacity contracts awarded will impose a cost of £980 million on consumers in 2018/19.
• The T-4 auction held in December 2014 for capacity to be delivered in 2018/19 was significantly over-subscribed, with 65 GW of capacity bidding for a notional required procurement of 48.6 GW. This suggests that the capacity market in GB was introduced prematurely.
• The auction clearing price was £19.4/KW-year, considerably below the auction cap of £75/kW-year.
• One major gas-fired project received a 15 year contract – all existing capacity clearing the first auction received either 1 or 3 year contracts.
• Due in part to the design of the capacity market, only a small amount of DSR capacity cleared the first auction.

Lessons learnt from first UK capacity market

• In assessing resource adequacy, it is important to properly take into account all available resources – demand-side, cross-border interconnections, plant availability. This is important both for determining need, lowering the costs and for securing European Commission state aid approval.
• Before introducing a capacity mechanism, it is critical to identify the problem and select measures that can solve it at lowest cost to consumers and the economy.
• Timing is essential. As the GB experience shows, introducing a capacity mechanism prematurely may be counter-productive, and represent a cost to consumers with little benefit.
• If a capacity mechanism is needed, DSR should be treated on equal footing with generation capacity. DSR has been shown to significantly reduce system costs, and can introduce new technologies and increased competition to the market.
• A capacity mechanism can adversely affect cross-border flows of energy by depressing energy prices during times of system stress, leading to a less inflows of energy and – conversely – incentivising greater outflow of energy.

Title of analysis: "Capacity market arrangements in Great Britain - lessons learnt for Poland"