Capacity Market ‘shares CfD auction flaw’, says Inenco

The Capacity Market’s ‘pay as clear’ auction format means consumers end up over-paying for the plant secured, according to Inenco. The company made the claim in response to a National Audit Office finding that consumers would over pay by £100 million every year for renewable projects’ Contract for Difference, because of a change in the rules by the Department for Business, Energy and Industrial Strategy (BEIS).

In an investigation into the 2017 Contracts for Difference auction, the NAO found that the decision to cap the funding and capacity available from specific technologies had an unintended effect. When a large project breached the capacity cap it was excluded from the stack of successful bidders. In the absence of that project, smaller – but more expensive – biomass projects bid for and won the freed-up capacity. However, auction rules meant that all projects received the higher strike prices set by those plant. The outcome is an expected £1.5 billion cost to consumers over the life of the contracts. NAO said “Almost all of this cost increase is due to small projects pulling up strike prices for projects that had already been accepted, rather than due to additional capacity being secured”, and added, “The Department did not highlight this change to its programme management board or test whether it might lead to unintended consequences.”

David Oliver, senior energy consultant at Inenco, said: “Whilst some changes will be made to future auctions, the fact remains that the government has overpaid for projects that could have be delivered at a far lower cost, locking in higher bills for homes and businesses for years to come.

“We believe that a similar flaw also affects the annual Capacity Market auction, where generators are paid the auction strike price, even when they submit lower bids.

“The main message from today’s report must be a review of the auction design to optimise the process and ensure no project is paid more than is necessary to ensure future security of supply from low carbon generation at as low a cost as possible to homes and businesses. Such a review should be extended to cover the Capacity Market auction as well as the CfD auction.”

Read the NAO report

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