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Upcoming UK Power Capacity Auction Could Set Record Prices

This month’s capacity market auction in the UK – designed to pay power producers to provide additional capacity to the grid in times of high demand – could fetch record-high clearing prices for the 2027-2028 market when backup capacity looks tight.  

The four-year-ahead (T-4) capacity market auction, awarding contracts to generators to have power supply available at peak demand periods, could clear at $85.40 (£68) per kilowatt per year, Bloomberg reported on Monday, quoting estimates from commodity research firm ICIS.

To compare, the previous record-high for the four-year-ahead (T-4) capacity was set at the auction last year, at a price of $79 (£63) per kW per year.

The highest-ever price for a capacity market auction was during the 2022 year-ahead auction, which cleared at the maximum price of $94 (£75) per kW per year.

This year, the government also has a maximum cap of $94 (£75) per kW per year for the year-ahead and four-year-ahead capacity auctions. The targeted capacity for 2027/2028 has been set at 44.0 gigawatts (GW).

Providers of backup power generation bid for the price they want to be paid for available capacity, below or at the price cap of £75 per kW per year.

Considering that the 2027/2028 backup capacity looks very tight, the auction at the end of February could clear at a record-high price, Robert Jackson-Stroud, an analyst at ICIS, told Bloomberg.

“There will be a need to secure gas peaking plants for sure,” as forecasts point to “especially tight” supply in 2027/2028, Jackson-Stroud added.

If ICIS’s estimate of a record-high £68 per kilowatt per year clearing price at the auction turns correct, this could mean a new natural gas-fired power plant – requiring around that price to be economically feasible – could be built in northeast England, according to BloombergNEF (BNEF).

BNEF has recently raised its forecast for the clearing price at the capacity market auction by 26%, to $83.20 (£66.25) per kW per year.    

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By Charles Kennedy for Oilprice.com

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