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Electricity margins will tighten, then rise with new capacity market

The government is to procure a total of 53.3 GW of electricity generating capacity when it re-introduces a capacity market into the UK later this year; an amount that equates to more than 80% of peak electricity use in Great Britain. Together with renewables and other generation this will, says the Department of Energy and Climate Change (DECC), ensure there will be enough power to meet the demands of homes and businesses in the future.

The new Capacity Market is aimed at addressing Britain’s medium-term electricity needs, ensuring power supplies towards the end of the decade.

The announcement, which DECC is calling ‘the final element of the government's energy security strategy,’ follows detailed recommendations from National Grid.

The first capacity market auction is to run this December, for delivery in 2018/19, and harks back to similar arrangements used in the UK in the decade following electricity privatisation; standard practice in many US states and in some EU countries, according to DECC.

Edward Davey, Secretary of State for Energy and Climate Change, said: ‘There was a real risk back in 2010 that an energy crunch would hit Britain in the middle of this decade and lead to damaging power cuts. But the excellent news is that with today's announcement we have the final piece of the jigsaw of our detailed energy security plans and can now say with confidence that we have defused the ticking time bomb of electricity supply risks we inherited. Britain is a world leader in energy security – leading in the EU and ahead of every other G7 country.’

Meanwhile, Ofgem has published its latest assessment of electricity capacity margins – the surplus of electricity generated compared with demand – for the shorter-term, which shows that electricity margins will tighten over the next two winters. But the probability of disconnections has reduced due to measures taken by Ofgem alongside National Grid and government, says the regulator.

Ofgem expects a reduction in the margins over the next two winters. However there has been some improvement in expected margins for next winter (2014/15) compared with its 2013 report. Margins are still expected to drop to their lowest level in 2015/16 resulting from closure of older power stations. After this, the margins are expected to improve as new power stations are introduced.

Since its 2013 Capacity Assessment, Ofgem says it has taken action to reduce the risk of disconnections by giving National Grid new tools it can use to help balance the electricity system and manage these lower margins. The new tools mean that National Grid will tender for new contracts with power stations so that they can provide extra reserve power when needed. National Grid will also carry out additional tenders for large businesses which are willing to reduce their power consumption during peak demand times in return for a payment.
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