The auction, administered by National Grid, could take as long as four days to secure 48.6GW of supply capacity, drawing from a pool of 64.4GW of qualifying plant.
The reverse auction will run over four rounds per day from a starting point of £75/kW hour per year which will drop by £5 each round. To remain in the auction generators will need to keep dropping their bids until only the most economically competitive plants are left to make up only as much capacity as is needed.
Analysts at RBC Capital said in an investor note Tuesday morning that they expect the auction to clear at the £40/kW mark, meaning an auction duration of at least two days, although Utility Week understands that other analyst models suggest levels lower than this.
Although the government has structured the auction “to keep costs down for bill payers” critics of the plans say the auction will subsequently favour existing coal-fired power plants rather than bring forward investment in new, cleaner gas-fired projects which are currently hindered by uneconomic market conditions.
Existing nuclear power plants, which are relatively insulated from the market stress faced by gas-fired plants, could also bring windfall profits for operators EDF Energy and Centrica.
But following the announcement of which plant had qualified for participation in the auction Baringa analyst Philip Grant told Utility Week that the auction could prove to be more competitive than anticipated.
“It will be interesting to see how the auction dynamics work between plant that is planning refurbishments and new plant. The auction could prove to be more competitive than previously thought as these types of plant will be critical in determining the level of capacity payments,” Grant said.
The auction has moved ahead despite a legal challenge from new market entrant Tempus Energy which claims that the auction discriminates against demand-side capacity providers.
If the legal challenge is successful, the auction result would be nullified retrospectively, which could take a heavy financial toll on developers that move forward on investment plans in the meantime. That in turn would leave the government open to further legal action.
But the Department of Energy and Climate Change said it is “fully confident” in the legitimacy of the auction.
“The European Commission has concluded that the capacity market is within European state aid rules. This challenge will have no impact on the running of the capacity auction in December,” a spokesman said.