A new Capacity Market surcharge will add around £378 million in total to energy bills this year, increasing retailers' energy costs by approximately 1%, according to Inprova Energy.
But it's a much smaller price rise than was forecast, taking the energy industry by surprise.
The Capacity Market is part of the UK government's Electricity Market Reform, which aims to enhance the security of UK electricity supply by ensuring that sufficient reliable capacity is in place to meet demand. Within the scheme, power and demand response providers are incentivised for supplying peak time generation.
The latest auction, finalised at the start of February, brought the Capacity Market forward by a year to help plug an anticipated shortfall for 2017/18. It cleared at the lowest ever price of £6.95/kWh to deliver 54.4MW extra capacity. The three previous auctions for 2018 to 2021 achieved substantially higher prices ranging from £18 to £22.50 per kWh.
"The low clearing price is better than expected news for retailers and will be good for UK energy system stability," said Michael Hill, Lead Analyst for Inprova Energy.
Inprova Energy expects Capacity Market costs for Winter 17/18 to add 0.129 pence per kWh to bills, but cautions that this is a national average and will not necessarily be reflective of what individual customers pay.
Hill explained: "The cost of the Capacity Market will depend on a number of factors, including individual peak consumption, total consumption and supplier market share. Some energy suppliers will pass on Capacity Market costs to their customers through a monthly charge, whilst others may instead choose to add a cost per kWh during peak periods. Retailers should review their contract arrangements and speak to their energy adviser or supplier to fully appreciate how these costs may affect their energy spend."