The Rise of the Capacity Market
Yesterday, the much anticipated T-1 GB Capacity Market auction cleared at £45/kW with 2.25GW of de-rated capacity awarded contracts, presenting a valuable opportunity for DSR and storage asset owners. This is a stark contrast to the last T-1 auction which cleared at £1/kW.
This comes shortly after the Department for Business, Energy and Industrial Strategy (BEIS) increased the target from 0.4 GW to 2.4 GW due to a “range of non-delivery uncertainties”. For the 2021/22 T-1 auction, the increase to 2.4 GW is a significant jump on the initial target outlined in last July, where National Grid ESO (NGESO) did not recommend any procurement in its Electricity Capacity Report. For context, the previous T-1 auction — for 2020/21 — had a target requirement of 0.3 GW (table. 1).
Table 1. Previous T-1 capacity market auctions clearing prices, target demand, prequalified capacity and excess plant capacity. The latest auction had the lowest excess plant capacity and prequalified capacity.
Approximately 4.4 GW of de-rated total capacity prequalified against National Grid’s procurement target of 2.4 GW for the 2021/22 T-1 CM auction. Contracts were awarded to 128 MW and 110 MW of proven and unproven DSR, respectively. This is a significant increase when compared to a total of 17 MW last year. Similarly, 114 MW have been awarded to battery storage, again, an encouraging increase over last year’s total de-rated capacity award of under 4 MW. Under 30 MW of contracts were awarded to wind and solar combined and this is likely to be because the capacity market does not represent a significant revenue stream for renewables due to the low de-rating factors (Fig. 1).
Figure 1. Proportion of volume per asset/technology group awarded contracts in the T-1 auction.
The record breaking clearing price could be attributed to a number of factors. Last summer Calon entered administration resulting in its total de-rated CCGT capacity of 2 GW not entering the auction. Westburton (1.7GW) exited the auction early which left the remaining coal unit (Ratcliffe) winning a contract. Existing coal units require higher capacity market payments as they have lower efficiencies, require more maintenance and are impacted by the uncertainty in the UK ETS carbon prices.
BEIS also revised the T-4 auction requirement to 42.1 GW, but allocated 2 GW of this to the T-1 top up auction. Consequently, the T-4 auction target was set to 40.1 GW and this is still lower than previous T-4 targets (Fig. 2).
Figure 2. Target capacity for T-4 capacity market auctions from the delivery year 2018/2019 to 2024/2025.
What caused the change in targets?
BEIS and NGESO’s decision to increase the auction targets were made in response to the recommendations in the 2020 Electricity Capacity Report analysing the impact of COVID-19, issued by National Grid in January 2021. A compounding factor may have been the two capacity market and six Energy Market Notices (EMN) issued this winter. To put this into perspective there had not been any notices since Winter 2016 (at the peak of the French nuclear outages).
On March 9th, the T-4 2024/2025 auction will take place. Over 53 GW of capacity has prequalified against the 40.2 GW target. However, only 39GW of this capacity includes existing plants. Therefore, key influencing factors in this auction could include the bidding price of the 3.5 GW of interconnector capacity, new build gas plants/recip engines (influenced by network reforms) and the strategy at which the 0.9 GW of de-rated battery projects bid (price takers given other revenue streams or if they are sensitive to the CM price).
As decarbonisation of the GB electricity system accelerates towards net zero, addressing the structural challenges of balancing a system dominated by low carbon technologies is becoming paramount.
For asset owners who are already benefiting from increasing price volatility and lucrative alternative revenues (for now) from dynamic containment, for the first time the T-1 capacity market results offer clear, attractive revenue certainty and an opportunity to participate in the transition towards net-zero.
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