Capacity Market promises energised start to 2018

It looks like there will be a healthy level of competition in the next few Capacity Market auctions, which should help mitigate the costs consumers face for funding the scheme.

Over 80GW of capacity has qualified for the next capacity auction, due in February 2018. This auction will provide capacity four years ahead for winter 2021/22.

The auctions are designed to provide security of supply to the UK electricity system. A large number of participants will not be awarded a contract though, as National Grid are only looking for 50GW. The level of capacity entering the auction is an increase on previous auctions, due in part to the inclusion of Interconnectors. There is over nearly 5GW of battery storage, although the competitiveness of the technology may be impacted by the recent decision to alter storage derating factors.

Who is looking to participate?

The register for those taking part in the next series of Capacity Market auctions was published on 1 December. With the auction taking place in February, those wishing to take part must register their interest. While further checks are needed to ensure compliance, over 26GW of capacity has already received provisional clearance to take part, adding to the 53GW that had pre-qualified.

Nearly 4GW of capacity was rejected, though it is not clear as to why. The breakdown for the upcoming auction can be seen below:

derated capacity market auction

The largest proportion of the capacity entering the auction is from the UK’s Combined Cycle Gas Turbine (CCGT) gas fleet. There is around 10GW of derated coal plant entering the auction, but with the UK aiming to close all coal-fired plant by 2025, this level is expected to fall in later auctions. The high level of potential participation in the February auction should help to drive costs down, as participants strive to secure entry. The most recent auction for capacity this winter had a price of £6.95/kW which was sharply down on expectations, and less than half that secured in earlier auctions.

Different auctions

Prior to the T-4 auction for delivery in 2021/22, there is a smaller T-1 auction, which will deliver additional capacity for the year starting winter 2018/19. This is in addition to the capacity secured in the first T-4 auction held in 2014, which obtained 49GW.

National Grid is looking to purchase 6GW of capacity, with 14GW, already registered. The breakdown is below:

capacity market auction

The aim of the T-1 auction is to provide more opportunity for Demand Side Response (DSR) and smaller-scale generation to secure aid. Currently 3.5 GW of the capacity is either DSR or battery storage. This still means that the bulk of the bidding technology is more traditional, generation-based capacity.

Changes to batteries

The ability for battery storage to take part in the upcoming auctions could be impacted by recent changes in its assumed availability. One criticism of the technology, is that in some cases it may not be able to provide electricity for the full time it could be needed to provide system security. Since these capacity registers were released, National Grid has published new guidance on the issue of battery derating. Derating is the process by which capacity is downgraded to reflect realistic actual output, taking into account maintenance and operational capabilities. Previously, batteries were derated by 96% – meaning only 96% of its total capacity could enter the auction.

However, the new auctions will have a much lower derating factor, depending on how long the battery could provide electricity. If only 30 minutes of maximum output can be provided, the derating could be less than 20%. The battery would have to provide consistent output for over 3.5 hours to secure the same level of derating as in earlier auctions. This could impact on the competitiveness of some of the capacity being brought to market in the capacity auctions. If this is the case, the pressure on auction prices will be reduced, and the costs of the scheme could rise again.

The current year is the first to see any significant cost for the Capacity Market in consumer bills, with suppliers passing these charges to consumers in a myriad of ways, as explained in a recent Utilitywise FAQ. Even before the next auction, with capacity already purchased for 2018 through to 2021 in earlier auctions, these charges are already expected to double for the subsequent year. Unless the competitive pressure is maintained in the auctions, then consumer costs will remain high, and may even increase further.

Control your costs with Utilitywise

We can help you stay informed of price increases and help you to budget for any impact these auctions may have on your costs. Our Long-Term Price Forecast Report is an essential guide that can assist you when budgeting for your business. It details delivered pricing for the next 5 years and even demonstrates the growing proportion of non-commodity costs. To find out more download our factsheet here.

To find out more about the Capacity Market you can contact us by calling 01527 511 757 or by emailing corporate@utilitywise.com


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