Early capacity market review (Internet of Things (IoT) thought leadership)
Jon Ferris, Procurement Services Director at Utilitywise PLC, one of the UK's largest and leading independent utility cost management companies, explains Early Capacity Market Auction and highlights the impact it will have on utilities customers.
The Capacity Market is a scheme established by the Government as part of its Electricity Market Reform (EMR) policy. It is designed to encourage investment in new power generation and ensure sufficient capacity is available when it is needed most. The objective is to deliver long-term security of supply for the UK, by incentivising investment in and provision of reliable capacity, at the lowest possible cost for consumers.
The Capacity Market rewards generation and Demand-Side Response (DSR) for guaranteeing availability to help balance the network when supply struggles to meet expected demand. The scheme takes the form of annual auctions, the main ones being carried out four years ahead of the required delivery of the generation, the so-called T-4 auctions. National Grid contracts for capacity in advance to ensure sufficient time to invest in new generation capacity. There are also additional auctions conducted a year before delivery aimed at encouraging DSR.
The auction price is initially set at £75/kW and is gradually lowered as providers place bids, detailing the capacity they can provide at that price. If there is more capacity than the Secretary of State has authorised for the auction, the price drops to the next band, and capacity that has bid a higher price drops out. The clearing price is determined once the capacity bidding matches the required capacity for the auction.
The first Capacity Market auction took place in late 2014, with generators bidding to provide capacity for the winter of 2018/19. A second T-4 auction took place in 2015 and a third in 2016. With these auctions, National Grid has secured capacity agreements for periods from 2018/19 to 2020/21. A supplementary early auction was announced in 2016 and ran in January 2017 to provide capacity for the 2017/18 winter season. Despite contracting for the highest volume, this short-term auction cleared at a significantly lower price than any of the other auctions.
What impact does it have on consumers?
Successful participants to the auctions are paid a monthly rate during the delivery year based on demand forecasts at the auction-clearing price. Once actual data on availability is known, these payments are reconciled.
However, as is the case with other subsidy schemes, energy suppliers will pass on these costs to consumers. The operational charge has been appearing on customer bills since April 2015, with administration costs being recovered for the first two years.
Utilitywise has analysed non-commodity costs (NCCs) as part of our Long-Term Price Forecast Report and has estimated annual cost impacts to consumers (£ per megawatt hour). For the coming year, as a result of the early auction for delivery in 2017/18, consumers could be paying around £1.40/MWh, with this more than tripling the next year to account for the higher clearing price for capacity being provided in 2018/19.
The first Capacity Market auction awarded just 5% of contracts to new build capacity. As a consequence, the majority of contracts were one-year, meaning that payments are only made during the year of delivery. New build generation increased to 6.5% of total capacity by the third auction in 2016. As more new generation is required and multiple year contracts play a larger role in the auctions, costs will be supported by payments being made for many years beyond the initial delivery period.
Reducing cost impact
The cost to consumers will vary and is dependent upon the consumers’ peak demand levels during the winter months. As such, the methodology for this charge will be similar to
Transmission Network Use of System (TNUoS) charges.
Businesses already undertaking Triad avoidance to reduce TNUoS charges will be aware of the benefits of better managing winter electricity consumption. Controlling demand will have a similar effect on Capacity Market charges.
Firstly, you need to know the key components of the utilities bill (the commodity and non-commodity costs). In particular, Distribution Use of System (DUoS) time-bands, which are focused on the week-day evening peak hours, with additional 12-2pm for London based businesses, see a higher price per kWh than any other time of day. Reducing consumption at these times will bring significant monetary savings on your utilities bill. Adding to this, are the previously mentioned winter Triads, between November and February each year. The Triads are used to calculate transmission costs based on consumer consumption during the three half-hourly periods of highest system demand determined by National Grid.
Secondly, you need to know how, when and where your building is using energy. By understanding your building’s energy profile and what systems, processes and equipment are influencing a rise and fall in consumption, you can identify opportunities to change.
Businesses can take control by implementing controls technologies to ensure out of hours consumption is consistently low and, that during in-hours, you are controlling (load shedding and shifting) around the DUoS and Triad periods.
The application of a modern day intelligent bureau is also part of the solution. Providing insights around inefficiencies in equipment and building performance. This bureau, like the one from Utilitywise, brings into the mix utilities market intelligence as well as experience around procurement contracts
Utilitywise can help you take control of your utility consumption with a range of controls and reduction services, ensuring you can better manage your usage and avoid the sting of increased charges. We have the tools and technology that can give you the power to load shed or shift your consumption, to avoid using energy at times of peak pricing.