Future of Energy

Capacity Market yet to incentivise new-build generation

Posted on 24 February 2020
By Ed Farley
Ed Farley
Technical Sales Analyst

Technical Sales Analyst Ed Farley works in npower Business Solutions’ Demand Side Response team, where he is responsible for modelling commercials, developing customer business cases and delivering consultancy analysis. Ed also manages nBS’s Capacity Market proposition from pre-qualification through to auction and delivery stages.

As is so often the case, there are two sides to every story. That’s certainly true of the recent T-3 Capacity Market auction, which out-turned its lowest-ever price for a long-term auction.

Rescheduled on the back of the well-documented suspension of the Capacity Market back in 2018, this latest auction provides the UK with >45GW reserve capacity which can be called upon in the event of system stress.

For National Grid, securing this volume for the 2022/23 delivery year at just £6.44/kW (£6,400/MW) is good value.

However, at a time when we need to encourage greater flexibility from demand side response (DSR) and stimulate investment in new-build, low-carbon generation, the news is not so positive.

As coal-fired power stations reach end-of-life and more nuclear plant is decommissioned, reliable alternatives are required to keep the lights on. This is especially so now we have a more intermittent, decentralised grid as a consequence of rapid growth in renewable technologies.

Gas dominates but battery storage and DSR also delivering

Perhaps unsurprisingly, the T-3 auction awarded its largest share of contracts to existing combined cycle gas turbines (CCGT). These secured just over 44% of total procured capacity, equivalent to just under 20GW.

Eight interconnectors totalling 5800MW and two coal-fired assets amassing 880MW also secured contracts.

Despite prohibitive de-rating factors, a number of battery storage assets were successful too. These accounted for just over 100MW out of a total of 533MW for the DSR technology class.

Returns expected to increase

The Capacity Market focus turns swiftly to the next auction on 5 March, which is a four-year ahead auction for delivery in 2023/24.

With a similar target capacity and number of market participants, we expect to see a similar outcome and clearing price in this instance.

Nevertheless, as we enter the mid-2020s, the market outlook remains positive.

As per several independent market forecasts, we anticipate significantly higher returns from Capacity Market contracts, given the demand for secure alternatives to replace decommissioned thermal and nuclear fleet.

Replacing lost Triad revenue

While Capacity Market returns may not be sufficient to incentivise cleaner, new-build generation in the near term, they still offer a reasonable return for consumers with existing flexibility.

The importance of the Capacity Market is also exaggerated by the forthcoming loss of Triad revenues from April 2021, as a result of changes introduced by Ofgem’s Targeted Charging Review.

We are working with consumers to displace Triad revenues in the region of £50,000/MW with the existing Capacity Market contracts we have for upcoming delivery years.

Participating in the Capacity Market now is one way to get your DSR assets and protocols established before revenues increase in the mid-2020s.

In a challenging DSR landscape, revenue stacking is becoming increasingly important. Hence, we are actively working to understand National Grid’s new suite of Reserve & Response products, while facilitating access for our customer to new localised DNO flexibility schemes.

For bespoke commercial modelling of what your business could achieve through DSR participation, you can speak to the DSR experts within our Energy HQ team.

If you have 2MW of existing flexibility and would like us to bid on your behalf in the next Capacity Market auction on 5 March, please do get in touch.

You can reach the DSR team by calling 0800 193 6866 or sending an email via nBS@npower.com.

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