The one-year-ahead Capacity Market auction, held on the 2nd of March, cleared at a record high price, exceeding everyone’s expectations and more than doubling the previous highest price. We’ve asked our expert what does this mean for the market…
Lisa Foley, Head of Strategy & Regulatory Affairs at GridBeyond, commented:
“The T-1 2021/22 capacity auction cleared at record levels on day one of the auction. This clearing price has now been confirmed as £45K/MW. To put this in context of the auctions held last year, the T-1 2020/21 cleared at £1K/MW/year, whilst the T-4 2023/24 cleared at £22.5K/MW/year.
“There are a number of reasons for this high price. Firstly, the very recent increase in the volume procured from 400 MW, as published in July 2020, to 2,400 MW in recent weeks.This was based on known risks of non-delivery for several T-4 2021/22 capacity agreements and other analysis related to system needs carried out by National Grid ESO.
“Secondly, approximately 4.2GW of capacity entered the T-1 auction for a volume requirement of 2.4GW. However, a number of existing coal plants exited the auction early as coal plants require quite high capacity prices to justify participation. Unexpectedly, one unit that left the auction was EDF’s West Burton A unit. This is likely linked to the overall portfolio management strategy by EDF, including their nuclear plants.
“T-1 auction secured approximately 240 MW of capacity from DSR, providing a great signal for flexibility in the market.
Over the recent months, National Grid issued several Capacity Market Notices. This means that the margins of the available generation are tight at the moment, and we are likely to see high prices in the T-1 Capacity Market auctions going forward to ensure National Grid ESO can securely operate the UK Grid.”
National Grid ESO describes Capacity Market Notice has a “a signal that the risk of a System Stress Event in the GB electricity network is higher than under normal circumstances.” This is a sign that “there may be less generation available than National Grid Electricity System Operator (ESO) expects to need to meet national electricity demand on the transmission system.”
What is the Capacity Market?
Under the Capacity Market, generators and large energy consumers receive payments for delivering an agreed amount of power onto the grid, or reducing their energy demand, to prevent blackouts when there is not enough supply in the network. The revenues can be layered on top of those from balancing and trading services.
Contracts for providing this service are awarded in annual auctions. There are two auctions per year: one for delivery about a year ahead (called the T-1 auction), and; one for delivery about four years ahead (called the T-4 auction).
For more information on how to participate in the next Capacity Market auctions, contact our friendly team.