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National Grid (NG) UK, has launched capacity market auction since 2014 to facilitate further integration of renewables in order to meet committed EU targets of 2020. Balancing supply with demand in real time by increasing generation or reducing consumption is the paramount importance for NG.  In total, 45,371 MW of capacity was secured for delivery in 2019/20. Existing “Short Term Operating Reserves (STOR)”generators are not allowed to participate in capacity market auction, unless their participation as STOR providers are withdrawn.

NG offers as long as fifteen years of forward contact to attract investment, so that capacity could be built for balancing. However, NG’s endeavour was seen as an opportunity by existing generating firms, as they diced a slice from their existing generation portfolio to participate in capacity market. It was actually revealed, when clearing price has dropped as low as £18/kW/year during 2015 auction. Whopping 90.64% capacity was released by existing generators during capacity auction of 2015. Only 4.18% of capacity will come from new build generators for delivery in 2019-20.

An interesting thing about this auction is the available capacity from Demand Side Response (DSR) technologies. Merely 0.02% and 0.97% of total capacity will be available from proven DSR and unproven DSR respectively. Grid situation could become onerous if unproven DRS does not respond rapidly.  On the contrary to fifteen years of forward contracts to generators, only one year’s forward contract is offered to DSR bidders. There are plenty of opportunities for DSR technologies to further its share in capacity market provided that long term contracts are offered by NG. There should be a separate incentive in place for proven DRS technology by NG. The breakdown of awarded capacity by technology/fuel type is as below.

• CCGT                                                          47.05% (nearly half)
• CHP                                                               9.07%
• Coal/Biomass                                            10.11%
• DSR                                                               1.03%
• Hydro                                                            1.50%
• Nuclear                                                       16.34%
• OCGT and Recipe Engine                        5.24%
• Storage                                                         5.65%
• Interconnectors                                         4.02%

The existing Combine Cycle Gas Turbine (CCGT) has secured nearly half of the total capacity auction. In comparison to other types of fuels, gas provides real arbitrage opportunity to the vertically integrated energy suppliers. Lower crude oil prices and long term forward contracts resulted to the promising spark spread and makes a strong business case for CCGTs to undercut other technologies and fuel types in capacity auction. All major big six and vertically integrated suppliers have participated in capacity auction and offered the capacity mix of existing technologies/fuel types (coal, gas and nuclear). It is anticipated that an impact of existing capacity release will also be seen in the wholesale prices.

It is also noteworthy that whopping 2600 MW (5.65% of total capacity offered) has been secured by energy storage technology, which is a decisive step towards the growth of mass energy storage technology in the UK. It is yet to be seen that which storage technologies can penetrate in the market at a price as low as £18/kW/year.

Concluding the above, it will be very interesting to see the next few years’ capacity auctions, as crude oil prices may impact the behaviour or CCGT’s participation. Regulator should develop a mechanism to encourage a new capacity building and shield it from short term fluctuation in oil and gas market. Proven DRS should also be encouraged by offering long term contracts.

Thanks for read.

Ref:

https://www.emrdeliverybody.com/Capacity%20Markets%20Document%20Library/2015%20T-4%20Capacity%20Market%20Provisional%20Results.pdf

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