Posted on: 29/03/2021
Head of Markets, Boz Bozhkov summarises the final results of the T-1 and T-4 Capacity Market Auctions, published last week. In this blog, Boz looks at the results in depth and explains what this means for our customers.
The Capacity Market is a government scheme introduced in 2014. It ensures security of supply at an affordable cost to consumers through a competitive auction process. Any Capacity Market applicants that secure a contract must deliver when there is a system stress event throughout the delivery year, which begins on the 1st October through to the 30 September.
The Final Auction Prices
On the 2nd March 2021 the T-1 Capacity Market Auction (for delivery year 2021/22) cleared after only 6 rounds and awarded contracts to a total capacity of 2.25GW (de-rated) at the record-breaking price of £45/kW/year.
A tighter 20/21 winter, with numerous Electricity Margin and Capacity Market Notices being issued, together with concerns about plants availability forced National Grid to revise their capacity requirements from -1,700MW (yes, minus) to 2,400MW. This unexpected announcement just a few weeks before the auction meant that the supply/demand balance was clearly in favour of a much higher-than-expected clearing price.
The T-4 Capacity Market Auction (for deliver year 2024/25) was far less eventful and cleared at £18/kw/year on the 10th March 2021. A total of 40.8GW of (de-rated) capacity were awarded contracts at round 13 of the auction. The clearing price was very much in line with some of the more bullish expectations and trending towards longer term CM price recovery.
T-1 Summary of Auction Results
You’ll see from the pie chart below that, Gas took the lions share with 986MW of awarded capacity (43%). Natural renewable generation technologies (solar, onshore wind and hydro) secured a combined capacity of 101MW across 10 projects. DSR secured 239MW of capacity across 29 CMUs.
T-4 Summary of Auction Results
Existing generating Capacity Market Units (CMU) made up 75% of the capacity that was awarded on agreement. Despite the relatively attractive clearing price, new build generation only secured contracts for 1,736MW of capacity, out of the 14,012MW of new build capacity that initially pre-qualified.
The majority of Capacity Market Agreements for the T-4 Auction were awarded to gas generation assets, taking 26.4GW of the winning capacity.
You’ll also see from the chart below, that natural renewable generation technologies (solar, onshore wind and hydro) secured a combined capacity of 771MW across 38 projects (or CMUs) and the waste sector secured 629MW of capacity, 25 CMU contracts.
DSR secured 1.07GW of awarded capacity across 136 CMUs. SmartestEnergy entered the T-4 auction with 100MW of pre-qualified DSR capacity and secured 15MW.
DSR is being pulled in two directions
On one hand, some of the more active and flexible demand sites are losing their Triad benefits and may look for alternative revenue and cost-saving opportunities, such as the Capacity Market. On the other hand, the low-for-DSR Capacity Market prices coupled with increased exposure to higher termination fees, may prove to be too challenging for a real uptake of DSR.
In any case, the Capacity Market is here to stay. The scheme is constantly evolving as new technologies and business models are joining and the CM will have a permanent place in almost any value stack for flexible demand.
Our Head of Pricing, Tom Putney, will be covering the Capacity Market in detail in our upcoming webinar.
> Register for our Non-Commodity Costs webinar on the 20th April, 11am
> Register for our Generator Revenue Streams webinar on the 21st April, 11am.