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Record-breaking prices in latest Capacity Market auctions

In the past few weeks we’ve seen the conclusion of both the T-1 and T-4 Capacity Market auctions, and the results are likely to be welcomed by consumers.

Both auctions have cleared at some of the lowest prices we’ve seen in the Capacity Market, and while this will be good news for some – including energy managers in businesses of all shapes and sizes – it’s not as encouraging for some generators.

Here’s what you need to know…

Record-breaking prices

On 1st February, the T-1 Capacity Market, which was contracting extra power for the grid for winter 2018-19, cleared at £6.00 per kW. This is the lowest price of any Capacity Market auction to date. Last week we once again saw low prices awarded, as the T-4 auction cleared at just £8.40 per kW for capacity in winter 2021-22. This is significantly lower than the £22.50 prices cleared in last year’s T-4 auction, and well below forecast prices.

The winners and losers

Gas plants accounted for the majority of the power secured in the T1 auction, with CCGT winning over 2,215 MW of capacity, whilst Coal and biomass plants were awarded 632MW of provisional contracts. There was a similar bias toward existing generation in the T-4 auction, with over half of the agreements going to gas-fired plants. CCGT won 23,022 MW of capacity, nuclear won 7,926 MW, Coal & Biomass accounted for 3,016 MW and CHP and auto-generation accounted for 4,644 MW of procured capacity.

All of the interconnectors that entered the T-4 auction won contracts, including three new-build projects – Eleclink, Nemo Link and IFA2. Interconnectors won over 4.5GW of capacity in total. Demand side response (DSR) had similar success to that of previous years, with 30 contracts awarded to DSR in the T-1 auction, resulting in a combined capacity of over 443MW. In T-4, 1.2GW of DSR were awarded agreements, while a further 1GW exited the auction with no agreement.

Storage, however, won just 2.7GW worth of provisional contracts in the T-1 auction, most of which went to pumped hydro.  Despite 500MW of battery storage being contracted in last year’s T-4 auction, and significant volumes of battery storage pre-qualifying for this auction, only 153MW of battery storage capacity was contracted in this year’s T-4 auction.

Encouraging signs

Coal power stations won contracts in both of the auctions, but not in overwhelming numbers – coal generation only accounted for around eight percent of contracts awarded in the T-1 auction, while over 7GW of coal capacity chose to exit the T-4 auction. Eggborough was one of those that missed out on an agreement in T-1, and it has since been announced that it will close later in the year. It’s likely that those that failed to secure a contract in T-4 auction this year will bid into the T-1 auction in January 2021, and if they’re unsuccessful, we can expect to see them close in Spring 2021. Coal’s dwindling presence in the CM auctions is a sign that we will largely meet our commitment to ending coal generation in the UK well before the deadline of 2025.

Energy managers will also be happy to hear that the record-breaking low prices that cleared in these auctions should mean lower prices for consumers. It seems that the CM is successfully delivering security of supply at good value for customers – which, with so many other energy costs rising, will be welcome news for many businesses.

Potential issues

The downside of the lower prices awarded in the CM auctions is that those who participated and won contracts will face a dip in their expected revenue. However, many of those that bid at such low prices will simply be using the auctions as top-up revenue, so this is likely to have little impact on them. They can also still participate in DSR and frequency response services in order to make the most of any spare capacity they may have.

There have been concerns raised that the low prices will deter developers of new, cleaner capacity. One of the key aims of the CM is to encourage new generation capacity, to ensure a seamless transition to a low-carbon, flexible grid. However, the latest auctions have shown that they now largely serve to keep existing plants running, rather than support new generation – just 762MW was awarded to new-build generation in the T-4 auction, out of a total 50GW.

While existing generation can accept low prices, developers of new generation need higher rates. Renewables have a significant impact on their running hours and the predictability of their revenue, which means that many new generation developers will have been unable to bid at the low prices we’ve seen in these auctions. This has led many to question whether changes to the CM are needed to ensure that we have sufficient new generation to replace coal capacity once it’s forced off the grid by 2025.

What does it mean for your business?

If you’re wondering what this means for your business, our experts can help you to make sense of it all. We can also guide you in creating an energy strategy that works for you, now and in the future – give us a call on 08451 46 36 26 or email enquiries@inenco.com.