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Capacity Market T-1: What Does It Mean For Businesses?

The T-1 capacity market auction for winter 2017/18 concluded on Friday 3 February, confirming the price that generators will be paid over the coming winter.

Some suppliers had forecast prices of up to £35/kW of generating capacity, which would have resulted in the scheme costing up to £1billion, meaning costs of around £130/MWh for all weekday peak consumption for half hourly business users and an average of £6-7/MWh for non-half-hourly sites.

The actual clearing price for the auction was a quarter of the forecast cost: with a clearing price of £6.95/kW, half-hourly users will instead pay £31/MWh for energy consumed between 16:00 and 19:00, Monday to Friday, between November 2017 and February 2018.

You can view our infographic explaining the outcome of the auction here.

Why is this price lower than previous CM auctions?

In the T-4 auctions that have taken place to date, generators have either been bidding to cover the cost of building new plant or securing a price that will justify keeping existing plant such as coal plants online to provide capacity for the year in question. Many of the bidders were asking for high prices to justify building new projects that had connection agreements and planning permission, but needed financial certainty to start construction. The T-4 auction for capacity in 2018/19 resulted in a clearing price of £19.40/kW, for example.

In contrast, the T-1 auction was looking to secure capacity to be available in just nine months’ time, meaning virtually all capacity is already built and in operation. This weakened the generators’ bidding position: any offer that is too high would not have been selected and the plant would receive no payment, even though it would still be available to generate. The sensible bidding strategy for an existing plant was to bid low to guarantee that the offer would be accepted. Because of the way the Capacity Market auctions work, these plants knew they would earn the same price as the highest accepted bid regardless of the price offered – so for those confident that they would be in operation this winter, the Capacity Agreements may well have been viewed as an upside with very little downside.

The majority of the 54.43 GW (40%) was awarded to existing CCGT gas plant, with coal and biomass making up almost 20% of the agreements. Energy storage received 4.98% and Demand Side Response just 0.38%. A full breakdown of the capacity agreements is available here.

Is there still a role for DSR in the Capacity Market?

Whilst there were very few DSR Capacity Agreements awarded in the T-1 auction, it fared far better in the T-4 auction that concluded in December, representing 1.4GW of capacity secured. Whilst existing plant were able to secure the bulk of the agreements in this most recent round, each Capacity Market auction presents an opportunity to secure additional revenue. Whilst the outcome of the 2017/18 scheme may be lower than predicted, it still represents additional cost to a business’ bottom line. Those businesses participating in demand response schemes will not only be avoiding this cost but also receiving additional revenue streams for it: in competitive industries, it makes sense to still consider DSR as an important element in a business’ energy strategy.

Get in touch with our energy experts today to understand how the new forecasts affect your energy budget.