The Capacity Market is the primary tool used by the Government to ensure that there is sufficient electricity capacity online to meet peak demand in winter, this is known as ensuring security of supply. It rewards generators and consumers with flexible energy assets for committing to supply an agreed amount of power to the grid, or reducing their demand on the grid during occasional 'system stress events'.
Auctions are held every year to procure this capacity to meet peak demand. In February, two auctions were held:
• T-1 auction: this procures capacity to ensure there is sufficient capacity for the upcoming winter (delivery between October 2022 and September 2023)
• T-4 auction: this procures capacity four years in advance to ensure investments can be made when required. Delivery of this capacity between October 2024 and September 2025
Prior to the T-1 auction being held, the UK government announced that it was to significantly increase its procurement capacity to reflect broader uncertainties within the power sector. This set the procurement target at level of capacity competing in the auctions. Such decision making by the government reflected some unexpected plant closures, as well as market volatility. However, last minute changes are not welcome as it leads to overall higher costs to consumers.
The result was therefore that inevitably the T-1 auction cleared at the price cap of £75/kW procuring 4.996 GW (i.e. all the capacity available). The majority of the capacity will be procured by gas generation, followed by demand-side response. Centrica was successful with both technologies.
Later in March, the T-4 auction procured 42.364 GW of capacity at £30.59/kW, which is the highest price since the auctions commenced in 2014. The higher price in this auction reflects the upcoming closure of most nuclear assets, as well as the final coal assets on the system.
The majority of the capacity procured was also gas generation, but we saw a significant level of battery storage (c.1GW) successful, with the majority over 2 hours in duration.
All units entered by Centrica were successful in securing a capacity market agreement, guaranteeing revenues for these customers in 4 years time, while contributing towards ensuring there is sufficient electricity capacity on the system to keep the lights on.
Jack Presley Abbott
Jack is a Senior Regulatory Manager for Centrica, drawing upon experience in a number of commercial and policy roles.
Jack is an expert on regulatory areas that are of interest to Centrica Business Solutions. Jack has expertise and experience across a range of topics which includes the capacity market, balancing services and carbon pricing, and regularly engages with external stakeholders on these subjects.