Record revenue returns from the Capacity Market
The latest auctions demonstrate the potential rewards of energy optimisation and solutions as value of reliable capacity increases
The latest Capacity Market auctions procuring reliable capacity to keep the lights on have cleared at record prices.
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. 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'.
Capacity market participants are increasingly coming from the Demand Side Response (DSR) market, which is open to both businesses and public sector organisations and covers assets such as Combined Heat and Power (CHP), battery storage and gas-fired generation. The requirement from these technologies will likely increase as coal and nuclear plants close in the 2020s and demand for power rises with the increasing electrification of heat and transport.
For Capacity Market participants, the programme provides a reliable monthly revenue stream which can be stacked with other revenue streams, such as providing frequency response services to National Grid.
Auctions are held every year to procure this capacity to meet peak demand. In March, two auctions were held:
- T-1 auction
procuring capacity for delivery between October 2021 and September 2022
- T-4 auction
procuring capacity for delivery between October 2024 and September 2025
On 10 March 2021, the T-4 auction cleared at £18/kW, procuring 40.8 GW of capacity; by comparison the previous auction cleared just below £16/kW. Centrica Business Solutions secured 416 MW of capacity in this auction for both Centrica-owned and customer-owned assets. 65% of the total capacity procured in the auction is gas-fired, including some new-build gas peakers. Interconnectors were also successful with 17% of the successful capacity and interestingly, some nuclear assets have unexpectedly not taken a capacity agreement.
For this T-4 auction, the government set aside 2 GW of capacity to be procured in the future T-1 auction to be held in 2024.
The T-4 event followed hot on the heels of the record-breaking T-1 auction, which took place on 03 March 2021. The clearance price achieved was £45/kW – the highest Capacity Market price ever and much higher than the previous two T-1 auctions, which cleared at ≤£1/kW.
A total 2.3 GW of capacity was procured at the latest T-1 auction, comprising gas, coal, battery storage and DSR. These assets will top-up the capacity procured in the T-4 auction, held in 2017.
The T-1 procurement target was substantially increased just weeks before the auction due to a large increase in the unavailability of new and existing capacity market providers. This late change decreased competitive tensions on the auction. Substantial changes to the procurement target must be made as far in advance as possible – to better enable potential participants to be available to complete.
For some time Centrica has advocated for more volume to be set-aside at the T-1 stage. This would better enable demand-side response to participate as it requires customers to take on capacity commitments 1 year ahead of time, rather than 4 years ahead of time. It would also better insulate the T-1 auction from the unpredictable clearing prices we have seen in recent years.
We welcome that the Government is setting a larger amount of capacity at T-1 stage, but this should have been communicated much earlier and even more capacity could be set aside in future auctions.
Maximise your DSR revenue
Centrica Business Solutions is Europe's number one DSR provider. We can help you tap into your energy generating or consuming assets to create a guaranteed revenue stream for your business.
Our advanced artificial intelligence (AI) technology can aggregate a portfolio of flexible load, which allows us to offer more secure revenues and shield your flexibility from penalties. You can view and manage your DSR through PowerRadarTM – our integrated solution platform – online or via mobile app at any time.