LCP’s Kyle Martin outlines key considerations for upcoming Capacity Market auctions and offers a view on what the European Commission’s mandated changes may mean.
Reapproval of the Capacity Market
The European Commission’s decision on the 24 October to confirm that the GB Capacity Market (CM) is compatible with State Aid rules was a relief for many in the energy industry, with companies holding a CM agreement expected to receive full payment for the standstill period by January 2020. This also clears the way for several changes identified under the EMR 5-year review to be brought forward, some of which have the potential to affect the dynamics of the CM auction and clearing prices.
The six changes that the European Commission have asked BEIS to make to the scheme include:
- Reducing the current 2MW minimum threshold for participating in the CM;
- Enabling cross border participation in the CM (allowing foreign capacity to bid into the CM directly);
- Changing the participation rules to allow for new technology types to take part in the Capacity Market auction (wind and solar will be able to take part for the first time in the 2020 auctions);
- Providing access to long-term agreements for all capacity providers depending on capital expenditure thresholds;
- Reviewing the volume in the year-ahead auction (T-1 auction); and
- Complying with the new EU Electricity Regulation such as adhering to new emission limits.
We don’t expect all these changes to be brought forward immediately with the 2020 auctions set to adhere to the current rules (with the exception of the participation of wind and solar). But these changes will need to be addressed in the future with consultations expected from BEIS on proposed changes. It’s also likely that a number of these changes will have an impact on the auction clearing price.
Key issues for consideration in the auctions
There are three auctions being run in 2020: the delayed T-3 auction starting on 30/01/2020 followed by the T-1 auction on 06/02/2020 and finally the T-4 auction on 05/03/2020. The interactions between the auctions will be challenging for many participants, especially for those looking to build new plant.
We’ve already seen some major coal closure announcements that will reduce the amount of capacity in the auction. EDF’s Cottam plant closed earlier this year with RWE announcing that Aberthaw will close on 31 March 2020, transferring a large amount of its capacity to SSE’s Peterhead power station for the 2019/20 and 2020/21 delivery years. SSE has also announced that Fiddlers Ferry will close in March 2020.
There are also several nuclear power stations that are scheduled to close in the 2020s along with older CCGTs considering closure decisions which could create a need to build new plant. On the other side, the commissioning of new interconnectors will continue to reduce the amount of available capacity being auctioned (as they will be price takers in the auction) but changes to allow overseas plant to directly participate in the future could change how interconnected capacity bids into the CM.
The T-3 auction gives developers just over 30 months to build new plant to be operational for winter 2022/23. Reciprocating engines, battery storage, Open Cycle Gas Turbines (OCGTs) and Demand Side Response (DSR) can all be deployed in this time frame, but we might see some other larger projects come through that are ready to be built. Timing is even more important after the Government stated that milestones for the T-3 auction would be tighter than the T-4 auction would normally allow.
There are several reforms that will also have an impact on future capacity bidding into the auction including:
- Changes to network charging including the Transmission Generator Residual (TGR) and BSUoS as well as longer term reforms to access rights on the distribution network;
- Updated de-ratings factors for storage technologies; and
- Saturation of the Firm Frequency Reserve (FFR) market.
The impact of renewables on the overall clearing capacity will be limited but they will be able to participate for the first time. For the modelling used to calculate renewables’ de-ratings, LCP worked with the EMR Delivery Body to develop our Unserved Energy Model (UEM). The de-rating factors for solar PV, onshore and offshore wind are shown below.
But possibly the biggest factor is that the T-3 2022/23 capacity requirement is over 5GW less than the 2021/22 requirement (44.2GW vs 49.5GW). This is because:
- 1GW more de-rated Contracts for Difference (CfD) and Renewable Obligation (RO) capacity is assumed to be in the market (outside of the CM auction);
- 6GW less non-delivery capacity has been assumed;
- 8GW more is being held back for T-1; and there was a
- 5GW reduction in total capacity needed due to lower peak demand.
This lower capacity requirement needs to be considered against the upcoming plant closures and changes to policy/regulation. Understanding the interactions between the auctions will be challenging but detailed analysis of the next auctions as well as a long-term view of where the CM is heading is essential to a successful bidding strategy.
How LCP can help you
LCP provides a number of market analysis options for the 2020 Capacity Market auctions. This ranges from forecast of clearing prices and detailed analysis of the upcoming auctions to bespoke modelling. Contact Kyle.Martin@lcp.uk.com for more information on how LCP can support you.