A straw poll of ‘end user’ demand-side response providers suggests that the majority would at least consider bidding for 15-year contracts within the Capacity Market (CM).
The central complaint that has led to the suspension of the CM is that demand-side response (DSR) can only bid for single year agreements, while new build generation schemes can secure 15-year terms.
There’s some debate on whether 15-year contracts are necessary – or desired – by DSR providers. But the principle of a level playing field is behind the legal challenge still rumbling through the courts.
Last week, MPs on the Science and Technology Committee said DSR providers should be able to bid for 15-year agreements, putting pressure on government to change tack.
Beis said last month that its “preference is to maintain one year agreement lengths wherever possible unless there is strong evidence to deviate away from this”. The department said it would start an evidence gathering exercise.
Given the pressure to reinstate the Capacity Market as soon as possible, it may be that the department decides to offer DSR providers multi-year agreements, if not 15-year terms.
The Energyst asked companies that provide DSR, end users rather than aggregators or other third parties, whether they would opt for 15-year contracts, were they available.
While based on a small sample, the straw poll suggests some appetite.
Of 10 providers that responded, only two thought 15-year agreements would be unsuitable.
Seven indicated that they would be open to considering 15-year contracts, though most of the ‘yesses’ contain caveats, some of which are significant.
One did not rule it, but suggested five-years would be more suitable.
There are shades of grey in most answers. See their comments below.
Andy Pennick, energy system operations manager, United Utilities: “Absolutely, we would go for 15-year contracts for DSR to provide some long term certainty to build a business case.
“For all things DSR, I need to massively discount future benefits due to inherent uncertainty around regulatory changes (such as TCR, effect of MCPD on back up diesel engines in STOR, modification changes to DUoS red bands/embedded benefits etc. etc. etc.) and market risk. So a 15-year certain revenue stream would go some way to helping prove the investment. DSR projects go head to head against other energy projects such as efficiency – which is a much simpler business case to make and also to explain to budget holders!”
Robert Wild, demand-side response manager, Severn Trent Water: “If there was a choice between short and long term (15yr) contracts and the prices weren’t so different that it was favourable to risk shorter term contracts, then probably yes – I guess it becomes a hedging decision. The assets we use for CM already exist for power resilience and those needs are unlikely to change. Over that period the technology might, but I imagine if we replaced a diesel generator we would have something that would be capable of continuing to meet a long term CM obligation.”
However, he adds: “I guess that raises the question of whether the obligation is tied to a specific asset.”
Richard Eaton, energy manager, Aggregate Industries: “Essentially yes. We recognise that the system needs a Capacity Market mechanism to function effectively but we would only sign up to a 15-year CM contract within certain areas of our business operations, where the requirements of National Grid ESO testing do not adversely impact our production schedules.”
Ross Greenhalgh, energy manager, Premier Inn: “In principle yes, that is a much better investment model, giving certainty over a long period to ensure the business case for investment is sound. In practice it may be challenging to get such a long commitment through internal procurement, but this is preferable to the current situation.”
Filippo Chiettini, energy manager, Tesco: “Yes, provided you can exit it without penalties or with penalty limited to level of payments received in that year.”
Generation manager, major transport company: “We would need to know finer details, T&Cs, minimum agreed capacity prices etc., but in principle this would be an option we would consider.”
Steve Edwards, head of flexibility, Liberty House Group: “Given the huge swings in value we’ve seen in the CM and DSR more generally, any stability would be welcome. I’d see long-term contracts being delivered via aggregated portfolios, which in our experience are more complex to administer than direct contracting. We’d need longer term value predictability to develop any new DSR capacity.”
Henrietta Stock, energy and carbon manager, SES Water: “To be honest, probably not. Apart from the fact that (at odds with most people I know) I’m pessimistic about whether we’ll ever see the Capacity Market return, we’ve previously only used diesel backup to participate in CM, which we can no longer do for new contracts. If we were to use genuine turn down by varying operational schedules, which is what we are looking to do, we wouldn’t want to commit to 15 years, as we would need more operational flexibility.”
Dan Fernbank, energy manager, Reading University:”I’d have to say no, because increasingly CHP does not look a good environmental option in the long term, so I wouldn’t consider tying in for so long.”
Spencer Green, optimisation manager, Breedon Cement: “It depends. The idea of some stability and certainty in any respect is clearly one that I, and most providers, always clamour for.
“The need for the both the financial returns to be sufficiently attractive and the testing arrangements not to be overly onerous over the whole time period is critical.
“Some degree of flexibility would need to be included as I doubt, given the current rate of change in this field, that anyone could confidently write such a contract now with a high degree of confidence it would be entirely suitable for the electricity market in 2025, let alone 2035!
“This leads on to a circular argument that if that flexibility includes the option for either party to walk away, should their respective situations change significantly, then what is the point of a 15 year contract?
“I believe that such a contract, but over a shorter period of around five years, minimises the risk to either party while providing sufficient certainty from an industry standpoint.”
Severn Trent’s Robert Wild and Liberty House Group’s Steve Edwards will share their DSR experience at The Energyst‘s DSR Event, London 11 September. Beis will also provide a Capacity Market update.
See the line-up here. Secure your seat here.
MPs: Give DSR 15-year Capacity Market contracts
Beis to consider 15-year contracts for DSR – if evidence to support it exists
Capacity Market: Sara Bell on what happens next
Tempus wins Capacity Market court case
The money and the power: What next for the Capacity Market?
Tempus Energy: A five year old can see the Capacity Market is anticompetitive, the billion won’t be paid
Decc “confident” of beating Tempus legal challenge
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It should be recalled why this 15 year period has become relevant. This has always been the length of time that the Treasury uses to measure the cost effectiveness of a proposed public sector investment project.
Also, nobody is forcing anybody to enter into a contract which must last for 15 years. It is entirely a case of being able to offer “up to” 15 years.But there is a big difference between .that option, and the current Government rules limiting DSR contracts to a maximum of just 12 months.