As expected, the Capacity Market’s T-1 auction has entirely cleared in the first round at its highest ever price.
4996.224MW of de-rated capacity across 226 pre-qualified Capacity Market Units (CMUs) have secured tenders for the maximum price of £75/kW/y for the 2022/23 period. With all units clearing in the first round, the auction was concluded by 10am on 15 February.
It follows energy secretary Kwasi Kwarteng announcing a target of 5.36GW for the auction in January. This target was set higher than the pre-qualified capacity due to the volatility of the energy market in the UK currently.
Writing in a letter to Fintan Slye, director at National Grid ESO at the time, Kwarteng said: “While I agree with the analysis [National Grid] provided in fulfilment of your remit under the Capacity Market Regulations, this target reflects the broader uncertainties within the power sector.”
Market volatility in the UK has been broadly driven by a shortage of gas in Europe, which has dramatically driven up wholesale power prices with numerous knock on impacts. This has included squeezing energy suppliers, with 27 collapsing and one entering special administration in 2021. Additionally, the price cap is set to jump by 54% in April with a substantial impact on the number of fuel poor in Britain, and the cost of balancing the grid has soared.
“Traditional power plants fueled by nuclear, gas and coal have proved unreliable, so additional back-up has had to be contracted this time round,” said Jess Ralston, analyst at the Energy and Climate Intelligence Unit.
“This capacity mechanism auction will add a few pounds to bills, an amount dwarfed by the £500 that high gas prices are adding. At the same time cheaper renewables are reducing our reliance on volatile fossil fuels and are due to save over £600 million from the cost of electricity during this gas crisis.”
The capacity for the T-1 22/23 period will come from:
- 3,385MW from gas
- 516MW from demand side response
- 411MW from coal
- 385MW from battery storage
- 101MW from waste
- 85MW from pumped storage
- 113MW from other sources
These CMUs have secured the highest price ever seen in the Capacity Market, beating the previous record set in the T-1 auction for 2021/22 of £45/kW/year.
Prior to this, the role of the auctions had been called into question, following multiple rounds that saw exceptionally low prices. For example, the T-1 auction for 2020/21 cleared at just £1.00/kW/y, a moderate jump on the record low set in June 2019, when the T-1 auction cleared at just £0.77/kW/y. Both were significantly lower than the £6/kW/y of the T-1 auction for 2018/19, which itself is dramatically lower than the T-1 22/23 auction this week.
Despite the swing in the auction prices however, they are unlikely to stay at these highs as capacity constraints in the UK balance out.
“Higher T-1 Capacity Market prices are likely to be a short-term issue. Currently coal closure policy is biting, and nuclear plants are retiring earlier than expected, therefore new build capacity is needed to maintain the Loss of Load Expectations in the Capacity Market. Prices will clear higher right now, but it is expected they will fall again in the next couple of rounds,” said Tom Edwards, senior modeller at Cornwall Insight.
“Another factor is the hold back, the amount reserved for the T-1 in future delivery years is significantly lower so there should be less to procure, this could however be affected by delays or failure to construct capacity contracted in previous rounds as supply chain disruptions cause havoc and cost increases.”
Current± is running a webinar on the impact of the energy crisis in the UK on the Capacity Market next week (23 February 2022), speaking to EnAppSys’s director Paul Verrill about how capacity constraints have driven the high prices, whether it will protect consumers and what we can expect in the coming T-4 auction.
Register for Current± Briefings: What impact is the energy crisis having on the Capacity Market? at 3pm GMT, on 23 February 2022 here.
