The government has set the forthcoming T-1 Capacity Market auction target volume at more than 5.36GW in response to what it has described as “broader uncertainties within the power sector”, meaning all participating assets in the auction are set to gain contracts at the maximum price of £75/kW per year.
The decision, confirmed by energy secretary Kwasi Kwarteng late last week, increases the target capacity established by National Grid ESO previously by more than 600MW and, crucially, is set to just above the amount of capacity – 5.33GW – pre-qualified for the auction.
The target was initially set at 4.5GW, ahead of the system operator suggesting the uplift of 200MW given volatility in the sector.
“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,” Kwarteng’s letter to Fintan Slye, director of the UK system operator at National Grid ESO, states.
But the move has been described as “shocking” by industry analysts and is ultimately one which may result in higher costs for consumers.
The decision follows tight margins in the system across winter, with National Grid ESO issuing its first Capacity Market Notice of the year earlier this week. Broader volatility in the energy market, predominantly driven by a shortage of gas, has caused growing concerns about the cost and challenges of energy security in the UK.
“We’ve been seeing lots of these really high prices in the Balancing Market and wholesale market. That is really what is driving the decision, making sure that we have enough capacity, hopefully for the upcoming winter,” Aurora Energy Research’s senior associate for GB, Asgeir Heimisson told Current±.
The pre-qualified capacity for T-1 is made up predominantly of gas assets, with just over 3GW securing a place in the auction. More than 1GW of battery storage has also pre-qualified, almost two-third of which (65%) being of one hour duration.
While some assets are not yet complete – for example 812MW of CCGT to have pre-qualified remains under construction – the £75/kW/yr value will act as a significant incentive, Heimisson said. T-1 participants have until 1 February to notify National Grid ESO on their intent to proceed or withdraw from the auction.
“In a ‘normal’ year some will withdraw and some will stay in but effectively exit the auction early if they have not managed to get the confidence they will be ready in time,” said Paul Verrill, director of EnAppSys. “By putting in the maximum bid they exit at the start of the auction. Under the current planned auction it would appear that all participants will win and this will be at the highest price (£75/kW) or else very close to it.”
There is a risk to incomplete power stations staying in, however, as the penalties are high and there is no grace period by which you must provide the capacity.
“Given the auction closing price may be high, they may take that risk but whether all the capacity arrives is dependent on completion of currently in construction projects,” Verrill added.
In a post of LinkedIn, Marlon Dey, research lead for Britain at research firm Aurora Energy Research, called Kwarteng’s T-1 target volume of 5.361GW a “shock move”, a sentiment which Heimisson echoed.
“It is completely new, we’re never seen this before. In all previous auctions they always have a demand curve. Now it is a vertical curve,” said Heimisson.
The target volume is a significant jump on the 2.4GW target set for T-1 2021/22, and given the likelihood of it all clearing at the maximum price, a significant jump in value.
The role of the T-1 auctions had previously been called into question due to a sequence of low clearing prices. The T-1 2020/21 auction for instance cleared at just £1/kW/y, with Cornwall Insight’s head of training, Ed Reed, saying at the time that with “such a low price, it raises the question of whether running these T-1 auctions for relatively low capacity is beneficial”.
“In the wider market, the potential for this auction to close at a very high (near maximum) price increases benefits to generators but also increases costs to consumers,” added Verrill.
This comes ahead of an expected increase to the price cap of almost 50%, following the surge in wholesale power prices over the past six months.
Along with the T-1 target, Kwarteng accepted National Grid ESO’s recommendation to decrease the T-4 auction target by 500MW, an increase which accounts for small technical considerations. As such, the capacity target for the 2025/26 delivery year has been set at 42.1GW, with 1.5GW set aside for the future T-1 auction.
This is broadly in-line with expectations following the pre-qualification results for both T-4 and T-1 in November 2021.