The increased clearing costs of both the one-year ahead (T-1) and four years ahead (T-4) capacity markets (CM), highlights the tight margins that the UK power grid is working with.
The T-4 auction for delivery in 2024/25 cleared at £18//kW/year, an uplift on the £15.97/kW/y price decided by the previous auction in March 2020. The top up T-1 auction for delivery in 2021/22 provided the real shock when it cleared on the first day of the auction, setting a record high for any CM auction at an unexpectedly high price of £45/kW/year.
The high T-1 price followed National Grid’s recommendation to increase the procurement target in the auction due to the non-delivery risk for a number of CM contract holders. The government subsequently approved a revised procurement target of 2.4GW, a dramatic increase on the 0.4GW accepted by them in 2020. This, combined with the early exit of the majority of the West Burton coal-power capacity units from the auction, is what caused the available capacity to drop towards the grid’s required volume so quickly.
It is of course encouraging that reliance on coal is decreasing and more renewables and battery storage are coming online. But the high price seen in the T-1 auction – and the large requirement for emergency power reserves that caused it - should act as a wake-up call for the storage and optimisation industries. As a burgeoning and increasingly essential part of the power sector, it is vital that we deliver on the promises we make. It’s concerning to see many contracts awarded to speculative bids in the T-4 auction may now go unfulfilled. The result is a lack of trust for the sector, higher bills for customers and genuine risk when it comes to supply meeting demand.
Renewables demand flexibility
As the UK moves towards net-zero, and renewable generation makes up an ever-bigger portion of our energy mix, unavoidably there will be greater peaks and troughs in supply.
This was a factor in the record number of capacity warnings issued by the grid over the winter. There is a clear and urgent need for fundamental change in the way energy is generated and distributed, and the key is encouraging access to flexibility for all generators and consumers, big and small.
The grid needs to be able to operate with more flexibility at a local level so it can cope with large fluctuations in supply and demand.
In essence, the system must be able to store energy generated through renewable sources at times of excess, ready to deploy when supply is reduced, and this needs to happen at both a local and national level. This is the only way to maintain energy security as we move towards a net-zero position.
Under the current system, renewable energy sources are frequently curtailed or stopped when generation levels outstrip real-time consumption. The result is that large amounts of potential renewable energy are being squandered, purely because the storage capacity doesn’t exist in the grid to allow the generators to run full-time. This is a vital problem to solve as part of the journey towards net-zero.
At the same time, flexibility markets could do more to incentivise small-scale energy generators, such as businesses with on-site energy generation technology by making it easier for them to participate.
This would not only create an extra degree of flexibility in the system, but it would give firms a more solid incentive to invest in low carbon technologies and play a role as we shift towards a more flexible, decentralised power network.
Commitment is needed
Establishing a more flexible energy network, accessible to all, is just the starting point for the large-scale changes that need to be made, and time is running out. A more flexible grid will allow operators to manage fluctuations at both national and local level more sustainably and at least cost to the consumer. It is encouraging that the government’s recently published energy white paper accepts this reality and includes flexibility as a key enabler for the future of the energy grid. However, now is the time to make firm commitments on when real change will happen.
The action that needs to be taken is clear, and that’s why we’re calling on the government commit to a clear timetable for change when it comes to implementing fully functioning local flexibility markets and opening up all flexibility markets to all participants, irrespective of size.