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T-1 Capacity Market auction clears at record £45/kW/year given tighter generation

This year's T-1 auction included battery assets such as Pivot Power's Kemsley (pictured). Image: Pivot Power.

This year's T-1 auction included battery assets such as Pivot Power's Kemsley (pictured). Image: Pivot Power.

The T-1 Capacity Market (CM) auction has cleared at a record high price of £45/kW/year on day one.

National Grid ESO released the results of the auction yesterday (2 March), after a total De-Rated Capacity of 2252.116MW was procured by 13:45.

This is just shy of the target of 2.4GW set by the Department for Business, Energy and Industrial Strategy in February, a steep rise from the initial target of 0.4GW announced the July prior, in an effort to manage a “range of non-delivery uncertainties”.

Tim Dixon, wholesale team lead at Cornwall Insight, said this uplift in target was driven by two Combined Cycle Gas Turbine (CCGT) power stations – the Severn Power and Sutton Bridge stations – going “dormant” following its owner Calon Energy going into administration in summer 2020, as well as several prolonged outages at nuclear plants.

“With a tighter auction, our forecast noted a high clearing price would happen should certain plants, particularly coal, be able to exit the auction early,” he continued. “The provisional results showed this to be true, with EDF’s West Burton A coal units failing to secure agreements, with the company saying it will now consider all options for the station.”

Batteries and renewables continue to step up

The capacity for 2021-22 is made up of 156 units, from 53 companies and 48 parent companies.

The battery storage companies to successfully have their assets cleared include Limejump, Pivot Power (the Cowley and Kemsley sites), Minety Battery Storage, Power Up Generation, GRIDSERVE, Harmony, ESB, Eelpower, Thrive Renewables, Amber Energy, Bagnall Energy and Anesco. It is a significant jump from the last auction, where only two battery assets managed to clear.

“We believe over the next few years that CM prices will stay high in general for short term procurement,” said Aaron Lally, managing partner of Vest Energy. “There will be a large amount of value that will be locked in at lower levels or missed for battery storage.

“For a long time with revenues so low (alongside de-rating factors), value add from traders has been limited but obviously this is changing. If you have an adjustable risk appetite and are able to benefit from price spreads in the CM going forward then your trader should be advising/executing on this (in the same way as any other revenue stream).”

Both wind and solar assets cleared, including the Crossdykes wind farm, Douglas West Wind Farm and two ScottishPower wind farms. Warrington Renewables and Energy Store both had solar assets clear. Additionally, 29 units of demand side response also secured contracts.

This was welcomed by a number of participants including Limejump, which told Current± it was “delighted that 0.5GW of renewable and DSR contracts secured contracts in yesterday’s CM auction including the 46MW onshore windfarm at Crossdykes in south west Scotland (which, last autumn, was the first subsidy-free windfarm to enter the Balancing Mechanism) and the 100MW Minety battery unit in Wiltshire, which Limejump will soon be optimising".

“At these levels, the market is definitely providing a signal for flexibility and, with our support, customers will certainly have more confidence for any future investment. We can expect to see more interest in the T-1 auction next year, even at low volumes,” the statement concluded.

Notably, only one coal unit cleared in this year’s auction, with Uniper’s existing 435.179MW CMU agreement standing, while four EDF coal units at West Burton A exited. Given the sheer capacity of the large scale EDF assets, they had a significant weight on the prices in the CM.

“The markets’ expectation was that EDF’s West Burton coal plant would win a contract and remain online, and so the plant's exit at or above the £45/kW clearing level has led to a much higher clearing price than auctions past,” explained Adam Lewis, partner at Hartree.

“This high exit price could have been in response to the forward markets’ negative clean dark spreads or a reluctance by EDF to add to their CM obligations in light of their increasingly unreliable nuclear generation fleet.”

More high prices to come?

The CM is designed to secure electricity capacity for the coming year at the least cost for customers. Yesterday’s T-1 auction was the sixth round, and follows consistently low clearly prices in recent years, with 1024.409MW of capacity for the 2020/21 period from 33 CM units clearing at just £1.00/kW/y in February 2020. The June previously set the record-low with that auction clearing at just £0.77/kW. The T-1 auction for 2018/19 was higher, at £6/kW/y, although still significantly less than seen in this round.

These record low prices in recent years has called the efficacy of the CM into question for some, but speaking to Current± EnAppSys’s director Paul Verrill said that overall the auction system is doing what National Grid would expect and securing capacity, and that “when the assets exist anyway, it'll take any price".

“But for me, the capacity mechanism has been very underpriced for quite a period and the type of impairments that have been made don't reflect that kind of commitment to stay running.”

Overall, while quite how high the T-1 CM auction cleared at has been a surprise seemingly driven by EDF’s exit, the tightness in the system driven by Calon’s market exit and nuclear outages meant the energy sector was expecting it to come through higher than previous years.

According to Alan Smallwood, optimisation director at Anesco, the T-1 auction was “always going to be volatile,” and pointed to how “we have seen less requirement for additional capacity than was expected and an excess of supply, resulting in low clearing prices” in previous auctions.

“Given that the T-4 auction for delivery in 2021/22 secured over 50GW of capacity at £8.40/kW, this top-up means that we have hit the procurement target at an average price of under £10/kW, despite the unexpected loss of 2GW of capacity,” Smallwood continued. “It’s actually a great example of the Capacity Market delivering secure capacity at a very reasonable price under difficult circumstances.”

Following on from the T-1 auction, the T-4 auction will be held next week, contracting for four years of capacity. Verrill noted that predicting the outcome of the CM auctions can be challenging, but that he “expects it to close and higher than it was last year".

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