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Critics round on Capacity Market as record low prices render compliance ‘fatally onerous’

Image: Getty.

Image: Getty.

Record low clearing prices in the T-1 Capacity Market auction have rendered the mechanism unfit for purpose, while meeting its minimum requirements could seem “fatally onerous” for battery storage developers.

Last week the T-1 auction concluded, clearing at a record low price of just £0.77/kW. Those economics made it significantly challenging for new generators to compete, and just one new-build battery storage project - Centrica’s 49.99MW Roosecote project - was successful in obtaining a contract.

Quentin Scrimshire, head of energy storage at Kiwi Power, said the latest prices didn’t achieve the mechanism’s purpose, and instead only served to reward larger generators that would already be generating throughout the winter.

“The whole mind-set around the Capacity Market has changed from being a mechanism that would drive investment to just a handout from the government on top of your standard operational case," Scrimshire said.

It’s not the first time that questions have been asked about the Capacity Market and its ability to meet its objectives. When the T-4 clearing price dropped to £6/kW last year, triggering large quantities of new capacity to exit the auction, industry professionals labelled the mechanism “outdated” and decried de-rating factors which had left it in a “state of flux”.

While the T-1 is indeed a top-up auction - Tom Edwards, senior modeller at Cornwall Insight, said it was ultimately “neither here nor there” for generating plant - the low prices have still been disappointing for clean technologies hoping to compete against dirtier counterparts.

That the £0.77/kW price does not even take into account technology de-rating, which consultancy Everoze said would take support for one-hour duration battery storage projects to just 72p/MW per day.

While Scrimshire said that any developer with an interest in battery storage had long since discounted the Capacity Market as simply a “nice to have”, the continued decline in price will nevertheless have been an unwelcome development.

“The Capacity Market is all about rewarding the cheapest megawatt and the cheapest possible megawatt we can build is a reciprocating engine. So storage can’t really compete in the same way, especially against existing generation,” Edwards added.

Such a level of support begs the question if developers would even consider the CM worth the hassle, especially given the fact Capacity Market regulations run into 68 pages, while there are a further 244 pages of consolidated rules to comply with in return.

“Thankfully, Ofgem are making efforts to lighten the administrative burden on suppliers, as indicated in the recent Five Year Review. The recent proposal to abolish the requirement for 6-monthly reporting on construction progress by an Independent Technical Expert is a positive step,” Benjamin Lock, partner at Everoze, said.

There is also the very real prospect of CM prices rising in the future. While there may be an abundance of generation on the system at the moment, coal, CCGT plants and nuclear facilities are due to retire in the coming years.

Madeleine Greenhalgh, policy and advocacy manager at Regen and policy lead at the Electricity Storage Network, forecasted that the price could rise again when more capacity is required, but stressed that the scheme must continue to recognise the role that flexible assets can play in the meantime.

“Security of supply must evolve in tandem with the decentralisation and decarbonisation of the whole electricity system and changes may need to be made to the design of the Capacity Market to reflect that, rather than just incentivising large CCGT plants,” Greenhalgh said.

Until then, questions will continue to be asked about the Capacity Market, its role in the energy market and whether or not it is fulfilling the role it initially intended to. Lock is clear in his opinion that in its current guise the CM exists as “another example… where there’s been government intervention and misaligned incentives and the creation of a market that isn’t fit for purpose”.

“They’re showing that decarbonisation and security of supply are not mutually exclusive. Capacity Market change might be slow. Industry is not,” he added.

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