The energy crisis in the UK is contributing to record clearing prices in the Capacity Market (CM), with the mechanism’s design in turn exacerbating tight capacity margins, EnAppSys director Paul Verrill has said.
Speaking during the latest Current± Briefings webinar, titled ‘What impact is the energy crisis having on the Capacity Market?’, Verrill explained the factors linking the two together and the driving factors behind the energy crisis.
The predominant factors were cited as extreme gas price fluctuations and very high carbon costs, the former triggered by low gas storage levels, geopolitical tensions and the carbon markets.
Indeed, carbon costs have risen as GB’s carbon mechanism – which it developed after leaving the European Union – is more expensive than the EU equivalent, further contributing to the crisis.
“We want to drive decarbonisation by increasing the cost of emissions, that drives the cost of carbon, but if the majority of your generation still comes from fossil fuel sources, that’s going to increase your power price as well,” he said.
Additionally, in Britain – alongside some other countries – the aging nuclear thermal generation fleet has also been a factor.
“We’ve seen very poor availability from nuclear and certain large power stations in GB, so the capacity we thought we booked in the CM hasn’t actually been there,” Verrill said.
This has also been met by poor interconnector availability, with "major" outages previously on the Britned interconnector, while the IFA1 interconnector with France is expected to be partially offline until October 2023 as a result of a fire at a convertor station in Sellindge in 2021.
Alongside this, missing money in the CM as well as early asset closures has “exacerbated the capacity crunch”.
"The energy crisis has driven the T-1 auction closing price, so a max of £75/kW, and it’s driven the T-4 price to the highest ever," Verrill said in reference to the recently announced T-1 and T-4 auction results.
The T-4 CM auction for 2025/26 cleared at £30.59/kW/year, while all the capacity in the T-1 auction for 2022/23 cleared in the first round at its highest ever price. The T-4 auction saw 3GW (1GW de-rated) of new build batteries clear, including Intergen’s 320MW Gateway battery, which Verrill described as "probably the standout star of this auction".
When the question of how the energy crisis has impacted on the CM was raised, Verrill said: “It increases the auction closing price due to reduced market participants, and this capacity crunch means there’s less people in a position to win a CM contract, but also the concern of the energy crisis means the government wants to buy more capacity. So if you put those two together it’s a supply/demand balance. Supply reduces and demand increases, the price rises.”
“Has the CM design contributed to the crisis? I think you could argue it perhaps has,” Verrill added.
“Some of the increased prices we’ve seen are due to aspects of design having increased the capacity crunch and led to more scarcity premiums in the market, particularly interconnectors, and if they’re not on then you have a problem.”
He explained that the aging plant derating factors in the CM are based on ~5 years prior, meaning that by the time it’s the year they were contracted for, the classification of how secure they are is based on where they were 5 years ago and not where they are now.
Additionally, low CM prices in previous auctions have led to assets leaving. The T-1 auction for 2020/21 cleared at just £1.00/kW/y, while a record low was set in June 2019, when the T-1 auction cleared at just £0.77/kW/y.
Meanwhile, the T-4 auction for 2021/22 procured at a clearing price of just £8.40/kW per year.
"This period gives the lowest CM prices we’ve seen in the past and then some assets can’t survive with those and they’ve left the market and now we’ve kind of run out of capacity a little bit," he said.
He did, however, reference reforms to the CM, including a consultation on de-rating factors, stating that previously a "very broad brush" has been used on de-rating factors.
"We've got transition work going at a pace, and the government can't dictate that. The private sector has to build these things.
"So you've got the energy transition happening at one pace, and then you've got the transition from the old world, and every now and again they get out of step."
"I think we'll have these peaks and troughs for a while until everything becomes balanced," he added.
The full video of the Current± Briefings webinar can be viewed below