The voice of the energy industry

Working to Capacity

It’s hard – and arguably a bit obtuse – to write about the energy market without reference to the current situation in Ukraine. As is becoming all too evident, such action can have grave consequences, and, obviously, the population of Ukraine, facing an unfolding humanitarian crisis, rightly dominate our concerns at present.

But among the other consequences is what this might mean for security of supply across Europe over the next few months. Security of supply is arguably one of those industry phrases that doesn’t resonate much with the wider world. While it’s often more colloquially known as ‘keeping the lights on’, it’s certainly been squarely in the spotlight in recent months, even before the existing tensions intensified to actual conflict. The existing gas crisis, while more focused on high prices than scarcity, had, understandably, already raised questions about whether we will have sufficient supplies over coming winters.

So, under the circumstances, it was not surprising to see record clearing prices at both auctions for the Capacity Market in recent weeks. The CM has been the main tool for keeping the GB lights on over the past decade, and held its T-1 and T-4 auctions in the latter part of February. The T-1 auction cleared at the maximum price of £75/kW/Yr – smashing the previous high mark of £45. Not only is the clearing price arguably a good barometer for the level of concern about security of supply, but a high price was more or less guaranteed after Secretary of State for BEIS, Kwasi Kwarteng, announced in January that the target capacity for this year’s T-1 auction would be increased from 4.7GW to 5.36GW to account for the current ‘broader uncertainties within the power sector’. With the target capacity higher than the actual pre-qualified capacity of the T-1, there was no scope for bids to be driven down by the auction process.

In total, 4996.224MW of de-rated capacity across 226 pre-qualified Capacity Market Units – or CMUs for short - secured tenders for the delivery year 2022/23. The lion’s share of the deliverable capacity for this period will come from gas, but we also see contributions from demand-side response, coal, battery, waste, and pumped storage.
Similarly, the more recent T-4 auction cleared at an all-time high of £30.59/kW/Yr, with 42,364.314MW of capacity procured across 574 CMUs for the delivery year 2025/26.  The previous highest clearing price for a T-4 auction occurred a few years back in 2016 – where contracts were awarded at a price of £22.50/kW/Yr. The higher-than-expected clearing price (around £22/kW/Yr was predicted for this year’s T-4) was seemingly driven by coal closing, higher capacity needs and changing pressures for thermal generation and nuclear opting out. For example, only two nuclear units (Sizewell B1 and B2) won contracts this year - both on the younger end of the UK’s current nuclear fleet. As we would expect, out of the total 42GW of procured capacity a large proportion of contracts (27.6GW) went to gas-fired plants - with hydro, energy-from-waste, diesel engines and onshore wind also expected to deliver capacity for the year 2025/26.  However, a record amount of battery storage cleared at over 1GW and made up a significant proportion of the new build capacity which had entered into last week’s T-4!

Ensuring security of supply is so important that a belt and braces approach is only to be expected, but it’s worth remembering that these record prices will be funded by customers already feeling the strain from higher bills. And while the actual impact on domestic bills is relatively small, it’s yet another reminder of how the current situation is forcing costs up across the sector.

The Capacity Market has done what it says on the tin for several years now, but, especially in light of this year’s records, it’s almost strange to recall that not that long ago clearing prices had reached such a low level - especially for the T-1 (£1.00/kW/yr for 2020/21 T-1 auction and £0.77/Kw/yr for T-1 auction in 2019) - that some commentators were starting to debate what should be the role of the mechanism in the future, with the constantly evolving generation mix. That’s why the upcoming 10-year CM review BEIS is about to launch will be a very important exercise. And indeed, we very much look forward to collaborating with Government and industry over the coming months.

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