Capacity Market T-1 Auction Woes
28 Jun 2019

Following the infamous cessation of the Capacity Market November 2018, the postponed T-1 auction for delivery in 2019/20 took place over 11th-12th June 2019. The preliminary results have now been published by National Grid.

The auction cleared at the all-time low clearing price of 0.77 £/kW/yr, securing 3.6 GW of capacity. Many in the market are saying the main reason for this low clearing price is the oversupply of capacity. 9.4 GW of de-rated capacity bid into the auction, which meant that less than 40% of entrants were awarded an agreement.

The capacity market was designed to provide incentive for existing capacity to remain on the grid, or for new-build capacity to be built in order to maintain security of supply during times of severe demand. However, at prices of 0.77 £/kW/yr this is clearly an extremely weak investment signal. Technologies that lean on the Capacity Market to provide a route to market and revenue certainty would have struggled in the auction. This is reflected in only one new-build storage asset winning a contract and 14 storage CMUs exiting the auction. Evidently, with a clearing price so low, only those generators that were already planning to generate using the Capacity Market to revenue stack, could compete.

Looking forward is interesting for the Capacity Market. Firstly, all current contracts and those awarded in the T-1 auction are subject to the full reinstatement of the scheme. Secondly, generators looking for longer term revenue surety would be looking at the T-3/T-4 auctions over the T-1. Where thermal generation has a greater stake and with capacity coming off the grid leading to new-build generators keeping clearing prices high, will we see prices recover in these auctions?

Capacity de-rating rules are also changing and BEIS intend to allow intermittent renewables to compete in auctions alongside more traditional Capacity Market Units. Will this increase competition, lowering clearing prices further? Or will heavy de-rating factors published earlier by National Grid and already low clearing prices make the capacity market unattractive to renewable generators? Existing and new-build renewable generators may look to join Capacity Market auctions to revenue stack, but new-build renewables would still look to use the CfD scheme as their primary ‘subsidised’ route to market to provide the surety needed to achieve financing. Aside from this, perhaps the previous two T-1 actions clearing at such low prices will spur generators and DSR providers to change auction tactics and exit the T-1 auction at levels they would truly be happy to receive rather than taking the approach that any contract is a good contract?

No matter the generator, unless prices recover to more lucrative levels, any Capacity Market revenues are likely to be insignificant compared to possible higher revenues in the wholesale markets and more assured revenues from PPAs and other government schemes.
For any further information or comments on this piece, please get in touch with Sam on our Solutions Team on 020 787 04959.

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