Details of next Capacity Market auction confirmed by BEIS

The Department of Business, Energy and Industrial Strategy (“BEIS”) has confirmed the parameters for both the next T-4 Capacity Market (“CM”) auction for delivery in 2021-22 and the T-1 CM auction for delivery in 2018-19.

How much capacity will be auctioned?

In a letter to the director of the UK System Operator at National Grid last Wednesday 5 July, the Business Secretary, Greg Clark confirmed that his department would be seeking a total target volume of 50.1 GW in the T-4 auction which will be held on 6 February 2018. This figure was less than the 50.5 GW which had been recommended by National Grid in its role as the Delivery Body in its Electricity Capacity Report (“ECR”), after the Panel of Technical Experts (“PTE”) consulted by BEIS for this purpose overrode the ECR analysis.

The letter also established a 6 GW target for procurement in the T-1 auction, which again represented a 300 MW reduction on the 6.3 GW recommendation by the ECR. The full auction parameters are listed in the table below:

Table 1 – Auction parameters1

There will not be a Transitional Auction, which have previously been aimed at securing demand-side response (“DSR)”.

PTE report

In its report on the ECR, the PTE stated that its departure from the recommendations by the Delivery Body owed to its “less conservative view” on the amount of capacity susceptible to non-delivery and the influence of DSR on peak prices. The panel claims that, since DSR will be enhanced over time by increased ‘smart response’ capability and higher cash-out prices in the balancing mechanism, it can therefore be taken off the underlying demand projections or treated as a form of non-CM capacity that can be subtracted from the target capacity. The panel recommended that, should the government wish to keep with the ECR recommendation of 50.5 GW of capacity, it should consider deferring more of that capacity until the later later T-1 auction in 2020, by which point “key uncertainties around demand and non-delivery should be much clarified”.

When will the auctions take place?

Last week also saw the publication of the auction guidelines for the relevant CM auctions by the Delivery Body, following the CM Operational Plan released in June. These documents also set out the schedule for the next auctions, which include the pre-qualification windows for both auctions which are set to open later this month:

Table 2 – Auction timetable2

The above timetable provides participants with a longer prequalification window for the T-4 auction than has been the case in the past. As a result, the T-4 auction is being held in February 2018 rather than December 2017, as would have been reflective of previous auctions. The change to the timing of the T-4 auction comes as a result of stakeholder feedback, with participants requesting more time for prequalification to formulate their strategies and engage with the Delivery Body. While this may alleviate pressure on participants at the beginning of the procurement process, however, the auction being two months later increases pressure on new-build large power stations to complete financing and finalise projects in time for delivery on 1 October 2020.

De-rating factors for storage

The ECR contained a list of the key development projects that will be taken forward this year, having been recommended by the PTE. This includes, for example, developing a process to improve both demand forecasting and CM de-rating factors for distribution connected generation technologies with the use of distribution generator and DSR data. However, a development project that will be deferred until summer 2017 (i.e. likely after the prequalification windows for both auctions have already opened) relates to the calculation of more “appropriate” de-rating factors for limited duration storage facilities, an issue raised by respondents to Ofgem’s consultation on CM rule changes.

The ECR states that “clearly with the estimated mean length of a “loss of load” event being around 2 hours, assuming a 30 minute battery can delivery for 2 hours is not appropriate”. This raises the prospect of the current 96% de-rating factor for shorter duration (often battery) storage is likely to be reduced to reflect the relevant duration of the storage facility in question.

How to apply for prequalification

The interactive guidance on prequalification published last week contains the full process under which companies can apply to participate in either auction. This includes stricter rules around the provision of information, since participants now have to provide all relevant information at the time of the prequalification submission rather than being able to submit new information in an appeal regarding the Deliver Body’s assessment decision.

1 Source: BEIS, Capacity Market Auction Guidelines.

2 Source: BEIS, Capacity Market Auction Guidelines.