Uncertainty in the Capacity Market

20 Sep 2019
Capacity market uncertainty

The Capacity Market is still in its suspended state after the landmark ruling in November 2018 by the European Court of Justice following the legal challenge by Tempus Energy. The European Court of Justice ruled that the European Commission had incorrectly granted the Capacity Market state aid approval. Earlier this month, Tempus lodged evidence with the European Commission to substantiate its claim that the Capacity Market unfairly discriminates against clean energy projects.

Tempus escalated its case to the High Court in March 2019 after BEIS made a series of decisions which they say amounted to an unlawful attempt to keep the mechanism in place. Tempus’ High Court hearing starts in November.

The UK Government hopes to reinstate the market late 2019 / early 2020. In the hope that the market is reinstated quickly, BEIS has instructed the EMR Delivery Body, National Grid Electricity System Operator (NGESO) that their preference is to keep running the scheme. Of course, BEIS has previously stated that any agreements awarded “will be conditional on the outcome of the (European) Commission’s formal investigation”.

In June, the T-1 “top up” auction was concluded for delivery year 2019/2020. The shock news was the clearing price of 77p/kW, compared to previous years where the clearing prices were £6/kW for the T-1 2017, £8.4/kW (T-4 2017), £22.5kW (T-4 2016) and so on.

A total of 129 Capacity Market Units (CMUs) secured a total of 3.6GW of capacity. 65 existing CMUs secured agreements for 1.76GW, with 32 new build CMU’s securing 640MW. The remaining 1.23GW went to Interconnectors and DSR technologies. The technology coming out on top was reciprocating gas engines securing a total of 552MW of capacity (19 existing, 26 new build). There was a somewhat disappointing outcome for storage, securing only 22MW of capacity over 6 projects.

 

Figure 1: Provisional auction results T – 1 2018, Delivery year 2019-20, using data from EMR delivery body

The downward trend for clearing prices only adds to what’s already been an uncertain year for the Capacity Market.

A number of industry participants, notably amongst renewable and energy storage developers, are questioning if the Capacity Market is fit for purpose and if it is delivering on its stated objective. Their principal criticism appears to be that there is insufficient value in the Capacity Market to justify the construction of new plant, supposedly required to avoid capacity shortfalls and instead acts as a financial boost for established conventional plant extending the lifespan of these generators. They assert that this is not beneficial for the GB system.

Will the Capacity Market continue, what form will it continue in and what future clearing prices can we expect? Combined with uncertainties over Ofgem’s current Targeted Charging Review there is good reason for investors to be cautious at present.

A T – 3 auction is planned for early next year (2022/23 delivery), which intends to allow renewables to bid for contracts. This is, of course, subject to the outcome of the ongoing judicial review, the effect of the ongoing political turmoil surrounding Britain’s legal relationship with the EU and the successful reinstatement of the market. Renewable technology would be allowed to bid on an ‘equivalent firm capacity’ basis provided they do not participate in any of the incentive schemes; FiTs, ROCs, CfDs or similar.

As the industry moves towards subsidy-free renewables, the role of the Capacity Market as a viable revenue stream for these technologies remains an open question.