The Capacity Market went live on 1 October. This marks the start of a 12-month transition period, and covers only about 1-2% of the system (0.4-0.8 GW this year and 54 GW expected in 2017/18), mostly small generators up to 20 MW and DSR aggregators. Under CM rules, National Grid has an obligation to notify the market when there is a higher possibility of a shortfall of generation in relation to forecast demand.

In the 5 weeks the system has been in operation there have already been 2 of these Capacity Market Notices (“CMN”s) issued by National Grid. So what are these notices, and what do they mean?

Capacity Market Notices – advising on the chance of a shortfall

National Grid must issue a CMN alert 4 hours ahead of a potential breach of the safety buffer threshold set by the UK Government – the initial level of this threshold is 500 MW.

However the CMN is only for information, it is not an instruction for capacity market participants (or others) to act. CMNs are generated automatically and are distinct from the operational warnings that the National Grid Electricity Control Room will continue to issue. The Control Room will continue to analyse the market and issue operational warnings as appropriate.

Capacity Market participants are expected to monitor CMNs and to respond appropriately. They will be assessed on how they perform if a CMN is active and where National Grid subsequently issues demand control, which would trigger their delivery obligations. These delivery obligations in the transitional period are the same as in the full market post 2018 in relation to a System Stress Event, and penalties may be applied if they are not met. According to National Grid:

“The (CM) notice serves as a reminder to capacity market participants to pay attention to any system notices or instructions that may appear from the system operator.”

Is this a sign of system tightness this winter?

The two CMNs issued so far indicated relative low potential shortfalls of 224 MW and 87 MW, which can be easily accommodated within the normal balancing mechanisms and/or the SBR, and it is likely that further such warnings occur throughout the winter as they are intended as an early signal that actions may be needed.

The first, larger, CMN on 31 October saw Ofgem bring forward the start of the Supplemental Balancing Reserve (“SBR”) by 1 day, and various plants that are outside the market were able to start up to meet demand. This included the Eggborough coal-fired power station, which received just under £2,500 / MWh to deliver power against market levels of around £50 / MWh.

In October National Grid announced that the system margin for this winter would be better than last year, at 6.6%, having procured 3.5 GW of SBR. This additional capacity should be enough for National Grid to adequately manage the system through the winter, protecting security of supply, however, prices are likely to be higher as a result. Peter Atherton, a consultant at Cornwall Energy, was quoted in the Guardian saying:

“The demand and supply tightness is real. National Grid is very confident that it’s manageable, but you are seeing it come through in prices.”

National Grid has committed about £122 million for 10 thermal plants to be on standby to provide reserve power as needed. These plants will receive a commitment fee, with further fees being paid if the plants are called upon to run. It is ironic that a consequence of decarbonisation policies is that large coal plant is being paid a premium to remain open and ready for use.

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