Last week the Government authorised the procurement volumes for the Capacity Market auctions to be held in February. While Kwasi Kwarteng accepted National Grid ESO’s recommendation for the T-4 auction to be held on 22 February, he decided to authorise a T-1 volume 650 MW higher than NG ESO’s recommended 4.7 GW, giving a procurement target of 5.361 GW for the 15 February auction. The reason given for this increase was “the broader uncertainties within the power sector.” Marlon Dey, research lead at Aurora Energy Research, described this T-1 target volume as a “shock move”.
.5.361 GW is the total amount of prequalified and conditionally prequalified capacity for the auction, of which around 3 GW represents existing assets, meaning the auction for delivery next winter will rely heavily on new-build assets. This also means that the auction price will almost certainly clear at the maximum level of £75 /kW per year.
“It defeats the purpose of having an auction. It’s a massive and expensive safety net,” – Andreas Gandolfo, analyst at Bloomberg NEF
This move means that this year’s T-1 auction will be very expensive, and part of a sharply rising trend: in 2020, 1 GW was procured in the T-1 auction at £1 /kW/y, in 2021, just under 2.3 GW was procured at £45 /kW/y, and this year we are likely to see 5.361 GW being procured at or close to £75 /kW/y. This will raise the cost of the auction to £402 million, roughly four times the cost of last year’s auction and four hundred times 2020’s T-1 auction, and is more bad news for consumers, who pay the capacity auction costs through their bills.
Most of the pre-qualified assets are gas (53%, of which a third is new-build). The second largest category is new-build battery storage at 15% of the total. Participants have until 1 February to confirm their intention to proceed with the auction…normally, some assets would be withdrawn, but given the likely high price of the auction, there will be a strong incentive for all pre-qualified assets to go ahead, even those not yet completed, although given the high default penalties, there may be some that feel the construction risk is too high.
This follows the first Capacity Market Notice of the year last Monday, and a string of high prices in the Balancing Mechanism – Drax units 5 and 6 (coal) fired up for the first time since November in the BM at £4,050 /MWh and £4,000 /MWh respectively. West Burton 1 and 2 were also accepted at £3,000/MWh and £4,000/MWh, as low wind hit prices. CMNs are triggered when the surplus above the forecast demand and operating margin four hours ahead falls below 500 MW.
So far, this winter has been relatively mild, which has seen gas prices, and consequently power prices retreat from the highs of late December. But there is still scope for cold weather to cause havoc, and the market continues to be vulnerable to low wind conditions. Clearly the Government has concerns over next winter as well.
The T-1 capacity auction for Winter 2022/23 closed on 15 February with 4,996 MW being procured at a record price of £75 /kW /year, which was the reserve price. 365 MW of capacity that had pre-qualified withdrew, meaning there was a shortfall of this amount against the target set by BEIS.
A quarter of the capacity was awarded to new-build generation, meaning there is significant delivery risk, although it is to be hoped that the high cost of delivery failures would have deterred developers from remaining in the auction if delivery was in doubt.