However, with the volume lower than in previous auctions it is estimated to add an average £0.05/MWh to UK electricity bills, less than the impact of the last TA auction. With further auctions planned, other businesses will have the opportunity to take part, aiding system security while also receiving a financial benefit.
Transitional Arrangements (TA) have been created as part of the Government’s Electricity Market Reform (EMR) – the mechanism to support both investment in low carbon generation and security of supply. The TA is technically an offshoot of the Capacity Market (CM), which was designed to ensure the UK has secure electricity supplies for the future, particularly during times of system stress. While the Capacity Market focuses on incentivising the provision of generation, the TA has been specifically developed for Demand Side Response (DSR) and storage units. The first TA auction ran in January 2016, and was carried out one year ahead of the required delivery of generation, thus serving as a T-1 auction. Indeed, the ultimate aim of the TA is to provide a test-bed for the inclusion of DSR in the full Capacity Market auctions. Under current arrangements, the duration of all agreements in the TA auction is one year.
The first TA auction price was initially set at £40/kW per year and was gradually lowered during the subsequent rounds as providers submit their bids, confirming they could deliver the capacity at that price. Similar to other four-year-ahead (T-4) Capacity Market auctions, the clearing price paid by National Grid to participants is reached once it has secured the targeted volume of capacity it needs.
Previous TA auction
The first TA auction secured over 802MW of capacity, of which more than half was DSR (474MW) and Combined Heat and Power (CHP) units (263MW). National Grid had announced that the auction will cost over £22.03 million. With this cost being spread across all suppliers and their customers, the national average impact on consumer bills of this auction is an estimated £0.08/MWh.
|Capacity (MW)||Clearing Price (£/kW per year)||New Build Gen (%)||Existing Gen (%)||Unproven DSR (%)|
|Jan 2016 TA||802.710||27.50||1.59||39.26||59.14|
|March 2017 TA||312.171||45||11.85||88.15|
The second TA auction started on 22 March, aiming to secure 300MW of capacity for the upcoming winter. The first round of the second auction started at the higher level of £75/kW per year, more similar to the four-year-ahead auctions rather than the first TA auction last year, participants submitted their bids for each round until the available capacity met the target.
Jesse Norman (Minster for Energy and Industry) had announced an increase in the target tolerances to +/- 200MW. Target tolerances allow more capacity to be procured if the clearing price is low, and less capacity if the price is too high. The change was needed because there is a greater than anticipated amount of prequalifying capacity (735MW) for this auction. However, a total of 372.99MW entered the auction when it started.
Future TA auctions (2020 T-1 Auction)
The volume secured in this latest TA auction was confirmed last year, when then Energy Secretary, Amber Rudd, also announced the delivery of the early Capacity Market auction for the 2017/18 winter, which took place in January 2017. At that point, Rudd also announced the volume to be secured in the T-4 auction for delivery in 2020/21. This auction took place at the end of 2016, but it was also announced that 600MW would be sought in the T-1 auction, expected late 2019/early 2020.
Before this point though, the T-1 auctions for delivery in 2018/19 and 2019/20 are still expected, in which businesses offering DSR are expected to take part, particularly if the TAs are considered a success. In this way, security of supply will be aided by DSR, while also giving businesses an additional benefit from being able to provide demand flexibility.
What is it?
The Electricity Market Reform (EMR) will transform the infrastructure to provide longevity and security as the UK’s electricity market adapts to investment into low carbon generation technology, and moves away from demand on existing electricity infrastructures and reliance on declining domestic fossil fuel reserves.
The £110 billion EMR investment will ensure that the UK remains competitive and remains an attractive place for investment into the energy market, increases support into renewable technologies and to reduce UK dependence on international gas and oil market while maintaining a resilient and diverse energy market.