Can you control your Capacity Market charges?

Can you control your Capacity Market charges?

The UK’s latest one-year ahead Capacity Market auction cleared at £6.00 per kilowatt per year. This is the lowest price an auction has cleared at, and it’s going to encourage 642MW of new-build generation. How will this affect your energy costs?

The majority of awarded contracts, however, went to existing gas plants. This is in addition to the capacity secured in the first T-4 auction held in 2014, which obtained 49GW. The capacity secured through this auction is expected to add on £0.12/MWh on an annual average to consumer bills. Collectively, the impact of the T-1 and T-4 auctions is forecast to contribute £3.80/MWh to the final annual electricity bill. For those consumers seeing the Capacity Market cost reflected on just their winter peak usage, the bill impact would be closer to £95/MWh on the volume used in that winter peak.

Capacity Market auction encouraging flexibility

Over 54% of projects which bid into the auction won a contract. This was after 10.6GW of generation looked to secure a deal at the start of the auction. You can see the breakdown in the table below.

Capacity Market auction

The first T-1 ‘early’ Capacity auction took place last January after National Grid identified the need for additional supply in winter 2017/18 with over 54GW of capacity being secured. However, about 96% of awarded capacity was from existing power stations or Interconnectors, with just 3% of units classed as new-build generating. Gas plants were awarded nearly 40% of contracts, while coal and biomass plant were awarded 20%. We wrote more about this auction last year in our blog.

Changes to batteries

The ability for battery storage to take part in the upcoming auctions has also been impacted by recent changes in its assumed availability. National Grid introduced modifications to battery de-rating prior to the commencement of the auction. De-rating is the process by which capacity is downgraded to reflect realistic actual output, taking into account maintenance and operational capabilities. Previously, batteries were de-rated by 96% – this means only 96% of its total capacity could enter the auction. However, now if only 30 minutes of maximum output can be provided, the de-rating could be less than 20%. The battery would have to provide consistent output for over 3.5 hours to secure the same level of de-rating as in earlier auctions. 176MW of battery storage which had prequalified had exited the auction before it had started due to this change in rules. Nevertheless, storage is still going to play part in supply security with over 2.6GW securing a contract in the T-4 auction delivering this upcoming winter.

A new T-4 in February

Capacity Market auctions are designed to provide longer-term subsidy contracts. New build plant can qualify for 15-year contracts, while up to three-year agreements are awarded to plant seeking a refurbishment. These T-4 auctions are carried out four years ahead of the required delivery of generation. Three such auctions have already occurred, securing available generation capacity for 2018/19 to 2020/21. The upcoming T-4, taking place in February, is looking to secure 49.5GW of capacity from winter 2021/22.

What does it mean for you?

The cost of these subsidy payments to generators are ultimately passed on to consumers. This year is the first year to see any significant cost for the Capacity Market reflected in consumer bills. You can find out about the many ways suppliers can pass on these charges to you in our FAQ. It’s worth noting that costs will vary depending on your peak demand levels during the winter months.

How can you cut your Capacity Market costs?

The basis of the Capacity Market cost is winter peak demand. If your consumption can be cut during this period, then your overall costs will be less. This can be achieved either by simply cutting overall demand, or by shifting energy usage to different times of the day or year, similar to Triad avoidance.

Utilitywise can help – free webinar

We can help you control and reduce your Capacity Market charges and other non-commodity costs (NCCs, that are paid in addition to the wholesale price of energy. Such charges have risen significantly in recent years and are increasing still. Within the next three years, NCCs will account for the largest portion of your bill at 66%.

We hosted a webinar (Feb 2018) to explain how you can cut and control your NCCs. To listen, you can download the recording here.

Ross Moffat

Posted by on Tuesday, the 6. February at 11.16

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.