Capacity Market, functioning or not functioning?

The Capacity Market is meant to act as the gateway for green generation in the UK. However, recent auctions are now calling that into question. National Grid’s T-4 auction for the 2021/22 winter period cleared at record low prices of £8.40kW/h – a price drop of almost 63% from the £22.50 achieved in a similar auction last year.

Whilst many have hailed this as a victory for UK bill payers, providing security of supply at the lowest cost, others are concerned that the low prices mean that innovative and emerging clean technologies are priced out of the auction in favour of new gas, or worse coal.

Combined cycle gas turbines (CCGTs) picked up the largest share of the auction securing 23GW of capacity, which equates to roughly 46% of that procured. Following this, nuclear picked up 6GW worth of capacity. However, battery storage projects only picked up 3.3GW worth of capacity.

An Institute for Energy Economics and Financial Analysis report last year suggested that one way of ensuring the Capacity Market supported new technologies would be by omitting support for existing gas, coal and nuclear from the scheme, and therefore encouraging investment in newer, greener technologies in the knowledge that there is more chance for developers to secure a contract in the market.

There are also questions over the type of capacity being procured in these auctions. The Capacity Market has been highly successful in getting new gas built that is able to respond for long periods of time, but as the UK moves towards a more flexible market, increasingly the need is for short term responses but that can be delivered at speed – something that battery storage, for example is very good at. This kind of response can be procured from co-located renewable projects for example, rather than natural gas.

The market is looking now more at flexibility rather than capacity. This is the key moving forward, and markets like the CM should be looking to procure a mix of traditional and innovative capacity, able to respond at different speeds for different periods of time. Is the Capacity Market currently doing that? Based on the auction result here, probably not.