Capacity markets are a hot topic these days. In the United Kingdom, the government has gone ahead and taken action. Electricity generators who have been successful in Capacity Market Auctions in the UK are now remunerated for keeping generation capacity available, regardless of how much energy they deliver.
Reforming the UK’s electricity markets has not only been good for power producers in the UK, it has also benefited consumers. According to Raoul Thulin from the Commercial Optimisation Team at RWE Supply & Trading UK, “The capacity market has had a very positive effect on our company, as it creates a degree of certainty about future income. In turn, this certainty allows us to increase security of supply for consumers in the UK energy market.”
Previously, similar to the situation in Germany, the UK had an ‘energy-only market’, meaning that only actual deliveries were traded and remunerated. In this market, wholesale prices and dispatch hours for conventional power stations declined, due to the rise of more renewable generation. While wind and solar generation can supply electricity, they cannot always do so when the electricity is actually needed. As a result, the expansion of renewables reduced the capacity utilisation of conventional power plants, but did not lower demand for secured capacity from these stations.
At the same time, the costs of complying with environmental standards increased. This in turn prompted many operators to decommission older power stations,
However, from now on we also have to monitor our delivery obligations for the capacity market and ensure that we are optimally prepared Raoul Thulin, Head of UK Markets, RWE Supply & Trading UK
As a study published by the Berlin-based think tank Agora Energiewende noted, “The case for capacity support in Great Britain reflects concerns over declining plant margins and associated risks to security of supply”. At the end of 2013, the UK government decided to introduce a capacity market, in light of the looming threat of capacity shortages from 2018.
The first auction took place in 2014. In the auctions, power producers bid on contracts by determining a price at which they are willing to commit to keeping their power stations available in case of supply shortfalls. According to Raoul Thulin, in terms of day-to-day operations not much has changed for him and his colleagues. Optimising assets on the forward markets and providing services for the UK’s transmission system operator National Grid are still the most important tasks. “However, from now on we also have to monitor our delivery obligations for the capacity market and ensure that we are optimally prepared.”
A shortage occurs when demand for electricity is higher than possible generation. This leads to the risk of supply shortages or outages. National Grid has to warn power plant operators who have Capacity Market agreements four hours before a possible shortfall. In such cases, all stations with capacity market contracts are obligated to make their capacity available. Otherwise, a fine can be imposed, which is calculated for each megawatt hour which is not delivered.
To verify whether all market participants can fulfil their obligations in the capacity market, plant operators must prove the availability of their power stations at least three times during the winter months.
Nowadays, auctions are held at least once a year, with the last one occurring in February. The current British ‘T-4’ capacity auction for capacity with a lead-in time of four years ended with a price of GBP 8.40 per kilowatt and year. Contracts were concluded for 50,410.119 MW for delivery in 2021/2022.
“This year’s T-4 auction was marked by strong competition. The clearing price was lower than our expectations, as well as the market’s expectations,” said Raoul Thulin.
Even though this price did not fully meet power generators’ expectations, the UK’s capacity market fulfils its purpose. At least RWE has invested in developing its power stations and is planning further investments with a view to improving security of supply for British customers.
Photo credits: lakov Kalinin, shutterstock.com