Do we have a capacity problem, or a flexibility problem, on the UK grid?
The latest capacity market auction, which contracts extra power for delivery to the UK grid for 2021-22, has this week cleared at a record low price, prompting fears it may prove redundant as a mechanism for encouraging new generation capacity and driving the transition to a low-carbon, flexible grid.
The T4 auction results, which were released today, delivered a clearing price of £8.40 per kW, well below expectations and previous auctions - last year's equivalent auction cleared at £22.50.
The low price is good news in the short term for energy billpayers, but has prompted fears the acution is now sending a strong enough price signal to developers of new, cleaner capacity. "Without adequate price signals from the T-4s we won't get much in the way of new capacity, and at the same time support coal until it is forced off the grid by legislation," Jonny Marshall, senior analyst at the Energy and Climate Change Intelligence Unit, wrote on Twitter.
Most of the UK's generation fleet bid into the auction, which represents an opportunity for plants to earn extra cash alongside their revenues from the wholesale market. Over the years, the auctions have largely served to keep existing plants running rather than encouraging new types of generation - such as new battery storage capacity or peaker gas power plants - onto the grid. This year was no different: out of more than 50GW of capacity that won an agreement, just 762MW was new-build generation, according to auction operator, the EMR Delivery Body.
Such new generation is seen by the government as vital to replace coal capacity as it is forced off the grid by government legislation through to the mid-2020s.
Although more than half of agreements went to gas-fired plants in this auction round, coal did manage to win some agreements to keep plants in operation up to at least 2021. Ratcliffe and Drax both won agreements for some of their units to keep running, providing 2.6GW of back-up capacity, although Aberthaw, Fiddlers Ferry, West Burton and Cottam all missed out.
It follows last week's T-1 auction, which contracted power for next winter, where Eggborough missed out on an agreement and promptly announced it would close later this year.
Meanwhile, significant volumes of battery storage may have pre-qualified for this week's auction, but just 153MW of capacity was contracted, with developers unwilling or unable to accept contracts at the ultra-low price on offer. In last year's auction, some 500MW of battery storage capacity was contracted at the higher £22.50 clearing price.
However, there was better news for interconnector operators. Three electricity interconnectors with France and Belgium, which participated in the auction for the first time, also won contracts this week.
The level of demand response contracted stayed largely stable to previous years, with 1.2GW of DSR awarded agreements, mainly through aggregators. A further 1GW exited the auction with no agreement.
The results have prompted calls for government to redesign the capacity market policy, to curb support for existing large thermal generators, encourage new green capacity online and support greater flexibility in the market. "Unfortunately, the capacity market is still failing to support flexible technologies like battery storage in favour of large centralised fossil fuel generation," Green Alliance's senior policy adviser on low carbon energy Chaitanya Kumar said in a statement. "It's time the government revisited the rules so the market can support the low carbon energy system we need for the future."
Jon Ferris, strategy director at blockchain energy firm Electron, said the capacity auction process is like "using a hammer to crack a nut". Against a backdrop of falling demand, focusing on acquiring a lot of new capacity is inefficient, he argued. In fact, he believes the UK does not have a capacity problem - the low auction prices testify to that - but a flexibility problem, and the capacity market is too blunt an instrument to solve those issues.
"The system is becoming increasingly complex, demand is becoming increasingly unpredictable, and generation is becoming more unpredictable," he told BusinessGreen. "And it's the fluctuations between [supply and demand] which is the big problem on the system. For that we need to incentivise flexibility - the capacity market is a simple tool that is not suited to the increasingly complex world. Inflexible plants are being rewarded just for being there, and that doesn't address the fluctuations where the rate of change between demand and generation is becoming increasingly challenging."
Last week Electron established a consortium of big name energy players, including EDF Energy, Northern Powergrid, Shell, Statkraft and Open Energi, to co-develop a flexibility trading platform for the energy market, which Ferris said will help increase the ability for flexibility technologies, like batteries and demand response schemes, to access value opportunities across the grid system.
Michael Phelan, chief executive of Endeco Technologies, which won DSR agreements from the T-4 auctions, agreed reforms were needed. "The value being so close to that of last week's T-1 indicates that the market is flooded with available capacity," he said in a statement. "The types of capacity will drive the next challenge that National Grid faces. With the proliferation of renewables, the issues now revolve around how firm the generation is and how to counter that with flexibility, rather than the amount of available power."
It's clear something is afoot with the energy market when contract prices slump from £22.50 to £8.50 over the course of just 12 months. But getting to the bottom of whether the slump is good news for consumers, bad news for batteries, a death knell for coal, or a lifeline for ageing plants, is a little more complex. Truth be told, it's likely a mixture of all of the above. The direction of travel towards a low-carbon grid is clear, but today's results will further fuel fears that rethink of the capacity market policy framework is needed to accelerate progress and really unlock the potential of emerging smart grid technologies.
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