Posted on: 22/02/2018
8.3GW of gas peaking plants have been successful in the Capacity Market T-4 auctions over the last four years, but with the clearing price hitting a record low, gas peaker developers are revisiting their business models. Angus Widdowson looks at the revenue sources for gas peakers to maximise the value of their assets.
Traditional generation plants are being replaced by renewable generation sources as we strive towards a cleaner energy system, but with less baseload supply and increasing intermittent renewable technologies, there is a growing need for more flexibility to meet peak demand.
We’ve seen increasing investment in gas peakers as a source of flexibility to provide new capacity. In the latest Capacity Market T-4 auction 1.8GW of gas plants were awarded contracts (1.4GW existing projects and 400MW new build), with an additional 2GW of behind the meter gas engines as part of the successful DSR contracts won.
With the Capacity Market T-4 auction price clearing at a record low of £8.40/kW/year - far from the expected threshold of circa £25 to finance projects, and Triad benefits being significantly cut, the business model has changed. We’re seeing much more emphasis on energy, balancing and ancillary markets to provide more lucrative and attractive revenue streams.
There could be real and increasing value in the day-ahead and within day markets as the grid gets smarter and market prices become more volatile. Last winter saw extreme price volatility caused by long French nuclear outages and UK power shortages boosting prices.
Prices have settled this winter but we expect to see more volatility in the future as the system loses more baseload coal and more renewables come on stream. Supply margins will inevitably tighten and in the coming years we should see spot market prices become even more volatile.
With advanced trading expertise, gas peakers can secure additional value in the Balancing Mechanism (BM). Cash out prices are extremely volatile but also very unpredictable, the BM provides more revenue certainty as the grid accepts bids or offers after gate closure enabling responsive gas peakers to take advantage of higher intraday prices.
Due to increasing imbalance on the grid from the growth in renewables, there’s value for responsive generation in STOR (Short Term Operating Reserve) contracts. Average STOR prices have steadily increased in the latest tender rounds over the last three years providing a secure source of revenue.
Gas peakers are unable to commit to STOR and actively participate in the wholesale and balancing market at the same time but with an optimisation plan to manage the asset around STOR availability windows, they can still capture revenue from the energy markets. STOR contracts can also be combined with other ancillary services such as the Capacity Market.
With the ability to respond rapidly to market signals, there are opportunities with gas peakers in ancillary markets. Although batteries have dominated the Frequency Response markets, the Capacity Market has provided a primary revenue source for peaking generation.
As the system continues to change, new and emerging grid services will present future opportunities for flexible generation.
Optimisation will create maximum value
These revenues are quite challenging to stack, but with strategic asset optimisation and risk management, gas peakers can operate in multiple markets and commit to various ancillary services.
SmartestEnergy offer an aggregation and optimisation service, providing support in developing and implementing an optimisation plan across balancing and energy markets to help our customers maximise the total value of their assets.