A future with or without the Capacity Market

Head of Markets, Boz Bozhkov from our Asset Optimisation team recaps on the recent developments around the Capacity Market suspension and the potential impacts on revenue for flexible assets.

The sudden announcement on the 15th November that the Capacity Market will be suspended has created much uncertainty across the industry.

The General Court of the European Union removed state aid approval, concluding that the Commission failed to carry out a full investigation of the UK Capacity Market and failed to properly assess the role of Demand Side Response (DSR). The UK government has therefore had to stop Capacity Market payments and auctions until the scheme is either re-approved or rejected.

Latest developments

As we await the outcome of the EU’s formal investigation, we’re in a standstill period. However, in the last week we’ve seen some recent developments as the Department for Business Energy & Industrial Strategy (BEIS) revealed plans to run a T-1 Capacity Market ‘top-up’ auction next summer and a postponed T-4 auction (potentially as T-3 next year) for delivery Winter 2022.

But this does all depend on the European Commission’s (EC) decision to approve reinstatement of the Capacity Market or not…

Possible scenarios

It would be a shock to the industry if the Capacity Market was not reinstated. BEIS are of the opinion that it will continue but there’s still a big question mark over how the scheme will run in the future.

I’ve been looking into the possible scenarios for businesses with flexible generation assets and the subsequent impact on their revenue if the Capacity Market was changed to remove conventional generation or reinstated in its current form.

Scenario A: Capacity Market is cancelled for conventional generation 

If the Capacity Market is cancelled for conventional generation it could mean that 15GW of capacity would not deliver in Winter 2019. Some industry experts predict average winter energy prices could increase by 10% with volatility in the market having a much more pronounced effect and doubling over the next few winters.

We have played out a couple of scenarios for a CM-free world – one, applying a very conservative 10% uplift in energy prices and another, where value from volatility is captured in a more significant (yet very plausible) way.

See the below charts showing the potential annual revenue for a 1MW gas peaker plant operating in winter 19 with both the short and long-term predictions applied:

 

This could be advantageous for not only gas peaker projects, but also commercial batteries that operate primarily for wholesale market arbitrage.

We’ve already seen APX prices reaching £185/MWh since the Capacity Market suspension was first announced, demonstrating the short-term increases in price volatility that generators can take advantage of while we await the outcome of the Capacity Market.

Scenario B: Capacity Market is reinstated in its current form

The next chart shows the potential annual revenue, again using a 1MW gas peaker plant in Winter 2019 as an example, if the Capacity Market was to be reinstated in it's current form. With Capacity Market payments at an estimated average of £12 per kW per year, total revenues of c£180,000 could be achieved.

For more analysis on the Capacity Market, read my blog published just before the Capacity Market suspension was announced where I look at how successful the Capacity Market has been over the last five years and where it should go in the future.

What's next?

It goes without saying, if the Capacity Market was to be cancelled it would have a significant impact on businesses participating in the scheme, especially those with the business case built around this fixed income, and those with long-term contracts up to 15 years.

There’s many unanswered questions but our regulation and market experts are following BEIS’ updates so we can keep you informed. We will continue to share developments around the Capacity Market reinstatement in our weekly newsletter, The Informer and on our social channels LinkedIn and Twitter.

If you would like to discuss how we can support flexible assets with wholesale market optimisation, please get in touch or visit our Asset Optimisation page.

About the author

Bozhidar is responsible for analysing market opportunities to help asset owners maximise revenues. His role includes the continued development of processes and systems to enable customers to always optimise their positions and he also liaises with National Grid and DNOs to ensure access to all relevant opportunities. Bozhidar joined SmartestEnergy from KiWi Power where he was Head of UK Operations. He holds a Bachelor of Business Administration from Northeastern University, USA and a Master of Science in Economics and Policy of Energy and the Environment from University College London.

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