Posted on: 30/10/2018
It has been five years since the Capacity Market was established through Electricity Market Reform (EMR). Boz Bozhkov, Head of Markets, provides an overview of how successful the Capacity Market has been and where it should go in the future.
The EMR programme was set-up by the government to tackle three issues within the energy market known as the energy trilemma, which are:
• Security of supply
• Minimising the cost of energy to consumers
• Decarbonising electricity supply
As part of the solution, the Capacity Market was created with the goal of ensuring enough reliable capacity is always available to meet demand.
New and existing power stations, electricity storage and demand-side response (DSR) generators can all take part, with two auctions (T-1 & T-4) taking place each year.
Security of supply
The Capacity Market has largely been a successful mechanism in providing security of supply.
Although since it was established, due to sufficient electricity margins only two Capacity Market Notices have been issued, with no System Stress events resulting from that.
However, the remaining seven coal power plants in the UK will be decommissioned by 2025 and the last nuclear power station in Scotland is set to close in 2023, leaving a large gap in capacity that will need to be filled by the Capacity Market.
Viewed in this context, coal generation should be phased out of Capacity Market auctions as soon as possible to allow for more new assets to be built.
Currently, the guaranteed revenues are extending the life of large greenhouse gas emitting technologies, whilst artificially depressing turn-out prices.
While the short-term cost benefit for the consumer is apparent, that is clearly in conflict with UK’s decarbonisation goals and is eroding the future security of supply when large plants are decommissioned and not enough new capacity is stepping in.
EMR and National Grid are by design technology agnostic and in a stable and slowly changing system that would be the only responsible approach.
However, in a system which will arguably change more in the next 10 years than in the last century, we cannot solely rely on pure market forces to support a green, cheap and reliable electricity system.
So far, the Capacity Market has manged to keep prices low but that tab will be picked up by the future consumer.
Decarbonising electricity supply
Currently, the Capacity Market is clearly not meeting its full potential in decarbonising electricity supply.
Allowing all renewable generators to compete in future auctions will achieve this, whilst also increasing competition for contracts, thereby lowering costs for end consumers.
If given appropriate de-rating factors, renewables can contribute significantly to security of supply, particularly when co-located with storage.
The Capacity Market is also one of a number of revenue streams which will need to be available to renewable generation in order to help ensure their continued deployment without subsidy support.
Enabling all renewable generators to access Capacity Market revenues could, for example, help bring online new tidal and hydro projects, a predictable resource which the UK, being an island, should be exploiting so long as facilities are cost effective.
The Future of the Capacity Market
Other measures which should be taken in order to improve the Capacity Market include allowing existing generations without a distribution connection to compete.
National Grid is missing out on useful generation by not allowing such assets to compete, as they allow for demand to be met without requiring more power on the network during a stress event.
In order to further ensure this long-term security in the 2020s, interconnectors should be excluded from future Capacity Market auctions.
Interconnector flows are simply a product of market prices; power will flow where the price is highest regardless of any Capacity Market contract.
The assets neither generate nor reduce consumption themselves, in fact interconnectors have the ability to make a Capacity Market event worse should they be exporting during a period of system stress.
Demand Side Response (DSR) is no longer the exotic curiosity of the industry and is quickly becoming an integral part of the electricity system.
With amplified price signals and advanced optimisation approaches, decentralised smaller-scale demand and generation assets can now be aggregated and access revenue streams traditionally only available to large scale power plants.
Technology and entrepreneurship have helped National Grid meet its goal of providing up to 50% of its balancing services needs through DSR, but the way the Capacity Market (and other balancing services) operate is largely tailored around an archaic, centralised and supply-minded system.
While some important steps are being taken, there is a lot more to be done to allow for flexible and seamless delivery of DSR capacity, benefitting both the business and the consumer.
Whilst the Capacity Market has been successful in its goal of securing supply so far, the ongoing 5-year review represents an opportunity to build on existing successes and improve it further.
More emphasis on decarbonising electricity supply can and should be made, and the Capacity Market is the ideal mechanism.
By making these changes, BEIS can ensure security of supply, aid the transition in decarbonising supply and ensure fair prices for consumers.
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.