Why is the Capacity Market key to a resilient system?


In January, the Government increased the Capacity Market’s target volume for the 2022/23 T-1 auction from 4.5GW to 5.36 GW. There is nothing particularly unusual in this move as the T-1 auction is a ‘top up’ auction, adding to the volume already awarded a ‘Capacity Market contract 2022/23’ via the T-4 auction (which took place in 2019). What is unique however, is that the required volume is higher than the volume in the auction. This means that it is likely that the auction will clear in the first auction price tranche which is between £70k-£75k per de-rated MW. To put this in context, the same volume for Winter 2019/20 would have cost £4k/MW but at a clearing price of £75k/MW it will cost nearly £400m!Read our blog to learn how the Capacity Market supports the National Transmission System Operator (National Grid) and why there has been a sudden request for additional capacity.

Taking a step back, why do we need the Capacity Market?

As the UK’s renewable revolution continues at pace, we are seeing a very volatile energy market, creating, at times, an ‘unpredictable’ network. The shift to intermittent renewable generation is causing balancing challenges – managing demand peaks and troughs is getting increasingly complicated for National Grid Over recent years, National Grid has designed and delivered a number of market mechanisms to help ensure that demand is always met, from the short-term reactive Dynamic Containment and Balancing Mechanism to the longer-term Capacity Market.
The Capacity Market formed part of the UK Government’s Electricity Market Reform package, an initiative with the ambition to ensure long term security of the electricity supply in the UK. It acts as an insurance policy against the possibility of blackouts at times when the system is under extreme stress. The government designed it to meet extreme demand and was expected to be used circa, 3 times a year. During these periods of high stress, National Grid issues  a Capacity Market Notice which gives generators a four-hour warning before they need to respond with much needed energy to help rebalance the system.

How does the Capacity Market work?

Through the Capacity Market, National Grid offers contracts for up to 15 years for new build assets which meet a certain spend threshold and one-year contracts to other assets. Capacity market contracts are issued per ‘de-rated’ MW which is determined based on their reliability. Capacity Market payments provide a fixed revenue stream to asset owners, providing at least partial coverage of their investment. There are two types of contracts, a one-year contract known as T-1 contract and/or a contract starting in 4 years’ time, which is known as a T-4 contract. Assets that enter the Capacity Market receive monthly payments per their de-rated MW contract at the relevant auction clearing price.
To participate, assets must perform a series of data-heavy tasks to provide sufficient evidence that they will be able to meet their contractual obligations. The Capacity Market product is complex and subject to continuous updates in rules and regulations that participants or their supplier need to stay on top of. Failure to comply with the latest rules and regulations can lead to terminations with fees as high as £35,000/de-rated MW in some cases.

The market reacts to Government’s call for additional Capacity Market volume

The original volume set aside for the T-1 auction was 4.6GW. Recently, National Grid reviewed the requirement and made a recommendation to the Secretary of State (SoS) of 4.7GW. The SoS decided to increase the volume further to 5.36GW to take into account ‘broader uncertainties within the power sector’. It is highly anticipated that (unless National Grid make any last-minute changes to the required volume), it will clear at an unprecedented £75k/de-rated MW. The Government believes that Winter-22 is looking tight already, hence trying to incentivise assets to commission this Capacity Market year. After the announcement we saw a sharp appreciation in Winter-22 power prices, in response to the expectation of a tight winter.

Not sure how to enter the Capacity Market?

Limejump has been involved in the Capacity Market since its inception, making us one of the most experienced in the market. Our experts take all assets through the whole Capacity Market process to maximise benefit and minimise concerns surrounding compliance and the risk of penalties. Our dedicated team are regulars at workshops hosted by National Grid, OFGEM and the Government, actively participating in constructive two-way conversations influencing reform and grasping a comprehensive understanding of all alterations that may come into effect.
Limejump will support our customers and their assets, guiding you through the complex and time-consuming process to ensure you have a seamless Capacity Market experience. Every year there are a significant number of submissions which don’t pass and need to go through the arduous appeals process. Previously, applications totalling 337MW across 22 sites were rejected, which resulted in an accumulative loss of over £15 million in revenue. Last year, Limejump prequalified all applications totalling  291MW across the T-1 and T-4 applications and currently has over 50 sites participating in the current 2021/22 Capacity Market year.   

So, where does the Capacity Market go from here?

Below are the key Capacity Market milestones. As we see further renewable penetration, the Capacity Market becomes more important than ever to National Grid and the UK’s security of supply. We are seeing more and more renewable tech types succeed in the auctions as well as ‘cleaner’ flex assets such as batteries – this will only grow as more and more batteries enter the market. We look forward to continuing to support customers with the complex auction process and supporting more and more clean tech types enter the market.

Official Prequalification WindowJuly – September
Provide Required Data to LimejumpJuly – August
Confirm Final Sites for SubmissionAugust
Results CommunicatedOctober
Official Credit Cover DeadlineNovember
T-1 2022/23 AuctionFebruary
T-4 2025/26 AuctionFebruary

Speak to our Capacity Market team

If you are interested in participating in the 2022 Pre-qualification, please reach out to our in-house experts.

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