National Grid (NG) UK has been conducting capacity market auctions since 2014 to support the integration of renewables and meet committed EU targets by 2020. Balancing real-time supply and demand is crucial for NG, with a focus on increasing generation or reducing consumption. In 2019/20, a total of 45,371 MW of capacity was secured through these auctions. Notably, existing "Short Term Operating Reserves (STOR)" generators are excluded from participating unless they withdraw from their STOR provider role.
NG attracts investment by offering contracts up to fifteen years forward, aiming to build capacity for effective balance. However, existing generating firms saw this as an opportunity, leading to a substantial release of capacity during the 2015 auction, causing the clearing price to drop to £18/kW/year. A staggering 90.64% of capacity was released by existing generators, with only 4.18% coming from new builds for delivery in 2019-20.
Demand Side Response (DSR) technologies play a limited role, with only 0.02% from proven DSR and 0.97% from unproven DSR. This raises concerns about grid stability if unproven DSR fails to respond rapidly. Unlike the generous fifteen-year contracts offered to generators, DSR bidders receive only one year's forward contract. To increase DSR's market share, NG should consider offering long-term contracts and separate incentives for proven DRS technology.
The breakdown of awarded capacity by technology/fuel type is as follows:
CCGT: 47.05%
CHP: 9.07%
Coal/Biomass: 10.11%
DSR: 1.03%
Hydro: 1.50%
Nuclear: 16.34%
OCGT and Recipe Engine: 5.24%
Storage: 5.65%
Interconnectors: 4.02%
CCGT dominates with almost half of the total capacity, driven by the arbitrage opportunity provided by gas. Lower crude oil prices and favorable spark spreads have made CCGTs a competitive choice in the capacity auction. The participation of major energy suppliers, the big six, and vertically integrated companies has impacted the wholesale prices, and the effects of existing capacity releases are anticipated.
Energy storage technology secured a significant 2600 MW (5.65% of total capacity), marking a decisive step towards mass energy storage growth in the UK. Future capacity auctions may be influenced by crude oil prices impacting CCGT participation. Regulators should develop mechanisms to encourage new capacity building, shielding it from short-term fluctuations in the oil and gas markets. Encouraging proven DRS with long-term contracts is also recommended. The evolution of capacity auctions in the coming years will be closely watched. Thank you for reading.
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