Capacity auction for demand-side response clears at £45/kW

Bidders secure contracts totalling 312MW in last transitional arrangements auction

The transitional arrangements capacity market auction dedicated to demand-side response (DSR) has cleared at £45 per kilowatt, nearly double the price achieved in last year’s auction.

Out of the 373MW of DSR that entered the auction 312MW – or 84 per cent – won contracts.

The auction for delivery in 2017/18 was conducted using the “descending clock” process whereby bidders decided to either stay in or drop out as the asking price was gradually reduced, until remaining capacity matched the procurement target and the auction cleared.

The target buy was set at 300MW, but with a 200MW variation depending on the price. Just 100MW would have been bought at the £75 per kilowatt (/kW) price cap and 500MW if the price had fallen to near £0/kW.

The auction cleared in the sixth round of bidding covering the price range £50/kW to £45/kW. As there was not an exact match between the target buy and the remaining capacity, the clearing price and volume were determined by an algorithm.

The volume procured was down significantly on last year’s auction when 803MW of contracts were won, reflecting the government’s decision in May last year to block any generation-based DSR from entering, leaving just turn-down services. Of the 312MW which won contracts in this year’s auction, 275MW was proven and 37MW unproven.

Contracts were won by ten companies: UK Power Reserve, Limejump, Eon, EnerNOC, EDF Energy, Energy Pool, Kiwi Power, Smartest Energy and Tata Steel. EnerNOC took home the biggest share (87MW), followed by Kiwi Power (60MW) and Smartest Energy (35MW).

The reaction

Commenting on the results of the auction, Smartest Energy’s vice president of asset optimisation Robert Owen said: “We had positive price expectations going into the auction but this is far higher than predicted. We believe this is because there was significant drop out of capacity from pre-qualified levels against an unadjusted target. It does reflect the level of prices needed to encourage DSR from many sources.

“The high price is good news for the contract winners and will help to build confidence for businesses to participate in DSR.”

This year’s transitional arrangements (TA) auction was the last of just two, meaning from now on DSR will only be able to vie for capacity contracts in the main auctions. Owens said his firm was concerned that DSR may “struggle to compete” alongside existing and peaking generators in the next auction and that a significant drop in price could mean “we lose momentum”.

“We would like to see confirmation from National Grid that support will be provided to help DSR gather more momentum and make a significant contribution to the UK’s energy mix,” he added.

Limejump chief executive of co-founder Erik Nygrad said: “The result of this auction is a resounding success for demand side response and will act as further encouragement to businesses considering whether to participate in these schemes in the future.”

Tim Rotheray, director of the Association for Decentralised Energy said: “[Yesterday’s] results are returning value to energy users for helping keep the lights on, while also cutting emissions through zero carbon demand response.

“Instead of paying power stations to increase supply, businesses will be managing demand in innovative ways while meeting all their energy needs leading to a more efficient, more affordable and lower carbon system.”

UK Power Reserve chief executive Tim Emrich commented: “We are continuing to build our portfolio via the UK’s capacity mechanism and look forward to working with new clients to manage their demand turn down…

“We see DSR and storage as critical components of a smart and flexible future energy system. We urge policy makers to be consistent in their support for small players like UK Power Reserve which are providing healthy competition to the big six incumbents resisting the creation of a decentralised system which works for consumers.”

In December, DSR won contracts totalling 1.4GW in the latest four-year-ahead (T-4) auction for delivery in 2020/21 which cleared at a price of £22.50 per kilowatt per year.

A further of 209MW of contracts were secured in February in the early auction for delivery in 2017/18 which cleared at a record low price of just £6.95/kW.