Target volume for T-1 capacity auction raised to 2.4GW

Energy minister Anne-Marie Trevelyan has written to National Grid Electricity System Operator (ESO) to accept its recommendation to raise the target volume for the upcoming year-ahead (T-1) Capacity Market auction to 2.4GW.

The new figure represents a more than six-fold increase on the previous target of 400MW and primarily reflects a significant reduction in the amount of the generation expected to be available due to outages, delays or cancellations to new plants and the decommissioning of existing capacity.

In its 2020 Electricity Capacity Report published in July, the ESO said its analysis suggested a requirement of minus 1.2GW for the T-1 auction and therefore recommended a target volume of zero. Kwasi Kwarteng, the energy minister at the time, nevertheless set the target at 400MW to account for uncertainties resulting from the ongoing coronavirus pandemic and recent prolonged plant outages as well as to comply with the government’s long-standing commitment to procure at least some capacity in T-1 auctions.

The ESO said the demand assumptions used to inform its prior recommendation did not consider any potential fallout from the pandemic as they had largely been finalised by the time its effects became clear.

In a fresh update to the secretary of state for energy, the ESO has now revealed it expects peak underlying demand during an average cold spell in 2021/22 to be reduced by between 3 per cent and 12 per cent as a result of the pandemic. It said recent observations during the closest to “normal” period over current winter season indicated the drop in demand would be nearest to the low end of the range (3 per cent) and on this basis recommended 1.7GW reduction in the target volume.

The ESO also recommended a 2GW decrease to reflect an uptick in the amount of firm capacity expected to be provided by interconnectors – the same amount by which contracted interconnectors were previously anticipated to underdeliver – after receiving new evidence on their likely availability.

It additionally recommended a 350MW decrease to account for the amount of embedded generation that holds long-term Short-Term Operating Reserve contracts and is expected to be operational but has opted out of the auction and a 50MW decrease to cover capacity contracted for later delivery years that has been commissioned early but has not prequalified.

However, these proposed reductions to the target volume were more than offset by the number of recommended increases.

The ESO recommended a 1.85GW rise to account for capacity with existing agreements for 2021/21 that is already known to have been cancelled, as well as a 3.9GW increase to cover risks to other contracted capacity due to a combination of long-term outages, the decommissioning of existing capacity, the delayed commissioning of new capacity or the parent company entering administration.

It similarly called for a 1.7GW boost to reflect risks to the availability of contracted coal and biomass units based on their performance during the recent spate of Electricity Margin Notices. The ESO said their average availability whilst the notices were in place was 1.7GW lower than their combined de-rated capacity. It said this adjustment would also cover the possibility that demand returns to pre-Covid levels if these risks do not materialise.

It also recommended a 150MW increase to account for a reduction in the amount of autogeneration – gas and oil engines used by businesses whose main purpose is not generation – that is expected to be operational next winter, and a 100MW increase after feeding the new figures for peak demand and firm interconnector capacity into its calculation of the least worst regret option.

The ESO said the cumulative total of all of these proposed adjustments – 4.1GW of subtractions and 7.7GW of additions – is a net increase of 3.6GW. It added this amount to its original capacity requirement of minus 1.2GW to give a target volume of 2.4GW.

The body proposed relatively minor adjustments to the target volume for the four-year ahead (T-4) auctions for delivery in 2024/25, recommending increases of 150MW to reflect a reduction in the amount of autogeneration that is expected to be operational and of 350MW to account for contracted capacity that has terminated its agreement.

This 500MW rise in the required capacity for 2024/25 to 42.1GW was also approved by Trevelyan, who set aside 2GW to be procured in the T-1 auction for that year.

The upcoming T-1 and T-4 auctions were originally due to take place in January and February respectively but were postponed in July to give participants more time to prepare in light of the pandemic. They will instead begin on 2 and 9 March.

Note: All capacity figures cited are for de-rated capacity.