Targets confirmed for upcoming capacity auctions

The government has confirmed the procurement targets for the Capacity Markets auctions due to take place next month.

An industry analyst told Utility Week that the target for the four-year-ahead (T-4) auction suggests secretary of state has decided “it’s better to be safe than sorry” when it comes to the assumed availability of nuclear generation.

In a letter to the Electricity System Operator (ESO), energy secretary Claire Coutinho said she had accepted its recommendation to set the target for the 2027/28 delivery year at 45GW – a 0.5GW increase when compared to the preliminary figure.

The ESO proposed the increase to account for Capacity Market units that had terminated agreements for the delivery year or failed to meet their completion requirements. It said the recommended 45GW target assumed that units which had opted out of the T-4 auction for delivery starting in 2027/28 would either be unavailable in that year or would opt in to the corresponding T-1 auction.

Coutinho said she had decided to hold back the procurement of 1GW of capacity for that T-1 auction, leaving a 44GW target for the T-4 auction.

Commenting on the announcement, Tom Edwards, senior modelling consultant at Cornwall Insight, said: “One of the big uncertainties before this announcement was that two of the nuclear power stations had said they were planning to be operational in that year but were opting out of the Capacity Market.”

In such instances, Edwards says the rules require the target to be reassessed to ensure the auctions are not over procuring capacity: “The secretary of state has clearly come to the decision that it’s not worth taking the risk.

“Given that Hinkley Point C is late and this would be 2027 when it should theoretically have been there for part of the year”, Edwards said the Coutinho seems to have taken the view “it’s better to be safe than sorry.”

Edwards said the clearing price is likely to be relatively high given the substantial gap between the 37.3GW of existing capacity that has prequalified for the auction and the 44GW target: “We need either some refurbished or new build capacity to clear the auction so that means the price is going to be set by someone who has to outlay a lot of upfront capital costs.”

Coutinho has also accepted the ESO’s recommendations to increase the target for the year-ahead auction for delivery next winter by 0.3GW to 7.7GW.

The ESO recommended increases of 500MW and 150MW to reflect expected and known non-delivery respectively. With regards to the former, it said a recent review of non-delivery trends had uncovered “new market behaviour that that we believe may not be captured within the historical five-year average” used to determine the preliminary target.

The body said these increases should be partially offset by a 400MW decrease to account for units with Short Term Operating Reserve contracts that have opted out of the auction but are expected to be available.

“Even though 7.7GW is pretty chunky, in proportion there’s a slightly higher margin so we don’t think the T-1 price is going to quite as high as it has been in the recent past,” said Edwards.

“We don’t think it’s just going to clear straight away, with everyone successful at £75/kW. This one, in our opinion, will be closer to the price taker cap which is £25/kW.”