Will UK power capacity market face shortage?

Dec 5, 2016

Can you imagine waking up in the morning and skipping the hot cup of coffee due to power shortage? Can you imagine skipping the hot shower due to power shortage? I can’t. But it could happen.

If you want to know what measures the British institutions have put in place to improve the current situation in the power sector, you should definitely read below.

The plant margins in Great Britain have declined in the recent years and this trend is expected to continue also in the future. This is based on the plant decommissioning and the low levels of investments in new capacity.

Great Britain’s electricity market has no explicit reward for conventional generation capacity other than some ancillary and balancing service payments. Some support is available for the renewable generation but this is a different story…

European Commission approved the new state aid guidelines in the middle of 2014. The Capacity Remuneration Mechanism (CRM) adopted by Great Britain became the first case notified by the Commission according these rules. Since this Mechanism gives an economic advantage to the certain participant, it is classified as “state aid” and therefore requires approval by the European Commission.

The Commission’s decision not to object to the CRM being implemented by Great Britain is now the subject of a legal challenge by Tempus Energy in the European General Court. Meanwhile, CRM has been implemented in the country.
The mechanism itself consists of a number of stages among which are the establishment of a reliability standard, assessment of the capacity necessary to meet that standard, pre-qualification, the capacity auctions, secondary trading, delivery and obligations.

As already mentioned, the forthcoming plant decommissioning together with a lack of new investment has raised concerns about future capacity margins. This has led to the introduction of a reliability standard. In order to be within the required standard the annual loss of energy expectation should not exceed 3 hours/year.

The System Operator is the one assessing the capacity required to satisfy the reliability standard. This assessment is the base for the amount of the capacity to be procured via the capacity auction. The first auction took place on December 2014, considering 2018/2019 period and 48,6 GW of required capacity.

The next step after the assessment is called pre-qualification process. The pre-qualification is necessary to establish the total capacity of potential providers.

The auction itself is a two-stage process. The first stage is held four years before the delivery year (the T-4 auction) for each delivery year. This step is followed by a second auction in the year prior to delivery (the T-1 auction).

There are short and long term contracts. All Price takers that bid below the market clearing price will be awarded contracts of one year duration. The projects for newly built plants should be awarded with 15-year contracts and last but not least all projects for refurbishment should be granted with 3-year contracts.

The System Operator invented the so called stress events for which the participants get annual payments for being available to deliver. Every time the participant fails to deliver contracted capacity during a declared stress event penalty will be imposed.

The System Operator have tendered for two new balancing services which should serve as means of transitional arrangements for the interim period before delivery in 2018. These two balancing services will be utilised as a last resort in order to prevent demand reduction. According to this mechanism, all large consumers who have flexible demand and generation could participate in meeting peak demand when capacity is scarce.

Summarizing at the end, as already mentioned, Great Britain capacity market was implemented to reform the power market and to solve the problem of falling capacity margins and the lack of investments which would lead to capacity shortage after 2018. Since similar concerns arose in a number of Member States, Great Britain’s response in terms of power market reform and introduction of this Capacity Remuneration Mechanism to support investment in new capacity may be of some interest to other EU countries.

References: http://www.fae.org.pl/files/file_add/file_add-25.pdf

Written by Valentin Pavlov

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