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Fit for purpose? Record low T-4 price triggers concern over Capacity Market future

Questions have been asked over the future of the Capacity Market mechanism after last week’s T-4 auction cleared at a record low price.

Last week’s T-4 auction for the 2021/22 winter period cleared at a price of just £8.40/kW per year and brought forward just 762MW of new build generators.

That is equivalent to just 1.5% of total capacity procured, seemingly defying one of the mechanism’s key intents of offering certainty to prospective new generation plant in the UK.

The results came just a week after the T-1 auction for 2018/19 cleared at just £6/kW per year, indicating that the value of capacity had tumbled since last year.

Michael Phelan, chief executive at demand side response provider Endeco/Gridbeyond, said that the auction represented a “seismic shift” in National Grid’s attitude to capacity, arguing that the market was now valuing flexibility rather than simple capacity.

“The ability to swiftly adjust and accurately control consumption, rather than the blunt delivery of power onto the system with lots of advanced notice, is of greater significance.

“The value being so close to that of last week’s T-1 indicates that the market is flooded with available capacity. The types of capacity will drive the next challenge that National Grid faces. With the proliferation of renewables, the issues now revolve around how firm the generation is and how to counter that with flexibility, rather than the amount of available power,” Phelan said.

Just 5% of new build generators prequalified for the auction won capacity contracts, a statistic which led Phelan to conclude that “the days of high prices and the encouragement of new generation plants are behind us.”

Chaitanya Kumar, senior policy adviser on low carbon energy for think tank Green Alliance, said change was needed.

“Unfortunately, the capacity market is still failing to support flexible technologies like battery storage in favour of large centralised fossil fuel generation. It’s time the government revisited the rules so the market can support the low carbon energy system we need for the future”

N-Ergy managing director David Bowman echoed Kumar’s sentiments, stating the results were “worrying” and “confusing” due to the lack of consistency between them and the government’s strategy to support clean growth.

“As advocates of renewable energy and battery storage, it feels like these future-proof solutions for energy storage are being disregarded with gas being the safer choice for the government. It clearly wants to achieve a low-carbon energy mix but wants the private sector to pay the price,” he said.

However Lawrence Slade, chief executive at Energy UK, was markedly more positive about the results, claiming that the auction price proved that competition is successfully providing security of supply “at the lowest cost to consumers”.

“This auction along with those preceding it has supported innovative, emerging technologies whilst ensuring we get the best value from existing assets. We will continue to work with government as the Capacity Market evolves, including the possible inclusion of renewables in future auctions, and in the forthcoming review of Electricity Market Reform,” he said.