Capacity Auction | Page 2
Demand-side
response (DSR)
opportunities
and the
Capacity
Auction
What was the outcome of
the previous auction?
The final pay out price was agreed
at £19.40 per kW, which was seen as
lower than anticipated and therefore
good news for consumers. Nearly
2.9GW of new build capacity received
contracts, including a large number of
small projects. However, almost 10GW
of existing capacity missed out on a
capacity contract, equalling just less than
17% of the capacity that participated.
How does prequalification
work?
The prequalification windows for both of
the winter auctions opened in July and
closed in August. Applicants are required
to send information about the type of
unit they are offering, the composition
of their energy network and historic
performance data.
Welcome
Context
Welcome to the latest Energy Matters
Briefing from npower Business
Solutions, where we bring you up to
date on the latest changes to energy
policy and regulation. Our goal is
to explain clearly and simply how
developments in the energy market
will impact the business world.
The Capacity Market is an important
part of the Government’s Electricity
Market Reform (EMR) programme. As
the energy market moves towards
renewables, these markets offer
an opportunity to ensure adequate
future capacity. It does this by giving
successful bidders a steady and secure
revenue stream and the stability needed
to bring forward investment and provide
existing generation to the National Grid.
For this issue, we are focusing on the
upcoming transitional capacity auction
due to take place in January 2016. We
will discuss the auction and explain how
you might be impacted.
This additional capacity will help
provide nationwide security of supply
during periods of peak demand and
will also offer a backup, covering for
more intermittent renewable sources.
Generators that take part are required
to deliver energy on demand and
ensure they fulfil their obligations or risk
financial penalties.
The first capacity auction took place
in December 2014 and there are two
more planned for this winter. One will
take place in December 2015, and it
will be opened up to interconnectors
(international energy networks) for the
first time. The January 2016 transitional
capacity auction will be of most interest
to British businesses as it is specifically
focused on the area of demand-side
response (DSR) and small (<50MW)
distribution network connected
generation.
This allows all companies, not just major
generators, to unlock hidden flexibility
in existing equipment and earn income
through providing energy at times of
high national demand. In a recent report
by Ofgem, it was revealed less than 1%
of energy procured in the first capacity
market auction was from DSR.1 Holding
a DSR-specific auction will create a
broader, more resilient energy grid and
provide a valuable source of revenue for
energy conscious firms.
In this issue, we’ll be discussing more
about the January transitional capacity
auction and how the introduction of DSR
could impact you.
1
ttps://www.ofgem.gov.uk/sites/default/
h
files/docs/2015/06/annual_report_on_the_
operation_of_the_cm_final_0.pdf
There is a screening process to remove
any firms that do not meet the criteria;
those receiving low carbon support
(e.g. through Contracts for Difference)
are not eligible along with those using
Short-Term Operating Reserve (STOR)
contracts.
What is the bidding
process?
The transitional capacity auction itself
is the reverse of what you may be
familiar with, using a format known as a
‘Dutch auction’. It starts at a high price,
capped by the Government to protect an
excessively high result. The auction price
is then reduced progressively until the
amount of capacity required is reached at
the lowest acceptable price. This will then
be the agreed capacity payment rate for
all those successful in the auction.
There will be four 90minute auction
periods per day over the course of four
days. The bidding takes place online and
all companies that wish to participate
need to set up an account on the EMR
Delivery Body Administration System.
If there’s a technical failure, phone bids
can be used through a pre-agreed
contingency process. These procedures
are correct at the time of writing;
however they may be subject to minor
changes closer to the auction itself.
Can firms enter both the
December and January
auctions?
It is not possible to enter both
auctions, however, eligible
participants could in theory
prequalify for both, enter
the December auction and, if
unsuccessful, enter the January
transitional capacity auction.
How much energy do
successful firms need to
initially provide?
For regular capacity market auctions,
generators are given a delivery date
four or five years in the future, to
allow them to plan and commission
any plant accordingly. Given the
more immediate nature of DSR, in
the January transitional capacity
auction successful firms will see
their agreements start in October
2016. However, DSR providers will
have the opportunity to ‘transition’
into the capacity market over the
next two years. This means they will
only need to make capacity available
for brief periods in the winter, as
opposed to committing to significant
contributions straight away.
How can npower help?
We are working with our customers to
develop a range of services which would
allow them to participate in DSR. Your
npower Business Solutions Client Lead
would be happy to discuss whether it is
appropriate for you; please get in touch
with them to find out more. If you are not
currently an nBS customer please e-mail
[email protected] for further information.
While the registration window for the
January transitional capacity auction
is no longer open, firms can prepare
themselves for future auctions by
considering the merits of DSR within their
business and enabling future earning
potential.
Through using DSR services you can
cut your supply costs and help support
National Grid at times of system stress.
For example, back-up generators allow
you to maintain site resilience, ensuring
your core business operations are
prioritised and protected from any local
network disruption.
How can I stay informed?
We’ll continue to update our customers
on upcoming policy developments as well
as providing information on upcoming
auctions through Energy Matters and our
blog. If you have any specific questions
about these issues, please email nbs@
npower.com
Page 3 | Capacity Auction
Your view
When asked if they are taking part in
January’s transitional capacity auction,
46% of those who are eligible said they
would be. However, 42% of respondents
who were eligible said they weren’t sure,
suggesting a lack of knowledge about the
auction and how businesses can take part.
However, 42% of respondents who
were eligible said they weren’t sure.
Of those surveyed, only 26% used
demand-side response to manage their
business energy spend, with 43% saying
they did not use it and would like to. A
majority (57%) of those who use it do so
in order to reduce energy costs, with the
same percentage saying they use the
revenues to offset their energy spending.
Most of those who are not using demand
side response said it was simply because
they did not know enough about it in
order to make an informed decision (75%).
Most businesses thought governments
should provide more incentives and
information around DSR; with 64%
supporting increased government
assistance.
Capacity Auction | Page 4
Message from Wayne Mitchell, Director of Markets & Innovation
at npower Business Solutions, responsible for overseeing the
development of energy products, services, and solutions for
some of Britain’s largest businesses.
The first ever DSR capacity auction
represents a landmark moment for
the energy industry. We know from
talking to customers that many are
worried about security of supply;
in a survey we conducted last year,
77% flagged it as a major concern.
So we welcome the Government’s
focus on creating a more varied,
resilient energy network to help
keep the lights on during the
winter months.
However, given this strong
opportunity it is disappointing
that there appears to be a lack
of knowledge about the capacity
auction and DSR more generally.
Many businesses told us they
would like to take part but felt they
lacked the knowledge to do so.
With many companies doing
everything they can to save
money, DSR presents a potential
opportunity for businesses to
positively impact their bottom-
line. The Government and
the energy industry share an
equal responsibility to make
sure businesses possess the
information they need to take
advantage of DSR in the future.
Whilst the window has closed
on the upcoming auction, we’d
encourage all businesses to
consider whether it would be
suitable for them to participate in
DSR. Using suitable on-site assets
for DSR could help businesses see
a significant return on investment,
whether it’s load curtailment or
backup generation.
By taking part in demand-side
response, firms can potentially
reduce their energy costs and
receive payments for any excess
energy exported back into the Grid
from on-site generation. They can
also benefit from the flexibility of
supply around costly periods such
as winter Triads.
Contact us: e-mail: [email protected] web: npower.com/nBS