Capacity Market in oversupply but predicted to balance out by mid-2020s

Earlier this month, Secretary of State for Business, Energy and Industrial Strategy Greg Clark wrote to the Delivery Body to update the target procurement volumes to 2.7GW, from the 4.6GW initially recommended in 2018, for the replacement T-1 2019-20 capacity auction that is due to be held in June.

This decision came after the Delivery Body had recommended a 2.3GW drop in the amount of capacity; including 1.3GW of capacity which has opted out of the auction but chosen to remain operational. The latest forecasts from Cornwall Insight show that regardless of those opting out, the auction is likely to be oversupplied depressing the price – illustrated in the below graph.

A graph showing pre-qualified capacity and target procurement of 2019-20 T-1 Capacity market auction

Tom Edwards Senior Modeller at Cornwall Insight, said:

“Previous auctions have had a similar issue with oversupply – particularly existing generation, interconnection and demand-side response (DSR) – much of which is actually behind the meter generation – this has led to low clearing prices.

“Oversupply will face some challenges in the medium term. Coal plants must close by 2025 – and most are closing earlier – and the existing nuclear fleet is starting to age. Older Combined Cycle Gas Turbines (CCGTs) are now finding it harder to recover their fixed costs amid a more flexible running regime in response to higher penetration of renewables.

“To date, the new plant which have won agreements through the Capacity Market have been relying on stacking values from embedded benefits and balancing services, but embedded plants face a tougher economic situation as a result of network charging changes. However, an upward capacity price correction is likely at some stage as the market’s supply and demand even out.

“Cornwall Insight forecasts in its Benchmark Power Curve that there will be an eventual recovery in Capacity Market clearing prices for delivery years in the mid-2020s, with new capacity brought forwards to replace ageing coal, gas and nuclear capacity.”

Benchmark Power Curve

The Benchmark Power Curve is a comprehensive market and asset-level power price modelling service that delivers long-term price forecasts, informed by industry-leading regulatory, market and policy expertise, and supplemented with direct access to trusted practitioners.