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It's leap year – look first
A word of advice to anyone who came away from yesterday’s Capacity Market Transitional Auction with a commitment to deliver real, tested megawatts by October 2016 from a named, specific site: jump. Jump to it. Get moving. There really is very little time.
For everyone else, I have different advice: pause and think. There are unalterable consequences to the choices we make now.
The Transitional Arrangements, or TAs, are a small sub-set of the main Capacity Market (CM), the Government’s flagship supply security policy. The whole of the CM is open to demand-side response (DSR) and small generation, but the TAs are a much smaller (800MW, it turns out) advance guard specifically for those technologies. The first of two TA auctions cleared yesterday, at £27.50 per kW. This was at the upper end of our expectations.
In a previous blog I explained why Flexitricity has a strong preference for the main auctions, which occur in December each year, over the TAs. Like everyone, we have no objection to the early revenue which the TAs offer. What we really object to is the three-year ban from the main auctions for any resource which so much as touches a TA capacity agreement.
The main auctions allow us to build up a four-year-ahead rolling revenue stream on which meaningful business cases can be built. Flexitricity is the only company to have contiguous revenue available from the beginning of the main CM, and we still have headroom to fit new sites into our Capacity Market Units. Going down the TA route means living on top-up auctions once the TAs are finished, which we expect to be a very bumpy ride.
Nevertheless, the TA route suits some business cycles, which is why we took a modest position in yesterday’s auction. We were joined there by a wide variety of companies, from Big Six electricity suppliers to steel and chemicals manufacturers.
Overall, DSR and combined heat and power (CHP) did well, with 475MW and 220MW respectively, according to the ADE’s analysis. Diesel farms got very little from this auction: only 50MW was contracted.
That was no surprise. Nothing tests a business case quite like project finance. One year of revenue followed by four years of uncertainty, volatility and exposure to potentially swamped auctions is not a good story to sell to a bank. The single new-build diesel site looks certain to be balance-sheet funded.
Flexitricity has a small number of customers for whom the TAs are the right route, due to business cycles or the natures of their core markets. We now have just six months to take those customers through the in-depth processes of metering compliance and performance testing.
This is a tough challenge even for those who know the route. We’ve already started, but we’re going to appreciate that extra day in February.
But note: we have no intention of taking any customer through this unless we’re confident that everything can be done in time. This is because once a site is formally assigned to a TA capacity agreement, it’s final. The site can’t go back to the main route. And that’s even if it hasn’t yet passed its metering and performance tests. To lose the main auction option yet still get nothing from the TAs would be painful indeed.
Anyone committed to the TAs – that is, with their sites named in a Capacity Market Unit right now – needs to leap into action. For everyone else, taking a day to fully understand the real choice being made here would be a good investment.
Written by Dr Alastair Martin, Founder and Chief Strategy Officer at Flexitricity