There’s only one thing wrong with the Capacity Market – and it isn’t the price

Published by Alastair Martin 08 / 02 / 17

In truth, there are many things wrong with the Capacity Market (CM) – the UK Government’s flagship policy for the security of national electricity supplies. Among these is not whether or not the CM will work. It will – the lights will stay on. Probably.

Nor is it the somewhat disappointing price in the first CM auctions, which this week hit a historic low of £6.95/kW per year. Admittedly, this was for the ‘bonus’ early auction for delivery from October 2017; the four-year-ahead market managed a more respectable £22.50/kW in December’s auction. Prices like that will delight Government: the consumer is getting supply security for only a modest hit on bills. The lesson is that auctions discover prices, and Dutch auctions discover low prices. Government made a shrewd pick of auction format for the CM.

Most of my thousand gripes about the CM are details which are eminently fixable. Flexitricity’s demand response portfolio is made up of a broad mix of flexible loads, combined heat and power (CHP) generators, critical power supplies and small hydro generators. This diversity is a massive part of its success, but the CM wasn’t designed to recognise that. Fitting flexible customer-side assets into the CM is like playing chess in boxing gloves. It can be done, but it’s pointlessly awkward.

The basic structures of energy policy aren’t wrong either. We live on an Atlantic archipelago that’s sometimes windy, sometimes wet and sometimes sunny, and which is surrounded by tidal and wave energy. We should be doing all we can to use our free resources in preference to burning commodities which come loaded with financial and environmental risk. We pay renewable resources to churn out the megawatt-hours as much as they can. We don’t pay them for reserve or capacity services, because that’s not what they do best. This means that the balancing capacity – traditionally gas, coal and oil burners, but now also demand response and batteries – isn’t going to make all of its living selling energy. So we pay such ‘despatchable’ resources for the security they provide. Taken as a whole, and setting aside Westminster’s recently-acquired fear of a wind turbine that anyone can see, this combination of policies – for green energy and reliable capacity – makes sense.

Back to those lights, and their staying-on-ness. Secretaries of State don’t get to use the word “probably” in this context. But that’s government policy. Perfect security costs infinite money, and no-one wants an infinite electricity bill.

The UK is in good shape when it comes to raw megawatts, if we count – and we should – energy efficiency and flexible consumers. They are part of the mix. Our Loss of Load Expectation (LoLE) sits at around 0.5 hours each year – that’s the number of hours in which we expect somebody, somewhere in GB, to be going without electricity because there isn’t enough. Government’s target LoLE is three hours. That’s what politicians mean when they say “the lights will stay on”. They mean probably.

This winter, France suffered the nightmare of all those concerned with reliability: a type fault. Type faults are faults affecting many different stations of a similar type. In this case, it was the discovery that many of France’s nuclear reactors had been made with the wrong type of steel, and were at risk of ageing disgracefully. Prior to the discovery of this fault, the French grid operator RTE had estimated LoLE at a respectable 1.25 hours. 2016/17 is the first winter I can remember in which we regularly exported power to France during our weekday evening peak.

Diversity is important in security, and being technology-neutral, the CM has the potential to encourage a broad mix of resources to participate. It has largely delivered this in all but one category – new-build generation. It is in this category that the CM’s real flaw is found.

The CM is buying the wrong stuff, and it’s doing it because it’s a single-issue policy that joins up with nothing.

Under the CM, it’s possible to get a 15-year contract if you’re building a new generation site, but everyone else must take shorter contracts. This means that the CM strongly favours low-capex projects. This delivers one thing: engine farms – rows of reciprocating engines, gas or diesel, in shipping containers.

It is a post-hoc rationalisation to claim that engine farms are what’s best for the consumer. They win where today’s capital cost is the only consideration. It’s also a calumny to claim that engine farms are there to balance wind. This is nuts: wind generation varies, but over timescales of hours and days, not minutes and seconds, which is where engines have a place. We do sometimes get storm shutdown events that result in a fast drop in renewable output. For that, engines are fine. But we’ve got enough – there are more megawatts of standby diesels already installed in the UK than there are of wind farms.

December’s auction saved some face, but not enough. Centrica’s repowering of King’s Lynn A will give us a nearly-new combined-cycle gas turbine CCGT. Intergen’s Spalding extension will produce a large open-cycle gas turbine (OCGT), which will probably compete with engine farms on efficiency, but not with a new CCGT.

An engine farm might manage an efficiency of 41% if it’s gas, or 38% if it’s diesel. That means around 60% of the energy put into an engine farm is blown into the sky as waste heat. Compare that to a new CCGT at 61% or more, or, better still, a CHP in a district heating network with a total efficiency approaching 85%. If the CHP has a heat store – a big tank of water – it provides all of the flexibility needed to balance renewables. Add a large-scale heat pump, and the site can switch from generation to beneficial consumption as renewable generation ebbs and flows – a virtual battery, without the lithium.

One of the huge problems faced by the energy industry is consumer engagement. Insiders know that energy would be cheaper, greener and more secure if the top deck of the Clapham omnibus buzzed with discussion about the merits of low-energy light bulbs, or whether to keep the washing machine off until after this evening’s peak. CHPs score over CCGTs because their natural home is in the community, and community ownership is a real possibility. Nothing captures attention better than skin in the game.

The Capacity Market misses all that, and instead floods the market with single-purpose peakers. There are only so many peaks to go round, and sending engine farms off hunting the role that CCGT and CHP could hold in the bulk energy market is environmentally and economically daft. Government knows that, but its efforts to control the problem have been tangential, and the damage largely collateral. Even this is an easy problem to fix. All that’s needed is an insistence that anyone wanting a 15-year contract meets the Government’s own Emissions Performance Standard or qualifies as Good Quality CHP, both of which are established Government schemes.

So why was the price in last week’s auction so low? In a word, P305 (note: in the GB electricity market, that qualifies as a word). It’s now over a year since Ofgem put the fizz back into prompt electricity markets with its reform of imbalance prices. No-one knows how long the fun will last, but for now, old power stations clearly find it worth staying at the party a little longer. That’s not a disaster; it’s the market doing what it’s supposed to do.

Meanwhile, the Capacity Market marches on, doing the one thing that it’s designed for, and optimising that at the expense of everything else.

Alastair Martin

Alastair Martin Founder and Chief Strategy Officer

Dr Alastair Martin founded the first demand side response business in Great Britain in 2004. Alongside heading up Flexitricity, Alastair has worked on a range of energy policy developments and participates in several key regulatory working groups and committees with the Association for Decentralised Energy, National Grid ESO and others.

Flexible energy specialist Flexitricity will provide market access for 19.5MW of Anesco’s battery storage portfolio. Renewables and energy storage developer Anesco is one of the largest battery developers in the UK and made history by installing the first utility scale battery storage unit in the UK.

Battery storage has a vital role to play in the global energy mix. It provides an answer to one of the biggest challenges faced by renewable generators – the intermittent nature of such technologies – offering a way to capture clean energy and balance energy generation against demand.

The partnership with Anesco will see Flexitricity optimising the Larport Farm battery from their 24/7 control room in Edinburgh. The battery will be delivering frequency response services to National Grid, and will also be traded in the day ahead and intraday energy markets, and directly with National Grid in the Balancing Mechanism.

Flexitricity brings market-leading expertise in frequency response, having been the first company to make aggregated flexibility available for frequency response in 2012. Now, through its Flexitricity+ service, launched last autumn, the energy specialist also brings the expertise and ability to optimise the flexibility of the asset in the energy markets and the Balancing Mechanism.

Flexitricity will manage the asset dynamically, keeping agile in their approach to ensure that the battery moves between different services and revenue streams, allowing Anesco to maximize revenue and return for investors.

Flexitricity has pioneered the demand response industry, generating over £20million for its Energy Partners since it started live operations in 2008. Flexitricity is the first supplier in the UK to provide full, active participation in the Balancing Mechanism for demand response assets.

The Edinburgh-headquartered business now has over 450 MW under management – a virtual power plant helping National Grid meet the energy demands of the UK.

Andy Lowe, Head of Business Development at Flexitricity, said: “We are very excited to be growing our share of the UK’s battery storage market through our partnership with Anesco.

“The transition towards a low-carbon economy is creating a huge opportunity for battery storage to help the National Grid meet the energy demands of the UK.

“With the competition in reserve and response services increasing rapidly, trading in the Balancing Mechanism is key in helping customers optimise the revenue from their energy assets.

“Flexitricity+ opens the door to this revenue stream and our 24/7 control room ensures we can monitor the energy markets and the site’s capabilities every second of the day.”

Steve Shine, Anesco’s Executive Chairman said: “We are delighted to be entering this partnership with Flexitricity. We are constantly looking for ways to optimise the revenue streams for our assets and we are looking forward to seeing positive results from this initiative”.


Ends                                                                                                         

Issued by Media Zoo on behalf of Flexitricity.

For more information please contact:

Neil McDonald: neil@mediazoo.tv / 07428 398 402 / 0141 471 8399

Ross Henderson: ross@mediazoo.tv / 07954 995 104 / 0141 471 8399

Notes to Editors:

About Flexitricity

Flexitricity created and now operates the first, largest and most advanced demand-response portfolio in GB and has unsurpassed knowledge of the market and its requirements.

Headquartered in Edinburgh, Flexitricity partners with businesses throughout Great Britain to provide reserve electricity to National Grid.  The word “Flexitricity” means “Flexible Electricity”. The company looks for flexibility in electricity consumption and generation, creating revenue for energy users and generators as well as reducing national CO2 emissions and helping to secure energy supplies.

Their team is fully engaged at industry and regulatory level and has a track record that demonstrates innovation and delivery success.

Flexitricity is part of the Alpiq Group, a leading Swiss electricity and energy service provider with a strong presence across Europe.

About Anesco

Anesco is a global leader in renewable energy and recognised as one of the top cleantech companies in the world. Its specialist team manages the funding, development, operation and maintenance of renewable energy and energy efficiency projects.

As the UK market leader in energy storage, Anesco commands the industry’s most accurate revenue modelling tool and its portfolio is on track to exceed 380MW by the end of 2020. The company has constructed over 100 solar farms, while its O&M service, AnescoMeter, is monitoring over 21,500 sites.

Anesco was the first in the UK to achieve subsidy-free solar; first to introduce utility-scale energy storage; and first to co-locate energy storage with existing solar sites. To date, the technologies the company has deployed and managed are generating over 1GW of renewable energy.

For further information - Nick Johnson, Communications Director, 07557 490001, nick.johnson@anesco.co.uk

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