In the last week of January, the first Transitional Arrangements (TA) auction took place. This is part of the Capacity Market, the Government’s key policy for securing electricity supplies, in which the TAs are supposed to act as “nursery slopes” for small generation and demand response. The Government sought a target capacity of 900MW, but because the auction cleared at a higher price than expected – £27.50/kW – only 802MW of capacity was bought.
These megawatts must now get ready to deliver supply security from October 2016. Hopefully, those who secured a Capacity Agreement in the TA auction knew what they were letting themselves in for. At Flexitricity, we’re taking our TA obligation very seriously – getting from the auction to delivery is not a simple matter.
The TAs offer a monthly payment from October 2016, a full two years before the first main delivery year from October 2018. That’s their main appeal for demand response providers and small generator sites. But this comes with a lock-out from the main auction for three years, and means providers must take their chances in annual top-up auctions, which are likely to be highly volatile and are not guaranteed to be run at all. For a few of Flexitricity’s customers, TA is a path that works with their business cycles. For the majority, building up a rolling four-year progression of predictable revenue through the main auctions – with two of those years already in the bag – is a far more compelling proposition.
As always, there’s more devilry in the detail. The TAs contain a risk which can only be understood by examining the requirements for metering and performance proving, and comparing these, line by line, with the capabilities of the actual sites. These verification requirements are identical for both main auctions and the TAs. However, while main auction providers have over 30 months to verify, TA verification must be complete by 31st August this year. Given other restrictions in the Capacity Market calendar, this really means late July. This accelerated schedule imposes a challenging timetable on all parties: the EMR Delivery Body (National Grid), EMR Settlement Body (Elexon) and, not least, the capacity providers. The tasks involved can’t be understated: there is much to be done and very little time to do it.
Each Capacity Agreement awarded will be delivered by a Capacity Market Unit (CMU) with one or more components (the individual sites). Each component must be proven, and in this respect the Capacity Market Rules pull no punches. Verification and testing is rigorous; as thorough as it is for the main delivery years, but to be completed in a compressed and immediate timescale. It’s a sleeves-rolled-up job for everyone involved, including owners of the individual sites.
Metering arrangements for each component must be documented and presented to Elexon (this is the metering assessment). For between 50-75% of cases, this must then be followed with a metering test, a thorough examination by Elexon of the metering arrangements. As part of this, Elexon has the right to visit any site to inspect and verify the metering equipment, including elements like current transformers which are often buried deep inside switchgear. For aggregated CMUs, around one in four sites are likely to be visited. If one component in the CMU fails the metering test, then none of the others can progress. Following certification by Elexon, performance of the CMU must then be proven to National Grid in a DSR test. The unit will only be approved when the DSR Test is successfully completed.
For those new to demand response, a short, steep and potentially rocky few months lie ahead. But it’s worth remembering that Elexon has never done this before either: every process and procedure is right now being built from scratch. So there is a risk that without planning, management and experienced support, the TA opportunity will be missed.
In fact, at this stage, only a part of the TA capacity is really associated with fully-committed sites. For demand response, a site becomes truly committed when it’s named as part of a CMU. Sites will be required to be named as part of the verification process. Before that, a site can still opt for the main auction route. Once it’s named for the TAs, however, the three-year lockout applies, even if it turns out that site can’t be verified in time.
Flexitricity is the only demand response company to participate in both the TAs and the main auctions. We’ve been preparing for the TA testing regime for months, informing our sites of the metering requirements, and collating and preparing necessary documentation. We recognised how challenging verification would be, and in particular the effort which is required from participating sites. We entered the TA auction secure that our TA participants are already great performers in balancing services like frequency response and STOR. Nevertheless, the Capacity Market is different. Success requires diligence and hard work, and at the key decision points, a heavy dose of pragmatism. Sooner is not always better.