Introducing Piclo Exchange Part 1: Diving into Capacity Market Secondary Trading

Part 1

In collaboration with LCP, and as a teaser for a report that will be published in December, this blog dives into the detail behind secondary trading in the Capacity Market (CM)

Part 2

Introduces Piclo Exchange, the new marketplace that boosts transparency and streamlines secondary trading in the Capacity Market. Stay tuned for this to be published next week! 

Capacity Market Providers can now register or sign up for a demo of Piclo Exchange by emailing exchange@piclo.energy

What is the Capacity Market?

The Capacity Market is used to ensure there is sufficient supply to meet periods of high demand on the electricity system. 

Each year National Grid ESO, on the behalf of the UK government, hold auctions to procure capacity to meet a set target requirement. Two types of auctions are held, the first is a four year-ahead auction (T-4), where the bulk of the capacity is acquired to meet the set target. Within the T-4, planned new assets can win multi-year contracts (up to 15 years) that finance their build, whereas existing, operational assets can gain single year contracts. The second type of auction, which follows T-4, is a one year-ahead (T-1) auction. The T-1 acts as a top-up to account for any changes to the capacity procured in the T-4 or in the set capacity requirement between the four year-ahead stage and delivery.

To win a contract in an auction, Capacity Market participants enter a £/kW-derated capacity bid price for either generation or demand turndown capacity. If successful, providers will receive Capacity Market payments split across each month of the relevant delivery year for the de-rated capacity provided.

Providers are then obligated to be generating (or reducing demand) when called upon by NGESO during a stress event. They are called upon by NGESO, who publish a Capacity Market Notice 4 hours prior to an expected stress event and face penalty repayments for failure to fulfil their obligations.

Why does secondary trading occur?

Secondary trading is when one provider transfers their contracted capacity obligations to another suitable, qualified provider.

Secondary trading can happen in cases where the holders of contracts are unable to deliver their obligation. This can happen if a unit is down for maintenance or, in the case of a new build asset, there are construction delays which means it will not be operational when required. If a Capacity Market stress event occurs and a provider is unable to deliver their obligation, they will face penalties of 200% of the capacity payment for the relevant month and up to 100% of the total annual payment for the delivery year.

In these situations, the holder ultimately may face having their agreement terminated, meaning they have two options:

• Secondary Trading – to avoid a penalty, providers can trade away their contract in the secondary market. This occurs pre-stress event, where contract holders exchange their obligation for either part of or the full delivery year with an eligible transferee (in this case, a pre-qualified Capacity Market participant that does not have an obligation in that delivery year).
• Volume Reallocation – to avoid a penalty after a stress event, Providers can also trade via volume reallocation. This occurs post-stress event, where contract holders reallocate capacity to another unit that provided excess capacity during the event.

In accordance with Capacity Market rules, participants may begin to trade following the T-1 auction through until the end of the delivery year. Looking at secondary trading in previous years, trading began to occur eight months prior to the start of a delivery year. There have been almost 300 trades in each of the previous two delivery years to date worth between £15m and £35m.

If a Capacity Market entrant is qualified but has been unable to secure a contract in either the T-1 or T-4 auction for the upcoming delivery year, secondary trading provides an additional opportunity to secure a contract.

Will volumes of secondary trading increase?

Secondary trading is set to increase in the Capacity Market. Reasons contributing to this include tighter margins (making stress events more likely), clarifications to the Capacity Market rules providing more security to transfers, and sharper potential penalties, placing more risk on post-event reallocation and shifting greater volumes of trades to the secondary market.

Next week, in Part 2, we’ll be introducing Piclo Exchange, the new marketplace that boosts transparency and streamlines secondary trading in the Capacity Market.

In the meantime, if you are a Capacity Market participant and would like to register to list your agreement and see the current contracts available to buy, or get a demo of Piclo Exchange please contact us at Exchange@piclo.energy