The Capacity Market is a critical revenue stream for energy asset owners. However, secondary trading is a lesser known area, and participants have a lot of questions about how it all works.
The Capacity Market is a critical revenue stream for energy asset owners. This revenue can be unlocked via the primary auctions, which are well known, or through secondary trading, which is lesser known but just as valuable.
If you're reading this you're probably interested in secondary trading and want to find out more. As the industry experts in secondary trading matchmaking, we’ve got you covered. In this article we’ll cover everything you need to know to make an informed decision including:
First of all, let’s take a moment to recap - What are Capacity Markets? Several countries now have a Capacity Market, and Great Britain was one of the first to create one - we’ll be talking about this market in particular. Our Capacity Market is essentially an insurance policy for Great Britain’s electricity supply. In the event that the demand for energy is forecast to exceed the available generation, the Capacity Market kicks in. This means that, if called upon, energy assets will increase generation or reduce demand to avoid a blackout from happening.
The companies who manage those assets are essentially paid to be on standby, and reliably provide these emergency services if needed. These payments play a large part in financing new and existing energy projects, especially in recent years as Capacity Market prices have reached record highs. Companies are awarded contracts from the Capacity Market auctions, which are held twice yearly. The T-4 is the main auction, which is held 4 years in advance of the delivery year. This is topped up by the T-1 auction, held a year in advance.
Now we’ve familiarised ourselves, next up is secondary trading - what is it?
Secondary trading is when a Capacity Market contract holder transfers their obligations to another company. The new contract holder must perform all the necessary tests, and be ready to deliver the required services if called upon. As they’ve taken on the responsibility of the contract, they also receive the payments. Here’s a few things to note about secondary trading:
Remember the T-4 and T-1 auctions? You can think of secondary trading as the unofficial “T-4 month” or “T-2 month” market, used by companies who want to trade before the delivery year is due to start in October. The busiest trading period is typically between July and September.
But why would someone want to transfer their contract? Who would want to trade away such a critical, guaranteed source of income?
From the transferors perspective, these contracts can be obtained up to 15 years in advance, so a lot can change by the time the delivery year comes round. For example:
These are just a select few reasons - there are many others. In the majority of cases, the contract holder will have to pay a termination fee or penalties if they don’t fulfil their obligations. So it makes sense to mitigate the risk and trade all or part of the agreement to another company who can fulfil the contract.
That makes sense, but who is taking on these contracts? If all the same rules as the primary auction apply, why get a contract second hand and not just apply to the primary auction?
From the transferee’s perspective, it’s often a case of timing, and sometimes it can prove more lucrative. For example:
Now we understand a bit more about why parties would want to secondary trade, the last piece of the puzzle is how do they find each other? We consulted with Capacity Market participants and the EMR delivery body to find out.
As you might expect, it often comes down to traditional methods of outreach - companies send lots of emails and call around their phonebook to spread the word, in the hope they’ll get some interest. It’s time consuming, resource heavy, and is naturally limited to their circle of contacts. We heard that companies wanted greater visibility of both the demand and supply, and that they found it difficult to manage dozens of stakeholders at various different stages.
To simplify all of this, Piclo has developed the first and only online marketplace for secondary trading of Capacity Market contracts. Transferors can now list their contracts in one single place, visible to a huge network of Capacity Market participants who can bid for the contracts, and sign the commercial arrangement of the transfer all via Piclo.
On top of this, we have a dedicated sales and marketing team to help you find the perfect match through outreach to our extensive database of flexible energy asset owners, the largest of its kind in the UK. As the foremost experts in secondary trading matchmaking, we offer ongoing support throughout the sourcing, bidding and contracting process. Once the marketplace has worked its magic and a bid is accepted, parties can use our free contract template, further reducing administrative burdens and legal fees. To date, we’ve successfully facilitated multiple trades through our marketplace.
To access the marketplace, head to piclomax.com, sign in or create an account, and click ‘Exchange’ on the top menu bar. We only grant access to qualified Capacity Market participants, so you may need to request access. If you don’t have access yet, you can see a summary by downloading the ‘Exchange Listings’ dataset from data.piclo.energy.
If you have any questions about Capacity Market secondary trading or are keen to get involved, reach out to our dedicated team at exchange@piclo.energy
We look forward to helping you find your next trade.