14 January 2022
With almost 30 energy suppliers ceasing trading, record-high wholesale prices, and balancing costs, 2021 was a difficult year to navigate for industry participants. The UK:
- was subject to extremely high gas prices
- experienced balancing prices of up to £4,000/MWh (see our webinar on these high price events)
- left the EU internal energy market
- introduced the UK Emissions Trading Scheme (UK ETS)
The fallout is yet to be fully felt with an expected increase to the price cap applied to standard variable tariffs, costs of over £1.8bn associated with the Supplier of Last Resort (SOLR) process to be socialised and potential deferral balancing costs into the 2022/23 charging year.
So, what can we expect in 2022?
1. Continuation of high day-ahead and balancing prices
With gas prices over 200p/th for 2022, day ahead prices, set by the cost of running gas-fired peaking plant, are expected to remain high. A cold weather shock in early 2022 such as another ‘Beast from the East’ could see new highs being set.
System margins remain tight with IFA2 reduced to 1GW capacity until October 2022, the retirement of the Hunterston B nuclear plant (1GW) and the continued mothballing of the Calon CCGTs (Baglan Bay, Sutton Bridge and Severn – c. 2GW combined ). Generators are continuing to bid into the Balancing Mechanism (BM) at £4,000/MWh despite Ofgem’s open letter regarding high balancing costs in 2021 and National Grid ESO’s balancing market review.
For storage owners these high intraday price spreads mean that adopting a hybrid strategy, entering both frequency and energy markets, will yield greater profits than a frequency only approach.
2. New frequency response products will be introduced but dynamic containment prices may fall amid increasing competition
Dynamic Containment (DC) clearing prices will begin to reduce as supply exceeds the volume requirement. The DC price spent the majority of 2021 at the cap of £17/MW/h, however, prices dipped at the end of the year due to new procurement rules and increasing supply. The end of the Enhanced Frequency Response (EFR) contracts in April 2022 will add further supply. Although supply may tighten as storage providers choose to capitalise on high intraday price spreads.
The roll-out of the new product suite will continue with the pre-fault Dynamic Moderation and Dynamic Regulation services to be implemented in March/April. As these markets are established, the monthly Firm Frequency Response (FFR) auction will be phased out. Due to the increased efficiency of the new products the total market size for pre-fault response will be reduced.
3. Significant increases to consumer bills as costs from failed suppliers begin to bite
In February, Ofgem will publish decisions on five consultations on adjustments to the energy price cap which will likely result in a significant increase. The cap was previously increased in October 2021 to £1,277 for a direct debit payer up from £1,138 is expected by industry to rise over 50% to £2,000.
In addition, over £1.8bn from the accelerated ‘Last Resort Supply Payment’ (LRSP) process through which the supplier of last resort recovers the cost of purchasing additional energy at short notice will be added to network costs from April 2022.
This could be joined by a deferral of up to £300m in BSUoS costs if a proposal to cap the charge at £10/MWh between January and March 2022 is approved.
4. Highly competitive capacity auctions as the energy system continues to decarbonise
Auctions for the T-1 (2022/23) and T-4 (2025/26) CM are due to be held in February with results from the CfD sealed bidding process to be released in July.
Over 8GW of battery storage capacity attempted to prequalify for the T-4 auction for 2025/26. Storage, whilst crucial for smoothing peaks and troughs in demand in a system increasingly reliant on intermittent generation, will face more competition in each market with cannibalisation becoming a greater consideration.
In the upcoming CfD Auction Round 4 (AR4) auction BEIS has confirmed onshore wind and solar will once again be able to participate and that the new negative pricing rule will apply, where generators are not paid if the Intermittent Market Reference Price (IMRP) (i.e. the day-ahead power price) goes negative for any period. Further work is needed to understand the perverse behaviours which may arise in the intraday and balancing markets.
5. Network charging reform may lead to substantial changes to locational signals for investors
The coming year could also see substantial developments and decisions around network charging following consultations launched in 2021.
In June 2021, Ofgem announced its minded-to positions under the Access and Forward-Looking Charges SCR which would levy transmission network charges on small distributed generators (>1MW). Additionally, in late 2021 Ofgem launched a call for evidence on a wider range of potential reforms to the TNUoS charge calculation methodology exploring how charges could be made more cost-reflective, less volatile and provide a valuable locational signal. Finally, the CMP375 workgroup will put forward suggestions for the future of the expansion constant which directly impacts the scale of TNUoS locational signal.
These changes could significantly impact the locational signal for investors which would have implications for future network congestion and reinforcements.
2022 will be a challenging year to navigate for both generators and suppliers. To be successful in wholesale, balancing, ancillary and capacity markets understanding the dynamics of competitors bidding strategies will be crucial. LCP provides industry-leading market insight and analysis advising policymakers, investors, suppliers and generators.