Cashing in on cash out
At lunch time yesterday, the System Operator published its first capacity market warning in two years for 17:30. This was due to the margin dropping below the threshold set out in the capacity market rules[1]. The notice instructed generators with capacity market contracts to be ready to meet that shortfall in capacity. The warning was cancelled after an hour as the system operator restored some capacity.
What causes a capacity market warning?
Capacity market warnings occur when either:
(i) The System Operator gives a Demand Reduction Instruction and/or an Emergency Manual Disconnection Instruction to one or more DNOs, or;
(ii) An Inadequate System Margin, is anticipated to occur in a SP falling at least 4 hours after the expiry of the current SP, or;
(iii) Automatic Low Frequency Demand Disconnection takes place.
The capacity market warning stated a forecasted transmission demand and operating margin of 37,368MW and an expected aggregate capacity of BM units of 37,488MW leaving a mere 120MW margin (Table 1).
Table 1. Capacity market notifications. Source: https://gbcmn.nationalgrid.co.uk/
This may seem unusual for the time of the year, especially on a warm September day. It highlights the challenge of balancing the grid when there are increasing levels of renewable generation and low transmission demand.
How does this compare to other system price surges?
The last time the system price surged was earlier this year on March 4th where prices jumped to £2,242/MWh during SP 37 (18–18:30) and remained above £1,700/MWh during SP 38 (18:30–19:00). This occurred because wind was generating approximately 2GW at the time, which was 2GW less than National Grid’s forecast and 4.4GW less than it had been generating the day prior. By comparison, the warning yesterday was likely to be triggered by plant outages and reduced availability from interconnector imports coupled with solar and wind generation below forecast.
Despite the hourly forecast showing a Loss of Load Probability (LOLP) of 36.9% in SP 37 and a De-rated Margin (DRM) of 193.4MW (Fig. 1), unlike on March 4th, yesterday National Grid did not call on its Short Term Operating Reserve (STOR). This meant that system prices were not calculated using the LOLP and the Reserve Scarcity Price [2] (currently set at £6,000/MWh) which would have made the system price exceed £2200/MWh.
What does this mean for asset owners?
Yesterday there were a few lucrative opportunities for traders to exploit across the day-ahead and intra-day markets and also cash-out.
At £540/MWh the system price was 75% lower than what was seen in March, although this was still above the average price for SP 37 and 38 in 2019 and 2020. For context, the average system price during SP 37 and 38 in 2019 was £54.5/MWh and £53/MWh respectively, and £28.2/MWh and £29.2/MWh in 2020.
Both the day-ahead and intra-day markets offered attractive arbitrage opportunities, with traders trading at the Reference Price Data (RPD) seeing prices over £500/MWh and day-ahead prices (Fig. 2) exceeding £170/MWh (over double the prices from the same time yesterday). Consequently, the spread opportunity for a 1MW/1MWh battery, cycling once a day and trading across both the day-ahead market would have been around £670/MW.
[1] An inadequate system margin is classed as a margin smaller than 500MW.
[2] The Reserve scarcity price is used to represent what the price of STOR actions would have been if they could have changed their pricing to match the market scarcity.
Author: Charlotte Johnson, Commercial Analyst
