Pricing
09 Nov 2021
Alex Done

Dynamic Containment update - the ‘first’ week of auctions

On 1 November 2021, we entered a new era of Dynamic Containment (DC) which brought with it two big changes: lower volume requirements in low-frequency DC (DCL), and the introduction of the high-frequency DC service (DCH).

In this article, we take a look at what’s happened in DC over the past week, including:

  • How much volume National Grid ESO (NG ESO) has secured in DC.
  • How pricing has developed, with a look at the new price caps.
  • How big the DC market is.
  • Who has secured contracts.
  • How the market has changed since 1 November.

How much DC has the ESO bought?

Figure 1 (below) shows the volume of DC procured over the first week of November 2021 for both the DCH and DCL services.

Figure 1 - Cleared and unfilled volume in DCH and DCL between 01 Nov 2021-08 Nov 2021 (inclusive).
  • Procured volumes in DCL averaged at 311 MW, compared to 48 MW in DCH (including EFA blocks with 0 MW procurement).
  • Procurement of DCH has been considerably lower than DCL, with a greater-than-zero requirement for DCH in 25 of 48 EFA blocks across the first week.
  • Interestingly, there is still significant unfilled volume in DCH, despite there being significant BESS capacity not tied into monthly FFR contracts.

How have prices evolved in DC?

Price caps

Before taking a look at how DC prices have evolved under the new procurement requirements, let’s consider one important change that came into effect on 1 November: the revision to the ESO’s price cap. Figure 2 (below) shows the price caps per EFA block, which have remained unchanged across November so far.

Figure 2 - Revised NG ESO price caps (cost of alternative actions), in effect from 01 Nov 2021-08 Nov 2021 (inclusive).
  • In DCH, the ESO’s price cap has been flat across the day with the ESO willing to pay up to £12/MW/h for high-frequency response in all EFA blocks.
  • Prior to 1 November, the ESO’s DCL price cap had remained consistent at £17/MW/h across the day.
  • From 1 November onwards, DCL price caps have undergone two key changes: an upward revision from £17/MW/h and a move to within-day variation.
  • The ESO is willing to pay as much as £48/MW/h for low-frequency response (in EFA blocks 4 and 5).

Price development

Figure 3 (below) shows how DC clearing prices have evolved over the first week of November.

Figure 3 - Market clearing prices in DCH and DCL between 01 Nov 2021-08 Nov 2021 (inclusive). (Empty values indicate a 0 MW service requirement from the ESO.)
  • Prices in DCL have begun to deviate from the consistent level of £17/MW/h, with highs of £48/MW/h and lows of £0.01/MW/h.
  • Prices in DCH have been roughly half that of their low-frequency counterpart, with a volume-weighted average clearing of £10.71/MW/h in DCH compared to £20.40/MW/h in DCL.
  • The ‘penny-bid strategy’ made its debut in DC - it’s something that we’ve seen before in pay-as-clear auctions. The idea is simple: price into the market at £0.01/MW/h (which almost always guarantees acceptance), and then take whatever price the market clears at. The main downside to this strategy is when penny bids set the clearing price, which is exactly what happened for EFA block 5 in Sunday’s auction.

Market saturation

Let’s combine the graphs we’ve seen so far in order to see how market saturation has impacted prices in DCL and DCH. Figures 4 and 5 (below) shows the same price data above (including the ESO price caps), in addition to the cleared and unfilled volume.

Figure 4 - Market saturation in DCL, including cleared and unfilled volume, market clearing price and ESO price cap between 01 Nov 2021-08 Nov 2021 (inclusive).
Figure 5 - Market saturation in DCH, including cleared and unfilled volume, market clearing price and ESO price cap between 01 Nov 2021-08 Nov 2021 (inclusive). Empty values indicate a 0 MW service requirement from the ESO.
  • Pricing in both services has varied significantly since 1 November, in response to large changes in the daily DC requirements from the ESO.
  • In both DCH and DCL, prices have been set by the ESO’s price cap in all instances where the market has been undersupplied, excluding the first auction in both services.
  • During periods of oversupply, prices in both services have crashed, with lows of £0.99/MW/h in DCH and £0.01/MW/h in DCL.

Who has secured contracts?

Figure 6 (below) shows the total ESO spend (or DC provider revenues) in both DCH and DCL in the first week (and change) of November.

Figure 6 - Total DCH/DCL service cost between 1 Nov 2021-8 Nov 2021 (inclusive).
  • To date, DCL has been a considerably larger market, with a total spend ~12x larger than DCH.
  • Limejump is the largest DC provider by revenue, securing contracts for the 100 MW Minety site.
  • In DCH, Conrad Energy took home the lion’s share of revenues, with their newly acquired Greenfield Road site. This is one of only ten sites to have been paid for the delivery of both high and low DC simultaneously.

How has the DC market changed?

In this section, we’ll compare the DC volumes and prices in the period 16 September - 31 October 2021 with those we saw in the first week of November, and take a look at how things have changed. 16 September coincides with the ESO’s move to EFA block procurement and pay-as-clear pricing - see here for more info.

Figure 7 (below) shows the changes to prices, volumes and total service cost, pre- and post-1 November.

Figure 7 - Comparison of volume-weighted average clearing prices, average procurement volumes and average daily spend in DCL. Pre-1 November covers all dates between 16 September 2021 - 31 October 2021 (inclusive). Post-1 November covers dates between 1 Nov 2021-8 Nov 2021 (inclusive).
  • Average clearing prices have risen from £17/MW/h to £20.40/MW/h, an increase of 20%.
  • Volume in DCL has been consistently lower than pre-November levels, with ~500 MW of BESS (roughly 50% of DC eligible capacity) opting to provide FFR secured in the October tender round (more info here).
  • The cost of procuring DCL has fallen since 1 November, with DCL market value falling by 55%.
  • Lower procured volumes have been the key driver of reduced service costs, despite increasing clearing prices.
  • While falling costs of procuring frequency response are great for the ESO and end consumer, this represents a significant reduction in DC revenues for providers.

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