The T-4 Capacity Auction concluded on 10th
December and results were confirmed at the end of last
At £18kW/year (at 2014/15 prices), the 2015 clearing price is lower than the 2014’s £19.40/kW/year level and the amount of capacity that has secured Capacity Agreements (CAs) is also slightly lower at 46.35GW comparing poorly with 49.26GW in the previous year. So far so poor - Strike 1.
While the overall capacity to be secured is based on a demand curve pre-established by the Secretary of State for Energy and Climate Change, Amber Rudd, in consultation to the Electricity Capacity Report, published before the start of any auction, the final price may be seen as an indicator of the appetite in industry to secure the capacity contracts.
There was a widespread declared hope that more new Combined Cycle Gas Turbine (CCGT) plant would enter the auction but for them to do so economically, given the costs of building new plant, it was widely believed prices needed to settle at or before £23/kW so we were a good £5kW/year off that and so the new build generators did not come in.
Of the new build generators prequalifying including: Carrington Power (1 & 2) offering 404x2 MW, Progress Power (299MW), Gateway Energy (1231MW), Spalding Energy Expansion 1 & 2 (680MW+317MW), Scottish Power Damhead Creek (1280MW) and Thorpe Marsh CCGT (640MW) – only Carrington Power came through and they had already committed to building even before the 2014 Auction. These results are notable in the context of the Government’s recently declared ‘dash for gas’ as announced by Amber Rudd on 18 November 2015. Strike 2.
As predicted the majority of capacity secured in the 2015 auction is to derive from existing CCGT CMUs (47.05%) followed by existing nuclear plants (16.34%). In fact nearly all (97.88%) of the CAs allocated are to existing plant with only 2.09% of capacity secured from new build or refurbishing generating units which get the security of 15-year CAs.
One of the reasons why prices are settling too low for new large-scale generators is that there is excess of supply entering the auction at pre-qualification stage. 58.85GW of de-rated capacity were there at the start of the auction, whereas target capacity is just 44.65GW – delivering a potential 14.2GW excess – and naturally suppressing pricing as too much supply chases too low a demand target.
So who were the new winners? Coal and biomass plant did well grabbing 9.48% of the market, as against 6.43% in 2014 auction. In addition interconnectors were able to participate in the Capacity Auction for the first time and existing interconnectors were able to secure 0.54% of the capacity mix but again new build interconnectors were negligible.
The other winners were the myriad of small (largely diesel-powered) embedded operators. They offered 3GW of new supply in pre-qualification most of which were successful. There's been a surge in the growth of diesel generation in recent years. The sites are made up of blocks of diesel generators which can respond quickly to provide power when demand on the grid increases.
Despite environmental concerns, investors find the technology attractive as sites can access several types of payments in the energy market while being exempt from a number of charges paid by larger power plants. The climate think-tank Sandbag confirmed this week that contracts worth over £250m awarded to polluting diesel generators and old coal power stations.
Dave Jones, an energy analyst at Sandbag, says that the auction is failing to deliver the right type of power: “The UK needs some new gas power stations to be built quickly, to replace closing coal power stations. However, we are concerned that new gas power stations will be crowded out of the capacity mechanism by small diesel and gas generators. Although these smaller generators are cheap to build, they are neither cheap nor clean when they are required to run." Strike 3 & Out.
He is exactly right. The Capacity Auctions are not working to create the right energy mix to secure our energy future while curbing carbon emissions sufficiently to meet the Government’s own targets. It is time to look again at how new build generating can be stimulated as leaving as relying on Demand-Side Response (DSR)-linked energy usage reductions to ease the palpable capacity margin squeeze when we hit peak demand may not be enough to keep the lights on over the next few winters.
The Government is consulting on further changes to the Capacity Market and intends to review the framework to check whether it “still commands the confidence of industry and investors to deliver world class energy security and investment in new capacity”. With this, and the aims of the recent COP21 Climate Change Summit agreement, in mind the next auction needs to produce very different results from the first two.
Click here to request a call back or telephone 02392 822 254