Distributed generation has 'fundamental advantage' in capacity market

Peaking plant well positioned in volatile energy market

Small-scale distributed generation has a "fundamental advantage" in the capacity market and will continue to crowd out larger plants in future auctions, Aurora Energy Research has told Utility Week.

Analysts expect 11GW of distributed generation, batteries and demand-side response to enter capacity auctions over the next decade, even if the government enacts policy changes to improve the prospects for combined-cycle gas turbines.

"There are some fundamental cost advantages that embedded plants have compared to the large transmission plants," said Aurora consultant Felix Chow, "namely that embedded plants have lower overall costs to be able to provide capacity that is running for very few hours each year."

Around 1.3GW of new distributed generation – mainly gas-fired reciprocating engines – won contracts in the four-year-ahead (T-4) auction in December, along with roughly 770MW in the year-ahead (T-1) early auction last month.

Aurora senior project leader Hugo Batten said there are two main drivers for the success of these peaking plants. "The first is that system just needs capacity which is competitive at load factors below 15 to 20 per cent."

“The second is that we think some market participants are betting there’ll still be scarcity in the system and there’ll be some non-delivery on previous capacity market contracts, which means we’ll still see these very high price peaks that we’ve seen over the last few winters.” He said the peaking plants - as their name suggests - will be well placed to take advantage of future price spikes.

Their success in recent auctions came despite Ofgem’s ongoing review into embedded benefits, which is expected to result in a significant reduction to or removal of the triad avoidance payments available to distributed generation. The regulator launched the review in January last year because of fears that the traid avoidance payments give an unfair advantage to distributed generation. Consultancy firm Cornwall has warned that removing them will force many developers to abandon their projects, leaving a shortfall in capacity.

“We’ve talked to a number of players in the market and there’s differing views on the extent the embedded benefits changes will hurt the business cases of peakers,” said Chow. “Aurora are relatively bullish on recips [reciprocating engines] and so we think, despite regulatory reform, they are still going to win in future capacity market auctions.”

He noted that the government has already tried to “tweak the auction parameters” to encourage the development of highly fuel efficient combined-cycle gas turbines (CCGT) by increasing the procurement target and shifting delivery from the T-1 to T-4 auctions. However, only one new CCGT secured an agreement in the latest T-4 auction. “We’re seeing that despite the policy changes there’s little system need for this type of technology and investors are responding to it.”

Even if the government enacts a raft of potential policy changes to incentivise new CCGTs – increasing the procurement target further; removing the triad avoidance payments; ending the exemption of small scale generation from the EU emissions trading system; and changing the reliability standards for batteries – Aurora expects 11GW of new peaking plants, batteries and demand-side response to enter the auctions over the next decade. By comparison they expect just 5GW of new CCGTs to bid for contracts starting between 2021 and 2030.

Author: Tom Grimwood,
Channel: Markets & Trading , Policy & Regulation , Finance & investment

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