T-4 auction: Better but not best

The recent capacity market auction ironed out some systemic issues with the mechanism but still failed to return quite the results government might have hoped for. Tom Grimwood reports.

The first two T-4 Capacity Market auctions did not go entirely to plan. The government wanted a series of large fuel efficient combined-cycle gas turbines (CCGTs) – a second ‘dash for gas’. Instead it got a fleet of small-scale distribution-connected generators, many of them burning ‘dirty’ diesel.

Ministers took action to change things in this year’s auction. They increased the procurement target by 3GW; instructed Ofgem to look at reducing the embedded benefits which gave an “unfair advantage” to distributed generation; and told Defra to consult on new emissions limits for small-scale generators.

Although there are reasons for them to be positive about the outcome of this year’s auction, they will still have been disappointed after just one new CCGT secured an agreement, and a small one at that. Analysts have told Utility Week more adjustments will be needed if that is to change. They also warn that whilst diesel is on its way out, it has had one last hurrah, and measures taken to stamp it out could cause problems in the future.

On the plus side, the volume of contracts awarded to new build generation increased from 2.4GW in last year’s auction to 3.4GW, as existing generation secured 44.5GW, including 5.7GW of coal. There was a breakthrough for batteries, which for the first-time secured agreements (501MW), and a tripling of demand-side response (1.4GW). Just 76MW of known new build diesel won contracts and the low clearing price will mean a limited impact on consumers’ bills – BEIS says £2 per year for the average household.

But this also meant by the time the ‘descending clock’ auction cleared at a price of £22.50 per kilowatt per year, all but one of the 10GW of new build CCGTs which entered the auction had dropped out. The only one left was a 333MW plant being developed by Centrica at King’s Lynn in Norfolk.  There was one other large gas plant – a 299MW open-cycle gas turbine being developed by Intergen at Spalding in Lincolnshire -  and a further 737MW of small-scale gas plant (less than 100MW). 

If the government wants to secure more CCGTs in future auctions, then the best thing to do is simply increase the procurement target further, says Aurora Energy Research executive director Ben Irons: “This is something that we’ve actually been recommending to them for some time. Our view is that capacity is frankly very cheap”. He finds it “surprising” that the government hasn’t therefore decided to buy more.

EnAppsSys founder and director Phil Hewitt says the real issue is that too much existing generation has stuck around: “The only way they could maybe get new CCGTs is to put an emissions cap in on existing stations… That would be the next step.”

He says because of its particular situation Scottish Power’s 1.47GW Damhead Creek is likely to have a price advantage over similar projects and yet was still unable to secure a contract. Scottish Power, having closed its Longannet coal plant in March, has unsurprisingly urged the government to evict coal generation from the Capacity Market via emissions limits, but Hewitt thinks that would be unacceptable in the current political climate.  

Then, there is also the diesel issue. Although the volume of contracts won by known diesel fell sharply - down to 76MW from 650MW last year - a further 474MW was secured by generators which did not disclose their fuel type. Similarly, with demand-side response it is not clear how much of the 1.4GW comes from real demand reduction rather than behind the meter generation, some of which could also be diesel.

“When we see gas/diesel as a fuel type that typically means its diesel”, says fellow EnAppSys director Paul Verrill. There are some which will be co-firing both, and those which are solely diesel “might as well put gas/diesel because you’ve got nothing to lose”.

That said, whilst there has been a “trail of development”, he does think this is the last time we’re likely to see diesel in such quantities. Those generators which can meet new emissions limits will be more expensive to build and are likely to face rising fuel prices and reduced embedded benefits.

However, there remains the issue of the potential unintended consequences from the actions yet to be taken by Ofgem and Defra, particularly if they apply to generators which have already secured contracts. 

“We’ve heard a lot of evidence that a number of the peaking plants that won contracts in the first T-4 auction two years ago are actually not going to deliver,” says Aurora’s Ben Irons. “They haven’t officially reneged yet, but given the way triads are going and other market developments, its frankly cheaper to just walk away and pay any penalties than it is for them to deliver an unprofitable project.”

Ministers will still have to do more if they want to secure large numbers of CCGTs in future auctions; whether that’s continuing with the changes being considered by Ofgem and Defra; introducing new emissions limits for existing generation or just simply buying more capacity. These actions will have costs both in terms of the clearing price, but also perhaps security of supply. They will now need to decide how hard they are willing to push.

Note: All capacity figures quoted are de-rated.

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

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